EXHIBIT 13



















                          CAROLINA NATIONAL CORPORATION
                            Portions of Registrant's
                              2004 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2004 Form 10-KSB



<PAGE>

                          CAROLINA NATIONAL CORPORATION

                           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," "plan," 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 limited  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.

                      Management's Discussion and Analysis
                              or Plan of Operation

                              Basis of Presentation

The  following  discussion  should  be read in  conjunction  with 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.  Its 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.


<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                               General - continued

The Company completed an 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 in 2002. 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.

                              Results of Operations

Year ended December 31, 2004, compared with year ended December 31, 2003

Net interest income increased $1,545,125,  or 131.57% in 2004 from $1,174,389 in
2003.  The increase in net interest  income was due  primarily to an increase in
average earning assets, which increased $40,545,000, or 98.92%, due to continued
growth in the loan  portfolio  during this second full year of  operations.  The
primary  component of interest income was interest on loans,  including fees, of
$3,764,903.

The Company's net interest  spread and net interest margin were 2.89% and 3.34%,
respectively,  in 2004 compared to 2.18% and 2.86%,  respectively,  in 2003. The
increase in net interest  spread was primarily  the result of a higher  interest
rate  environment.  Yields on all earning  assets  increased in 2004.  Yields on
average earning assets increased from 4.11% in 2003 to 4.82% in 2004.  Yields on
average interest-bearing liabilities were 1.93% for 2004 and 2003.

The provision for loan losses was $505,607 in 2004 compared to $675,660 in 2003.
The Company  continues  to  maintain  the  allowance  for loan losses at a level
management  believes to be sufficient to cover known and inherent  losses in the
loan portfolio.

Noninterest  income  decreased  $31,651,  or 10.39%,  to  $272,876  in 2004 from
$304,527  in 2003.  The  decrease  is  primarily  attributable  to a decrease in
residential mortgage  origination fees, which decreased $131,997,  or 57.02%, to
$99,502 for the year ended  December  31, 2004 due to  decreased  mortgage  loan
demand  in a rising  interest  rate  environment.  Service  charges  on  deposit
accounts increased by $82,855 or 165.14% to $133,028 for the year ended December
31, 2004, when compared to 2003 as a result of increased deposit account volume.

Noninterest  expense increased  $517,642,  or 19.68%, to $3,148,184 in 2004 from
$2,630,542 in 2003. Noninterest expenses increased in all categories as a result
of our continued growth during the second full year of operations.  Salaries and
employee benefits  increased  $265,605 to $1,752,657 for the year ended December
31, 2004.  This increase is  attributable to normal pay increases and the hiring
of  additional  staff to meet needs  associated  with our growth.  The Company's
efficiency  ratio was 105.2% in 2004 compared to 177.9% in 2003.  The efficiency
ratio is  defined as  noninterest  expense  divided  by the sum of net  interest
income and noninterest income, net of gains and losses on sales of assets.

Net loss was $432,770 in 2004 compared to a net loss of $1,211,112 in 2003.  The
decline in net loss reflects our continued  growth,  as average  earning  assets
increased from  $40,987,000  for the year ended December 31, 2003 to $81,532,000
for the year ended  December 31, 2004.  Return on average assets during 2004 was
4.82%  compared to 4.11% during 2003.  Net loss is after the  recognition  of an
income  tax  benefit  of  $228,631  and  $616,174  for the years  2004 and 2003,
respectively. The income tax benefit was based on an effective tax rate of 34%.

                               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.



                                       2
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         Net Interest Income - continued

Average  Balances,  Income and  Expenses,  and Rates and Yields.  The  following
tables set forth, for the period indicated, information related to the Company's
average  balance sheet and its income and yields on average  earning  assets and
average  costs and rates of  liabilities.  Such  yields and rates 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.

<TABLE>
<CAPTION>
                                                               For the year ended                       For the year ended
                                                                December 31, 2004                        December 31, 2003
                                                                -----------------                        -----------------
                                                         Average    Income/      Yield/       Average      Income/        Yield/
(Dollars in thousands)                                   Balance    Expense        Rate       Balance      Expense          Rate
                                                         -------    -------        ----       -------      -------          ----
Assets:
   Earning Assets:
<S>                                                    <C>          <C>             <C>         <C>          <C>           <C>
     Loans (1) ....................................    $ 71,713     $ 3,765         5.25%       $ 30,412     $ 1,538       5.06%
     Securities, taxable ..........................       2,782          56         2.01           4,294          78       1.82
     Federal funds sold and other .................       7,037         105         1.49           6,281          69       1.10
                                                       --------     -------                     --------     -------
       Total earning assets .......................      81,532       3,926         4.82          40,987       1,685       4.11
                                                       --------     -------                     --------     -------
   Cash and due from banks ........................       1,669                                      982
   Premises and equipment .........................         625                                      533
   Other assets ...................................       1,746                                    1,131
   Allowance for loan losses ......................      (1,056)                                    (436)
                                                       --------                                 --------
       Total assets ...............................    $ 84,516                                 $ 43,197
                                                       ========                                 ========
Liabilities:
   Interest-Bearing Liabilities:
     Interest-bearing
       transaction accounts .......................    $  5,202     $     9         0.17        $  3,887     $    10       0.26
     Savings deposits .............................      22,906         380         1.66           9,589         133       1.39
     Time deposits ................................      34,512         817         2.37          12,953         367       2.83
     Federal funds purchased ......................           7          -           -                54           1       1.85
                                                       --------     -------                     --------     -------
       Total interest-bearing liabilities .........      62,627       1,206         1.93          26,483         511       1.93
                                                       --------     -------                     --------     -------
   Demand deposits ................................      10,551                                    4,719
   Accrued interest and other liabilities .........         461                                      113
   Shareholders' equity ...........................      10,877                                   11,882
                                                       --------                                 --------
       Total liabilities and
          shareholders' equity ....................    $ 84,516                                 $ 43,197
                                                       ========                                 ========
Net interest spread ...............................                                 2.89%                                  2.18%
                                                                                   =====                                   ====
Net interest income ...............................                $ 2,720                                   $ 1,174
                                                                   =======                                   =======
Net interest margin ...............................                                 3.34%                                  2.86%
                                                                                   =====                                   ====
</TABLE>
-----------------

(1)  There  were no loans in  nonaccrual  status in 2004 or 2003.  The effect of
     fees amortized on loans in 2004 totaling $133,701  increased the annualized
     yield on loans by .19% from 5.06%.  The effect on the  annualized  yield on
     earning  assets in 2004 was an increase  of .17% from 4.65%.  The effect on
     net interest spread and net interest margin in 2004 was an increase of .17%
     and .17% from 2.72% and 3.17%, respectively.




                                       3
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         Net Interest Income - continued

Analysis of Changes in Net  Interest  Income.  Net  interest  income can also be
analyzed  in terms of the impact of  changing  rates and  changing  volume.  The
following  table  reflects  the extent to which  changes in  interest  rates and
changes in the volume of earning assets and  interest-bearing  liabilities  have
affected the Company's  interest income and interest  expense during the periods
indicated.  Information on changes in each category  attributable to (i) changes
due to volume (change in volume  multiplied by prior period rate),  (ii) changes
due to rates  (changes in rates  multiplied  by prior  period  volume) and (iii)
changes in  rate/volume  (change in rate  multiplied by the change in volume) is
provided as follows:

<TABLE>
<CAPTION>
                                                                                          2004 compared to 2003
                                                                                          ---------------------
                                                                                     Due to increase (decrease) in
(Dollars in thousands)                                              Volume (1)         Rate (1)        Volume/Rate           Total
                                                                    ----------         --------        -----------           -----
Interest income:
<S>                                                                <C>                <C>                <C>                <C>
   Loans ...............................................           $ 2,089            $    59            $    79            $ 2,227
   Securities, taxable .................................               (27)                 8                 (3)               (22)
   Federal funds sold and other ........................                 8                 24                  3                 35
                                                                   -------            -------            -------            -------
     Total interest income .............................             2,070                 91                 79              2,240
                                                                   -------            -------            -------            -------
Interest expense:
   Interest-bearing deposits ...........................               798                (38)               (65)               695
   Short-term borrowings ...............................                 -                  -                  -                  -
                                                                   -------            -------            -------            -------
     Total interest expense ............................               798                (38)               (65)               695
                                                                   -------            -------            -------            -------
       Net interest income .............................           $ 1,272            $   129            $   144            $ 1,545
                                                                   =======            =======            =======            =======
</TABLE>

(1)Volume-rate  changes  have  been  allocated  to  each  category  based  on  a
consistent basis between rate and volume.

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.



                                       4
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         Net Interest Income - continued

The  following  table sets forth the  Company's  interest  rate  sensitivity  at
December 31, 2004.

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>
   Federal funds sold .............................       $  1,767        $      -        $       -         $     -        $  1,767
   Loans ..........................................         58,077           1,600           29,557           1,281          90,515
   Investment securities ..........................              -               -            2,969             393           3,362
                                                          --------        --------         --------        --------        --------
     Total earning assets .........................         59,844           1,600           32,526           1,674          95,644
                                                          --------        --------         --------        --------        --------
Liabilities
Interest-bearing liabilities:
   Interest-bearing deposits:
     Demand deposits ..............................          6,047               -                -               -           6,047
     Savings deposits .............................         24,763               -                -               -          24,763
     Time deposits ................................         13,181          21,181           10,547               -          44,909
     Note payable .................................              -               -              900               -             900
                                                          --------        --------         --------        --------        --------
       Total interest-bearing liabilities .........         43,991          21,181           11,447               -          76,619
                                                          --------        --------         --------        --------        --------
Period gap ........................................       $ 15,853        $(19,581)        $ 21,079          $1,674        $ 19,025
                                                          ========        ========         ========        ========        ========
Cumulative gap ....................................       $ 15,853        $ (3,728)        $ 17,351         $19,025        $ 19,025
                                                          ========        ========         ========        ========        ========
Ratio of cumulative gap
  to total earning assets .........................           16.6%           (3.9)%           18.1%           19.9%           19.9%
</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 note payable is  reflected at its  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.


                                       5
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                     Provision and Allowance for Loan Losses

General.  The Company 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  was to initially fund the allowance
for loan losses at approximately 1.50% of total loans outstanding based upon the
prior experience of management and other new banks to provide for a risk of loss
inherent in the loan portfolio until a history was established.

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 estimated losses 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
losses 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 years ended December 31, 2004 and 2003.

                            Allowance for Loan Losses
<TABLE>
<CAPTION>

  (Dollars in thousands)                                                                                2004                  2003
                                                                                                        ----                  ----
<S>                                                                                                   <C>                   <C>
Total loans outstanding at end of period ...............................................              $90,515               $55,030
                                                                                                      =======               =======
Average loans outstanding ..............................................................              $71,713               $30,412
                                                                                                      =======               =======
Balance of allowance for loan losses at beginning of year ..............................              $   827               $   152
Net loan losses ........................................................................                    -                     1
Provision for loan losses ..............................................................                  505                   676
                                                                                                      -------               -------
Balance of allowance for loan losses at end of year ....................................              $ 1,332               $   827
                                                                                                      =======               =======
Allowance for loan losses to period end loans ..........................................                 1.47%                 1.50%
</TABLE>


                                       6
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                              Nonperforming Assets

Nonperforming  Assets. There were no nonaccrual loans, loans past due 90 days or
more and still accruing interest,  or restructured loans at December 31, 2004 or
2003.

The Company's policy with respect to nonperforming assets is as follows. Accrual
of interest  generally 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 unless the estimated net realizable value of
collateral  exceeds the principal balance and accrued  interest.  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. Potential problem loans are loans that are not included
in impaired loans  (nonaccrual loans or loans past due 90 days or more and still
accruing),  but about which  management  has become aware of  information  about
possible  credit problems of the borrowers that causes doubt about their ability
to comply with current  repayment  terms.  At December 31, 2004, the Company had
not identified any  criticized or classified  loans through its internal  review
mechanisms.  The  results of this  internal  review  process are  considered  in
determining  management's  assessment  of the adequacy of the allowance for loan
losses.

                         Noninterest Income and Expense

Noninterest  Income.  The largest  component of  noninterest  income was service
charges on deposit accounts,  which totaled $133,028 for the year ended December
31, 2004 and $50,173  for the year ended  December  31,  2003.  The  increase in
service  charges  on deposit  accounts  is due to an  increase  in the volume of
deposits in 2003.  Residential mortgage origination fees decreased from $231,499
for the year ended  December 31, 2003 to $99,502 for the year ended December 31,
2004. The decrease was due to fewer mortgage refinancings in the rising interest
rate environment.

The following  table sets forth the principal  components of noninterest  income
for the year ended December 31, 2004 and 2003.

  (Dollars in thousands)                                       2004       2003
                                                               ----       ----

Residential mortgage origination fees ................         $100       $232
Service charges on deposit accounts ..................          133         50
Other income .........................................           40         23
                                                               ----       ----
   Total noninterest income ..........................         $273       $305
                                                               ====       ====

Noninterest  Expense.  Salaries  and  employee  benefits  comprised  the largest
component of noninterest expense which totaled $1,752,657 and $1,487,052 for the
years ended  December  31, 2004 and 2003,  respectively.  Salaries  and employee
benefits  increased as a result of new employees hired to assist with the growth
of the Company in addition to pay raises for existing  employees.  Net occupancy
and  furniture  and  equipment   expenses  increased  by  $32,572  and  $25,774,
respectively,  as a result of the new drive-through  facility and overall growth
of the Company.  Other operating  expenses totaled $992,631 and $798,940 for the
years  ended  December  31, 2004 and 2003,  respectively.  Data  processing  and
related fees comprise one of the largest components of other operating expenses.
These fees  increased  from  $161,533  for the year ended  December  31, 2003 to
$226,311  for the year ended  December  31,  2004.  This  increase  was directly
related to the increase in the volume of accounts over the two periods.


                                       7
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                   Noninterest Income and Expense - continued

The following table sets forth the primary components of noninterest expense for
the years ended December 31, 2004 and 2003.

  (Dollars in thousands)                                    2004          2003
                                                            ----          ----
  Salaries and employee benefits .....................     $1,753       $1,487
  Net occupancy expense ..............................        256          224
  Advertising and marketing expense ..................         70          105
  Office supplies, forms, and stationery .............         34           43
  Data processing ....................................        226          162
  Professional fees ..................................        199          140
  Furniture and equipment expense ....................        147          121
  Telephone ..........................................         34           29
  Loan closing expenses ..............................         55           64
  Postage ............................................         13           14
  Other ..............................................        361          242
                                                           ------       ------
Total noninterest expense ............................     $3,148       $2,631
                                                           ======       ======

                                 Earning Assets

Loans.  Loans are the largest  category of earning assets and typically  provide
higher yields than the other types of earning assets.  Loans also entail greater
credit and liquidity risks than most of the Company's investment  securities and
short-term investments, which management attempts to control and counterbalance.
Loans averaged $71,713,000 in 2004 and $30,411,722 in 2003. At December 31, 2004
and 2003, total loans were $90,515,050 and $55,030,473, respectively.

The following table sets forth the composition of the loan portfolio by category
at December 31, 2004 and 2003 and highlights the Company's  general  emphasis on
mortgage lending.

Composition of Loan Portfolio
<TABLE>
<CAPTION>
  December 31,                                                 2004                          2003
                                                               ----                          ----
                                                                    Percent of                     Percent of
  (Dollars in thousands)                               Amount          Total           Amount         Total
                                                       ------          -----           ------         -----
<S>                                                  <C>              <C>            <C>              <C>
  Commercial and industrial ......................   $  11,490         12.69%        $   9,680         17.59%
  Real estate:
    Mortgage-residential .........................      32,241         35.62            28,368         51.55
    Mortgage-nonresidential ......................      43,862         48.46            15,252         27.72
  Consumer .......................................       2,922          3.23             1,730          3.14
                                                     ---------        ------         ---------        ------
      Total loans ................................      90,515        100.00%           55,030        100.00%
                                                                      ======                          ======
  Allowance for loan losses ......................       1,332                             827
                                                     ---------                       ---------
      Net loans ..................................   $  89,183                       $  54,203
                                                     =========                       =========
</TABLE>
The largest  component of loans in the Company's  loan  portfolio is real estate
mortgage  loans.  At December 31, 2004, real estate mortgage loans totaled $76.1
million and represented 84.1% of the total loan portfolio.  At December 31, 2003
real estate mortgage loans totaled $43.6 million and  represented  79.27% of the
total loan portfolio.



                                       8
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                           Earning Assets - continued

In the context of this  discussion,  a "real estate mortgage loan" is defined as
any loan 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.

Residential  mortgage loans totaled $32.2 and $28.4 million at December 31, 2004
and 2003,  respectively.  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  $43.9  and $15.3  million  at
December  31,  2004 and 2003,  respectively.  The  demand  for  residential  and
commercial real estate loans in the Columbia market has increased due to the low
interest rate environment.

Commercial and  industrial  loans totaled $11.5 and $9.7 million at December 31,
2004 and 2003, respectively,  and comprised 12.69% and 17.59%, respectively,  of
the total portfolio.

At December 31, 2004,  consumer loans totaled $2.9 million and represented 3.23%
of the total loan portfolio. Consumer loans totaled $1.7 million at December 31,
2003 and represented 3.14% of the total loan portfolio.

The Company's loan portfolio reflects the diversity of its market. The Company's
offices are located in the Columbia,  South  Carolina  area.  The economy of the
Columbia  metropolitan area is significantly  influenced by offices of state and
federal government, a major state university,  and a United States Army base 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.

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, 2004.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

<TABLE>
<CAPTION>
                                                                             Over One
                                                                               Year
  December 31, 2004                                       One Year            Through             Over
  (Dollars in thousands)                                  or Less           Five Years         Five Years             Total
                                                       -----------         -----------        -----------        -----------
<S>                                                    <C>                 <C>                <C>                <C>
  Commercial and industrial ........................   $     4,956         $     4,680        $     1,854        $    11,490
  Real estate ......................................         3,181              52,456             20,466             76,103
  Consumer and other ...............................           720               2,015                187              2,922
                                                       -----------         -----------        -----------        -----------
                                                       $     8,857         $    59,151        $    22,507        $    90,515
                                                       ===========         ===========        ===========        ===========

  Loans maturing after one year with: ..............
     Fixed interest rates ..........................                                                             $    32,598
     Floating interest rates .......................                                                                  49,060
                                                                                                                 -----------
                                                                                                                 $    81,658
                                                                                                                 ===========
</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.



                                       9
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                           Earning Assets - continued

Investment  Securities.  The investment securities portfolio is also a component
of the Company's total earning assets.  Total securities  averaged $3,226,233 in
2004 and $3,988,338 in 2003. At December 31, 2004 and 2003, the total securities
portfolio was $3,361,463 and  $3,617,631,  respectively.  All marketable  equity
securities were designated as available for sale in 2004 and as held to maturity
in 2003 and were recorded at their cost.  Nonmarketable securities which totaled
$392,400 and $315,500 at December 31, 2004 and 2003, respectively, were recorded
at cost.

The  following  table sets forth the fair  value of the  securities  held by the
Company at December 31, 2004 and 2003.

Fair Value of Securities
  December 31,                                              2004            2003
                                                            ----            ----
  (Dollars in thousands)
U.S. government agencies .........................         $2,969         $3,306
Nonmarketable equity securities ..................            392            316
                                                           ------         ------
   Total investment securities ...................         $3,361         $3,622
                                                           ======         ======

The following  table sets forth the scheduled  maturities  and average yields of
securities available for sale at December 31, 2004.

Investment Securities Maturity Distribution and Yields

  December 31, 2004                                          One to Five Years
                                                             -----------------
  (Dollars in thousands)                                  Amount           Yield
                                                          ------           -----
U.S. government agencies ......................           $2,969           2.00%
                                                          ======           ====

Nonmarketable equity securities totaled $392,400 and $315,500 and had a yield of
4.68% and 5.59% at December 31, 2004 and 2003, respectively.

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  $6,593,134  in 2004 and  $6,281,072  in 2003. At
December 31, 2004, there were $1,767,000 in short-term investments.  These funds
are an important source of the Company's liquidity.  Federal funds are generally
invested in an earning capacity on an overnight basis.

                 Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities totaled $62,627,000 in 2004 and $26,482,836
in 2003.

Deposits. Average total deposits totaled $73,171,000 during 2004 and $31,148,323
in 2003.  At December 31, 2004 and 2003,  total  deposits were  $86,093,924  and
$50,645,656, respectively.



                                       10
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                              Deposits - continued

The  following  table sets forth the  deposits  of the Company by category as of
December 31, 2004 and 2003.

Deposits
<TABLE>
<CAPTION>

  December 31,                                                              2004                              2003
                                                                            ----                              ----
                                                                                Percent of                         Percent of
  (Dollars in thousands)                                           Amount        Deposits             Amount        Deposits
                                                                   ------        --------             ------        --------
<S>                                                               <C>              <C>                <C>             <C>
Demand deposit accounts ..............................            $10,375           12%               $7,498           15%
NOW accounts .........................................              6,047            7                 4,829           10
Savings accounts .....................................             24,763           29                18,100           36
Time deposits less than $100 .........................             18,008           21                13,428           26
Time deposits of $100 or over ........................             26,901           31                 6,791           13
                                                                  -------         ----               -------         ----
   Total deposits ....................................            $86,094          100%              $50,646          100%
                                                                  =======         ====               =======         ====
</TABLE>

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  $59,334,614 at December
31, 2004 and $43,855,091 at December 31, 2003.

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  105% at  December  31,  2004 and 109% at
December 31, 2003. The maturity distribution of the Company's time deposits over
$100,000 at December 31, 2004, 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 ......   $     9,640        $     2,811      $      9,008       $   5,442      $    26,901
</TABLE>

Approximately  36% of the  Company's  time  deposits over $100,000 had scheduled
maturities  within three months,  and 80% 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.

Note Payable.  The Company  executed a line of credit with Bank One in 2004 that
allows the Company to borrow up to $7 million if certain covenants are met. (See
Note 7 to the Consolidated  Financial Statements) At December 31, 2004, the line
had a balance of $900,000 and a weighted  average  interest  rate of 5.16%.  The
average balance of this note payable for 2004 was $9,863.  The maximum amount of
this note payable at any month end was $900,000 in 2004 and the weighted average
interest  rate was  5.16%.  Proceeds  from the line are  being  used to  provide
additional capital to the Bank.

                                     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  position.  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.



                                       11
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                               Capital - continued

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 and  subordinated  debt  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 regulatory capital  requirements at December 31, 2004 and 2003
as set forth in the following table.

Analysis of Capital and Capital Ratios

  December 31,                                             2004           2003
                                                           ----           ----
(Dollars in thousands)
Tier 1 capital ...................................        $6,558         $7,314
Tier 2 capital ...................................         3,061            705
                                                         -------        -------
   Total qualifying capital ......................        $9,619         $8,019
                                                         =======        =======

Risk-adjusted total assets (including
  off-balance-sheet exposures) ...................       $95,332        $56,310
                                                         =======        =======

Tier 1 risk-based capital ratio ..................          7.07%         12.99%
Total risk-based capital ratio ...................         10.37%         14.24%
Tier 1 leverage ratio ............................          6.88%         14.33%

In order to continue to grow,  the Bank will need to increase its capital in the
near future.  We have  arranged a credit  facility  with another bank which will
allow us to borrow up to $7 million, subject to a number of conditions, which we
may use to  increase  the capital of the Bank.  (See Note 7 to our  Consolidated
Financial  Statements)  At December 31, 2004,  we had borrowed  $900,000 on this
line of credit which was added to the Bank's capital in the form of subordinated
debt.  We may also use other  means,  such as the sale of stock,  to raise funds
with which to increase the Bank's capital.

                                       12
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                             Off-Balance Sheet Risk

Through its  operations,  the Bank has 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,
2004, the Bank had issued  commitments  to extend credit of $23,518,305  through
various types of commercial lending arrangements.  Approximately  $19,886,905 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 at December 31, 2004.

<TABLE>
<CAPTION>
                                                             After One     After Three
                                                              Through        Through
                                            Within One         Three          Twelve        Within     Greater Than
                                               Month          Months          Months       One Year       One Year           Total
                                               -----          ------          ------       --------       --------           -----
<S>                                        <C>            <C>             <C>            <C>          <C>            <C>
Unused commitments
   to extend credit .....................  $   314,762    $   829,931     $ 3,664,058    $ 4,808,751  $  18,099,554  $   22,908,305
Standby letters of credit ...............       20,000         10,000         580,000        610,000             -          610,000
                                           -----------    -----------     -----------    -----------  -------------  --------------
                                           $   334,762    $   839,931     $ 4,244,058    $ 5,418,751  $  18,099,554  $   23,518,305
                                           ===========    ===========     ===========    ===========  =============  ==============
</TABLE>

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

                           Return on Equity and Assets

The following  table shows the return on average  assets (net income  divided by
average total  assets),  return on average equity (net income divided by average
daily  equity),  and equity to assets ratio  (average  daily  equity  divided by
average total assets) for the period indicated. Since its inception, the Company
has not paid cash dividends.

                                                         2004            2003
                                                         ----            ----
     Return on average assets .......................   (.051%)         (2.81%)
     Return on average equity .......................   (3.98%)        (10.19%)
     Equity to assets ratio .........................   12.87%          27.51%

                          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 notes to the consolidated  financial statements at December 31,
2004,  included  in this  Annual  Report to  Shareholders,  and  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.




                                       13
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                              Liquidity Management

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 relatively  predictable
and subject to 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.



                                       14
<PAGE>






             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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,  2004  and  2003  and  the  related
consolidated  statements  of  operations,  changes in  shareholders'  equity and
comprehensive  income,  and cash flows for each of the years then  ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). 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, 2004 and 2003 and the  results of its  operations  and cash
flows for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.


                                                s/Elliott Davis, LLC
Elliott Davis, LLC
Columbia, South Carolina
February 18, 2005




                                       15
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                           December 31,
                                                                                                           ------------
                                                                                                    2004                  2003
                                                                                                    ----                  ----
Assets:
  Cash and cash equivalents:
<S>                                                                                            <C>                     <C>
    Cash and due from banks ........................................................           $  1,614,863            $  2,459,441
    Federal funds sold .............................................................              1,767,000                       -
                                                                                               ------------            ------------
        Total cash and cash equivalents ............................................              3,381,863               2,459,441
                                                                                               ------------            ------------
  Investment securities:
    Securities available for sale ..................................................              2,969,063                       -
    Securities held to maturity (fair value of $3,306,188
      at December 31, 2003) ........................................................                      -               3,302,131
    Nonmarketable equity securities ................................................                392,400                 315,500
                                                                                               ------------            ------------
        Total investment securities ................................................              3,361,463               3,617,631
                                                                                               ------------            ------------
  Loans receivable .................................................................             90,515,050              55,030,473
    Less allowance for loan losses .................................................              1,332,200                 826,593
                                                                                               ------------            ------------
        Loans, net .................................................................             89,182,850              54,203,880
                                                                                               ------------            ------------
  Premises, furniture and equipment, net ...........................................                710,511                 497,442
  Accrued interest receivable ......................................................                372,527                 217,064
  Deferred tax asset ...............................................................              1,581,010               1,341,864
  Other assets .....................................................................                126,113                 571,863
                                                                                               ------------            ------------
        Total assets ...............................................................            $98,716,337             $62,909,185
                                                                                               ============            ============
Liabilities:
  Deposits:
    Noninterest-bearing transaction accounts .......................................            $10,374,841              $7,498,008
    Interest-bearing transaction accounts ..........................................              6,046,689               4,829,484
    Savings and money market .......................................................             24,762,926              18,099,415
    Time deposits $100,000 and over ................................................             26,901,355               6,790,565
    Other time deposits ............................................................             18,008,113              13,428,184
                                                                                               ------------            ------------
        Total deposits .............................................................             86,093,924              50,645,656
  Federal funds purchased ..........................................................                      -                 533,000
  Note payable .....................................................................                900,000                       -
  Accrued interest payable .........................................................                289,089                  97,181
  Other liabilities ................................................................                508,210                 250,583
                                                                                               ------------            ------------
        Total liabilities ..........................................................             87,791,223              51,526,420
                                                                                               ------------            ------------
Commitments and contingencies (Notes 10 and 12)
Shareholders' equity:
  Preferred stock, 10,000,000 shares authorized, none issued .......................                      -                       -
  Common stock, no par value, 20,000,000 shares authorized;
    1,427,303 shares issued ........................................................             13,994,796              13,994,796
  Retained deficit .................................................................             (3,044,801)             (2,612,031)
  Accumulated other comprehensive loss .............................................                (24,881)                      -
                                                                                               ------------            ------------
        Total shareholders' equity .................................................             10,925,114              11,382,765
                                                                                               ------------            ------------
        Total liabilities and shareholders' equity .................................            $98,716,337             $62,909,185
                                                                                               ============            ============
</TABLE>

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




                                       16
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Operations
                 For the years ended December 31, 2004 and 2003


<TABLE>
<CAPTION>
                                                                                                  2004                     2003
                                                                                                  ----                     ----
Interest income:
<S>                                                                                           <C>                      <C>
  Loans, including fees ........................................................              $ 3,764,903               $ 1,538,196
  Investment securities:
     Taxable ...................................................................                   55,706                    61,469
     Nonmarketable equity securities ...........................................                   20,777                    17,078
  Federal funds sold ...........................................................                   84,337                    68,845
                                                                                              -----------               -----------
        Total ..................................................................                3,925,723                 1,685,588
                                                                                              -----------               -----------
Interest expense:
  Time deposits $100,000 and over ..............................................                  223,513                   131,289
  Other deposits ...............................................................                  982,055                   379,118
  Federal funds purchased ......................................................                      129                       792
  Note payable .................................................................                      512                         -
                                                                                              -----------               -----------
        Total ..................................................................                1,206,209                   511,199
                                                                                              -----------               -----------
Net interest income ............................................................                2,719,514                 1,174,389
Provision for loan losses ......................................................                  505,607                   675,660
                                                                                              -----------               -----------
Net interest income after provision for loan losses ............................                2,213,907                   498,729
                                                                                              -----------               -----------
Noninterest income:
  Service charges on deposit accounts ..........................................                  133,028                    50,173
  Residential mortgage origination fees ........................................                   99,502                   231,499
  Other ........................................................................                   40,346                    22,855
                                                                                              -----------               -----------
     Total noninterest income ..................................................                  272,876                   304,527
                                                                                              -----------               -----------
Noninterest expenses:
  Salaries and employee benefits ...............................................                1,752,657                 1,487,052
  Net occupancy ................................................................                  256,306                   223,734
  Furniture and equipment ......................................................                  146,590                   120,816
  Other operating ..............................................................                  992,631                   798,940
                                                                                              -----------               -----------
     Total noninterest expense .................................................                3,148,184                 2,630,542
                                                                                              -----------               -----------
Loss before income taxes .......................................................                 (661,401)               (1,827,286)
Income tax benefit .............................................................                 (228,631)                 (616,174)
                                                                                              -----------               -----------
Net loss .......................................................................              $  (432,770)              $(1,211,112)
                                                                                              ===========               ===========
Earnings per share
Basic loss per share ...........................................................              $      (.30)              $     (0.85)
                                                                                              ===========               ===========
Average shares outstanding .....................................................              $ 1,427,303               $ 1,427,303
                                                                                              ===========               ===========
</TABLE>

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




                                       17
<PAGE>

                          CAROLINA NATIONAL CORPORATION

               Consolidated Statements of Changes in Shareholders'
                          Equity and Comprehensive Loss
                 For the years ended December 31, 2004 and 2003


<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                                                                         Other
                                                        Common Stock                                    Compre-
                                                        ------------               Retained             hensive
                                                  Shares           Amount           Deficit               Loss             Total
                                                  ------           ------           -------               ----             -----
<S>                                             <C>             <C>               <C>                  <C>              <C>
Balance, December 31, 2002 ............         1,427,303       $13,994,796       $(1,400,919)         $       -        $12,593,877

Net loss ..............................                 -                 -        (1,211,112)                 -         (1,211,112)
                                                ---------       -----------       -----------           --------        -----------

Balance, December 31, 2003 ............         1,427,303        13,994,796        (2,612,031)                 -         11,382,765

  Net loss ............................                 -                 -          (432,770)                 -           (432,770)
  Other comprehensive loss,
    net of  tax benefit ...............                 -                 -                 -            (24,881)           (24,881)
                                                ---------       -----------       -----------           --------        -----------

Balance, December 31, 2004 ............         1,427,303       $13,994,796       $(3,044,801)          $(24,881)       $10,925,114
                                                =========       ===========       ===========           ========        ===========
</TABLE>


























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




                                       18
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows
                 For the years ended December 31, 2004 and 2003



<TABLE>
<CAPTION>
                                                                                                    2004                  2003
                                                                                                    ----                  ----
Cash flows from operating activities:
<S>                                                                                           <C>                      <C>
Net loss .........................................................................            $   (432,770)            $ (1,211,112)
Adjustments to reconcile net loss to net cash used by
  operating activities:
     Provision for loan losses ...................................................                 505,607                  675,660
     Depreciation and amortization expense .......................................                 132,759                  109,751
     Discount accretion and premium amortization .................................                   2,131                   70,790
     Deferred income tax benefit .................................................                (233,090)                (616,174)
     Increase in accrued interest receivable .....................................                (155,463)                (114,041)
     Increase in accrued interest payable ........................................                 191,908                   77,289
     Decrease (increase) in other assets .........................................                 445,750                 (502,971)
     Increase in other liabilities ...............................................                 257,627                  199,664
                                                                                              ------------             ------------
        Net cash provided (used) by operating activities .........................                 714,459               (1,311,144)
                                                                                              ------------             ------------
Cash flows from investing activities:
  Purchases of securities available for sale .....................................              (3,000,000)                       -
  Purchases of nonmarketable equity securities ...................................                 (76,900)                 (45,000)
  Calls or maturities of securities held to maturity .............................               3,300,000                2,000,000
  Net increase in loans ..........................................................             (35,484,577)             (44,886,963)
  Purchase of premises, furniture and equipment ..................................                (345,828)                 (92,807)
                                                                                              ------------             ------------
        Net cash used by investing activities ....................................             (35,607,305)             (43,024,770)
                                                                                              ------------             ------------
Cash flows from financing activities:
  Net increase in demand deposits, interest-bearing
     transaction accounts and savings accounts ...................................              10,757,549               21,408,833
  Net increase in certificates of deposit and
     other time deposits .........................................................              24,690,719                9,085,196
  Increase (decrease) in federal funds purchased .................................                (533,000)                 533,000
  Proceeds from notes payable ....................................................                 900,000                        -
                                                                                              ------------             ------------
        Net cash provided by financing activities ................................              35,815,268               31,027,029
                                                                                              ------------             ------------
Net increase (decrease) in cash and cash equivalents .............................                 922,422              (13,308,885)
Cash and cash equivalents, beginning of year .....................................               2,459,441               15,768,326
                                                                                              ------------             ------------
Cash and cash equivalents, end of year ...........................................            $  3,381,863             $  2,459,441
                                                                                              ============             ============
</TABLE>

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





                                       19
<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 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  up to
applicable limits. 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
valuation of 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  Available-for-Sale  - Securities  available-for-sale  are carried at
amortized  cost and  adjusted  to  estimated  market  value by  recognizing  the
aggregate  unrealized gains or losses in a valuation  account.  Aggregate market
valuation  adjustments  are  recorded  in  stockholders'  equity net of deferred
income taxes.  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 adjusted cost basis of investments  available-for-sale  is
determined by specific  identification and is used in computing the gain or loss
upon sale.

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 which approximates the interest 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.

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, 2004 and 2003, the
Company's  investment  in Federal Home Loan Bank stock was $122,400 and $45,500,
respectively.  The investment in Federal Reserve Bank stock totaled  $270,000 at
December 31, 2004 and 2003. Dividends received on these stocks are included as a
separate component of interest income.


                                       20
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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. Fees earned on loans are amortized over the life of the loan.

When  serious  doubt  exists as to the  collectibility  of a loan or when a loan
becomes  contractually  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 in  accordance
with the  contractual  terms.  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, 2004, management has determined that the Company had no impaired
loans.

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.  Management  evaluates current and future
economic  conditions  which may  affect  the  borrowers'  ability to pay and the
underlying  collateral  value of the loans in  determining  the  estimate of the
allowance  for loan  losses.  Loans  which are  deemed to be  uncollectible  are
charged off and deducted from the  allowance.  The provision for 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
buildings  of 40  years  and  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.

Residential  Loan  Origination  Fees  -  The  Company  offers  residential  loan
origination  services to its customers in its immediate  market area.  The loans
are offered on terms and prices offered by the Company's  correspondents and are
closed in the name of the correspondents. The Company receives fees for services
it provides in conjunction with the origination  services it provides.  The fees
are recognized at the time the loans are closed by the Company's correspondent.

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,  depreciable  premises  and  equipment,  and  net  operating  loss
carryforwards.

Advertising  Expense -  Advertising  and public  relations  costs are  generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place.  External costs relating to
direct mailing costs are expended in the period in which the direct mailings are
sent.  Advertising  and public  relations  costs of $69,505  and  $104,548  were
included in the Company's results of operations for 2004 and 2003, respectively.

Retirement  Benefits - The Company has a 401(k) Plan in place for the benefit of
all  eligible  employees.  The Company  contributes  to the Plan  annually  upon
approval by the Board of Directors.  The amount of the contributions  made is at
the  discretion  of the Board.  Contributions  made to the Plan in 2004 and 2003
amounted to $24,706 and $28,554, respectively.


                                       21
<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 14. 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 had an exercise price equal to the market
value of the  underlying  common stock on the date of grant.  In  addition,  the
Company has  outstanding  stock  warrants  which were issued to directors of the
Bank in connection  with the  organization  of the Bank as described in Note 13.
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,
                                                       -----------------------
                                                         2004             2003
                                                         ----             ----

Net loss, as reported ..........................    $  (432,770)    $(1,211,112)
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ...       (121,991)       (296,988)
                                                    -----------     -----------
Pro forma net loss .............................    $  (554,761)    $(1,508,100)
                                                    ===========     ===========

Loss per share:
  Basic - as reported ..........................    $     (0.30)    $     (0.85)
                                                    ===========     ===========
  Basic - pro forma ............................    $     (0.39)    $     (1.06)
                                                    ===========     ===========

In calculating the pro forma disclosures, the fair value of options and warrants
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
2004;  dividend  yield of 0  percent;  expected  volatility  of  10.61  percent;
risk-free  interest  rate of 4.05  percent;  and expected  life of 7 years.  The
Company did not issue any options or warrants during 2003.

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.  Due to the net loss, the  outstanding  warrants and stock options
are not considered  common stock  equivalents  and therefore,  dilutive loss per
share is not presented.

Comprehensive  Income - Accounting  principles generally require that recognized
revenue,  expenses, gains and losses be included in net income. Although certain
changes  in assets  and  liabilities,  such as  unrealized  gains and  losses on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive income (loss).

The components of other  comprehensive loss and related tax effects for the year
ended December 31, 2004 are as follows:
                                                                          2004
                                                                          ----
Unrealized holding losses on securities available-for-sale ........    $(30,937)
Reclassification adjustment for losses realized in net income .....           -
                                                                       --------
Net unrealized losses on securities available-for-sale ............     (30,937)
Tax effect ........................................................       6,056
                                                                       --------
Net-of-tax amount .................................................    $(24,881)
                                                                       ========



                                       22
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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  $1,014,301 and $433,910
for the years ended December 31, 2004 and 2003, respectively.

Income taxes paid for the years ended  December 31, 2004 and 2003 totaled $5,346
and $5,558, respectively.

Changes in the valuation account of securities available-for-sale, including the
deferred tax effects,  are considered  noncash  transactions for purposes of the
statement  of cash  flows  and are  presented  in  detail  in the  notes  to the
financials.

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 April 2003,  the  Financial  Accounting
Standards  Board  ("FASB")  issued SFAS No. 149,  "Amendment of Statement 133 on
Derivative  Instruments  and Hedging  Activities",  which  amends and  clarifies
accounting  and  reporting  for  derivative   instruments,   including   certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives)  and loan  commitments  that relate to the  origination of mortgage
loans held for sale, and for hedging activities under SFAS No. 133,  "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 149 clarifies under
what  circumstances  a  contract  with  an  initial  net  investment  meets  the
characteristics  of  a  derivative,  clarifies  when  a  derivative  contains  a
financing  component,  amends the  definition  of an underlying to conform it to
language used in FASB  Interpretation  ("FIN") No. 45, and amends  certain other
existing pronouncements. The pronouncement was generally effective for contracts
entered into or modified  after June 30, 2003.  The adoption of SFAS No. 149 did
not have any  impact on the  financial  condition  or  operating  results of the
Company.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of  both  Liabilities  and  Equity",   which
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150  requires  an issuer to  classify  certain  financial  instruments  that
include certain  obligations,  such as mandatory  redemption,  repurchase of the
issuer's  equity,  or settlement  by issuing  equity,  previously  classified as
equity,  as  liabilities  or  assets  in some  circumstances.  SFAS No.  150 was
generally effective for financial instruments entered into or modified after May
31, 2003,  and  otherwise  was  effective at the  beginning of the first interim
period  beginning  after  June  15,  2003,  except  for  mandatorily  redeemable
financial  instruments of nonpublic entities which are subject to the provisions
of SFAS No. 150 for the first fiscal period  beginning  after December 15, 2003.
The adoption of SFAS No. 150 did not have any impact on the financial  condition
or operating results of the Company.

In  December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary
Transactions."  The  amendments  made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary  assets should be measured based on the fair value
of the assets exchanged.  Further, the amendments eliminate the narrow exception
for  nonmonetary  exchanges of similar  productive  assets and replace it with a
broader  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial  substance.  Previously,  Accounting Principles Board ("APB") Opinion
No. 29 required that the accounting for an exchange of a productive  asset for a
similar  productive  asset or an  equivalent  interest  in the  same or  similar
productive   asset  should  be  based  on  the  recorded  amount  of  the  asset
relinquished.  APB Opinion No. 29 provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets.  SFAS No. 153
is  effective  for  nonmonetary  asset  exchanges  occurring  in fiscal  periods
beginning after June 15, 2005. Earlier  application is permitted for nonmonetary
asset  exchanges  occurring  in  fiscal  periods  beginning  after  the  date of
issuance. The provisions of this statement shall be applied  prospectively.  The
adoption of this  statement  is not  expected  to have a material  impact on the
financial condition or operating results of the Company.



                                       23
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements (continued) - In December 2004, the FASB issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No.
123(R) will require companies to measure all employee  stock-based  compensation
awards  using a fair  value  method  and record  such  expense in its  financial
statements.  In addition,  the adoption of SFAS No. 123(R)  requires  additional
accounting  and  disclosure  related  to the  income  tax and cash flow  effects
resulting from share-based  payment  arrangements.  SFAS No. 123(R) is effective
beginning as of the first interim or annual  reporting  period  beginning  after
December  15,  2005.  The Company is  currently  evaluating  the impact that the
adoption of SFAS No.  123(R)  will have on its  financial  position,  results of
operations and cash flows.

In  November  2002,  the  FASB  issued  FASB  Interpretation   ("FIN")  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of  Indebtedness  of Others".  FIN No. 45 elaborates on the
disclosure  to be  made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees and warranties that it
has issued.  FIN 45 requires a company,  at the time it issues a  guarantee,  to
recognize an initial  liability for the fair value of obligations  assumed under
the guarantee. The initial recognition requirements of FIN No. 45 were effective
for  guarantees  issued or modified  after  December  31, 2002.  The  disclosure
requirements  were  effective for financial  statements for periods ending after
December 15, 2002. The adoption of FIN No. 45 did not have a material  impact on
the Company's financial position or results of operations.

In  December  2003,  the FASB  issued FIN No. 46  (revised),  "Consolidation  of
Variable Interest Entities" ("FIN No. 46(R)"), which addresses  consolidation by
business  enterprises of variable  interest  entities.  FIN No. 46(R) requires a
variable  interest  entity to be  consolidated  by a company if that  company is
subject to a majority of the risk of loss from the  variable  interest  entity's
activities or entitled to receive a majority of the entity's  residual  returns,
or both.  FIN No.  46(R)  also  requires  disclosures  about  variable  interest
entities  that a company is not required to  consolidate,  but in which it has a
significant  variable interest.  FIN No. 46(R) provides guidance for determining
whether an entity qualifies as a variable interest entity by considering,  among
other  considerations,  whether the entity lacks sufficient equity or its equity
holders lack adequate decision-making ability. The consolidation requirements of
FIN No. 46(R) applied  immediately to variable  interest  entities created after
January  31,  2003.  The  consolidation  requirements  applied to the  Company's
existing  variable  interest entities in the first reporting period ending after
December  15,  2004.  Certain  of the  disclosure  requirements  applied  to all
financial  statements  issued after  December 31, 2003,  regardless  of when the
variable interest entity was established.  The adoption of FIN No. 46(R) did not
have any impact on the Company's financial position or results of operations.

In November  2003, the Emerging  Issues Task Force ("EITF")  reached a consensus
that certain  quantitative  and qualitative  disclosures  should be required for
debt and  marketable  equity  securities  classified  as  available-for-sale  or
held-to-maturity  under SFAS No. 115 and SFAS No. 124 that are  impaired  at the
balance sheet date but for which  other-than-temporary  impairment  has not been
recognized.  Accordingly  the  EITF  issued  EITF  No.  03-1,  "The  Meaning  of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments."
This issue  addresses  the meaning of  other-than-temporary  impairment  and its
application  to   investments   classified  as  either   available-for-sale   or
held-to-maturity  under SFAS No. 115 and provides  guidance on quantitative  and
qualitative  disclosures.  The  disclosure  requirements  of EITF  No.  03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement  and  recognition  guidance of EITF
No. 03-1 has been delayed.  The FASB staff has issued a proposed  Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a,  "Implementation  Guidance for the
Application  of Paragraph 16 of Issue No. 03-1".  The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due   to   interest    rates   and/or   sector    spreads   and   analyzed   for
other-than-temporary   impairment   under  the   measurement   and   recognition
requirements  of  EITF  No.  03-1.  The  delay  of the  effective  date  for the
measurement  and  recognition  requirements  of EITF No. 03-1 will be superseded
concurrent  with the final issuance of FSP EITF 03-1-a.  Adopting the disclosure
provisions of EITF No. 03-1 did not have any impact on the  Company's  financial
position or results of operations.



                                       24
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements (continued) - In March 2004, the Securities and
Exchange  Commission  ("SEC") issued Staff Accounting  Bulletin ("SAB") No. 105,
"Application  of  Accounting   Principles  to  Loan   Commitments",   to  inform
registrants  of the  Staff's  view  that the fair  value  of the  recorded  loan
commitments  should not consider the expected  future cash flows  related to the
associated  servicing of the future loan.  The provisions of SAB No. 105 must be
applied to loan  commitments  accounted for as derivatives that are entered into
after March 31, 2004.  The Staff will not object to the  application of existing
accounting  practices to loan commitments  accounted for as derivatives that are
entered into on or before  March 31, 2004,  with  appropriate  disclosures.  The
Company  adopted the provisions of SAB No. 105 on April 1, 2004. The adoption of
SAB No.  105 did not have any impact on the  Company's  financial  condition  or
results of operations.

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.

Risks and  Uncertainties  - In the normal  course of its  business,  the Company
encounters two significant  types of risks:  economic and regulatory.  There are
three main  components of economic  risk:  interest  rate risk,  credit risk and
market risk. The Company is subject to interest rate risk to the degree that its
interest-bearing  liabilities  mature or  reprice  at  different  speeds,  or on
different basis, than its  interest-earning  assets.  Credit risk is the risk of
default on the Company's loan portfolio that results from  borrowers'  inability
or unwillingness to make contractually  required payments.  Market risk reflects
changes in the value of collateral underlying loans receivable and the valuation
of real estate held by the Company.

The  Company is subject to the  regulations  of various  governmental  agencies.
These  regulations can and do change  significantly  from period to period.  The
Company also undergoes periodic  examinations by the regulatory agencies,  which
may subject it to further changes with respect to asset  valuations,  amounts of
required  loss  allowances  and  operating  restrictions  from  the  regulators'
judgments  based  on  information  available  to  them  at  the  time  of  their
examination.

Reclassifications   -  Certain  captions  and  amounts  in  the  2003  financial
statements were reclassified to conform with the 2004 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, 2004 and 2003, the requirement was
met by the cash balance in the account.

NOTE 3 - INVESTMENT SECURITIES

Securities available-for-sale consisted of the following:

<TABLE>
<CAPTION>
                                                                                         Gross Unrealized
                                                                  Amortized              ----------------                 Estimated
                                                                     Cost             Gains              Losses           Fair Value
                                                                     ----             -----              ------           ----------
December 31, 2004
<S>                                                              <C>                <C>                <C>                <C>
Securities of U.S. government agencies
   and corporations ....................................         $3,000,000         $        -         $   30,937         $2,969,063
                                                                 ==========         ==========         ==========         ==========
</TABLE>

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

<TABLE>
<CAPTION>
December 31, 2003
<S>                                                              <C>                <C>                <C>                <C>
   U.S. government agencies
      and corporations .................................         $  3,302,131       $    4,057         $        -         $3,306,188
                                                                 ============       ==========         ==========         ==========
</TABLE>



                                       25
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


NOTE 3 - INVESTMENT SECURITIES - continued

The following is a summary of maturities  of  securities  available-for-sale  at
December 31, 2004. The amortized cost and estimated fair values are based on the
contractual  maturity dates.  Actual  maturities may differ from the contractual
maturities  because  borrowers may have the right to prepay  obligations with or
without penalty.

                                                           December 31, 2004
                                                           -----------------
                                                      Amortized      Estimated
                                                        Cost         Fair Value
                                                        ----         ----------
Due after one year but within five years            $ 3,000,000    $  2,969,063
                                                    -----------    ------------
    Total                                           $ 3,000,000    $  2,969,063
                                                    ===========    ============

The following table shows gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at December 31, 2004.

Securities Available for Sale
<TABLE>
<CAPTION>
                                                     Less than                  Twelve months
                                                   twelve months                   or more                         Total
                                                   -------------                   -------                         -----
                                                           Unrealized                     Unrealized                      Unrealized
                                          Fair value         losses       Fair value        losses        Fair value         losses
                                          ----------         ------       ----------        ------        ----------         ------
<S>                                       <C>             <C>             <C>             <C>             <C>             <C>
Securities of other U.S.
  government agencies and
  corporations .....................      $2,969,063      $   30,937      $        -      $        -      $2,969,063      $   30,937
                                          ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>

There were no securities with  unrealized  losses for more than twelve months at
December 31, 2004.

At  December  31,  2004 and 2003,  no  investment  securities  were  pledged  as
collateral  to secure  public  deposits  or for other  purposes  as  required or
permitted by law.


NOTE 4 - LOANS RECEIVABLE

Major  classifications  of loans  receivable  at December 31 are  summarized  as
follows:
                                                          December 31,
                                                          ------------
                                                      2004             2003
                                                      ----             ----
Real estate - construction ...............        $15,063,632        $ 6,444,887
Real estate - mortgage ...................         61,038,890         37,175,462
Commercial and industrial ................         11,490,226          9,680,099
Consumer and other .......................          2,922,302          1,730,025
                                                  -----------        -----------
   Total gross loans .....................        $90,515,050        $55,030,473
                                                  ===========        ===========

Transactions  in the  allowance  for  loan  losses  during  2004  and  2003  are
summarized below:

                                                        2004             2003
                                                        ----             ----
Balance, beginning of year ..................       $  826,593       $  152,000
Provision charged to operations .............          505,607          675,660
Chargeoffs ..................................                -           (1,067)
                                                    ----------       ----------
     Balance, end of year ...................       $1,332,200       $  826,593
                                                    ==========       ==========


                                       26
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2004 and 2003,  the Bank had no loans in nonaccrual  status,  no
loans  past  due  ninety  days or  more  and  still  accruing  interest,  and no
restructured loans.

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.


NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

                                                              December 31,
                                                           2004           2003
                                                           ----           ----
Buildings ........................................       $210,140       $      -
Leasehold improvements ...........................         92,562         82,870
Furniture and equipment ..........................        691,022        565,027
                                                         --------       --------
    Total ........................................        993,724        647,897
Less, accumulated depreciation ...................        283,213        150,455
                                                         --------       --------

  Premises, furniture and equipment, net .........       $710,511       $497,442
                                                         ========       ========

Depreciation  and  amortization  expense was $132,759 and $109,751 for the years
ended December 31, 2004 and 2003, respectively.


NOTE 6 - DEPOSITS

At December 31, 2004, the scheduled  maturities of  certificates of deposit were
as follows:

     Maturing In:                                               Amount
     ------------                                               ------
         2005                                                $ 34,534,448
         2006                                                   9,206,095
         2007                                                   1,161,425
         2008                                                       7,500
                                                             ------------
            Total                                            $ 44,909,468
                                                             ============


NOTE 7 - NOTE PAYABLE

On August 12,  2004,  the  Company  executed  a line of credit  with Bank One to
borrow up to  $3,000,000.  The  borrowable  amount  increases to $5,000,000  and
$7,000,000  after the  receipt  of the March 31,  2005,  and June 30,  2005 Call
Reports,  which are financial  reports filed with the Federal Deposit  Insurance
Corporation,  respectively.  The  entire  principal  balance  of the note is due
September 30, 2006, with interest payments due monthly. The interest rate on the
note is 2.75% above the 30 day LIBOR rate.  At December 31,  2004,  the rate was
5.16%.  The note is  secured  by 100% of the Bank  stock  owned by the  Company.
Proceeds from the note were used to provide  capital to the Bank for  regulatory
purposes.  On December 28, 2004, the Company  borrowed  $900,000 on this line of
credit.


                                       27
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 8 - OTHER OPERATING EXPENSES

Other  operating  expenses  for the years ended  December  31, 2004 and 2003 are
summarized below:

                                                            2004          2003
                                                            ----          ----
Professional fees ..................................      $199,392      $140,058
Telephone expenses .................................        34,048        28,995
Office supplies, stationery, and printing ..........        57,802        43,307
Data Processing and related expenses ...............       226,311       161,533
Advertising and public relations ...................        69,505       104,548
Postage ............................................        13,142        14,004
Other legal expenses ...............................        55,485        64,431
Other ..............................................       336,946       242,064
                                                          --------      --------

   Total ...........................................      $992,631      $798,940
                                                          ========      ========

NOTE 9 - INCOME TAXES

Income tax expense for 2004 and 2003 is summarized as follows:

                                                    2004                2003
                                                    ----                ----
Current portion
  Federal ............................           $       -            $       -
  State ..............................                 787                  922
                                                 ---------            ---------
     Total current ...................                 787                  922
                                                 ---------            ---------
Deferred .............................            (229,418)            (617,096)
                                                 ---------            ---------
Income tax benefit ...................           $(228,631)           $(616,174)
                                                 =========            =========

The gross  amounts of deferred tax assets and deferred  tax  liabilities  are as
follows:
                                                              December 31,
                                                              ------------
                                                         2004             2003
                                                         ----             ----
Deferred tax assets:
    Allowance for loan losses ..................      $  444,340      $  275,627
    Net operating loss carryforward ............         924,361         797,824
    Organization and start-up costs ............         206,125         288,575
    Loan origination costs .....................          67,809          33,867
    Other ......................................           1,761               -
                                                      ----------      ----------
       Total deferred tax assets ...............       1,644,396       1,395,893
                                                      ----------      ----------
Deferred tax liabilities:
    Accumulated depreciation ...................          72,325          59,296
    Available for sale securities ..............           6,056               -
                                                      ----------      ----------
       Total deferred tax liabilities ..........          78,381          59,296
                                                      ----------      ----------
       Net deferred tax asset ..................      $1,566,015      $1,336,597
                                                      ==========      ==========

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, 2004, 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 $1,792,952 as of
December 31,  2004.  This net  operating  loss expires in the years 2021 through
2024.


                                       28
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 9 - INCOME TAXES - continued

A  reconciliation  between  the income tax  expense  and the amount  computed by
applying the Federal  statutory  rate of 34% for 2004 and 2003 to income  before
income taxes follows:

                                                            2004         2003
                                                            ----         ----
Tax expense (benefit) at statutory rate ..............   $(224,876)   $(616,177)
State income tax, net of federal income tax effect ...      (7,525)     (35,936)
Other ................................................       3,770       35,939
                                                         ---------    ---------
    Income tax benefit ...............................   $(228,631)   $(616,174)
                                                         =========    =========

NOTE 10 - 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 required monthly payments of
$7,289 for years 1 and 2 of the initial  lease  period,  and  requires  $8,098 a
month for the three years thereafter. The monthly payment upon the first renewal
will be $8,098.

Additionally,  the Company leases another  building as a branch  location where.
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.

The Company  also leases a plot of land one block from its main branch  location
where the Company has built a drive up teller facility.  The operating lease has
an initial seven-year term, which expires January 31, 2010, and is renewable, at
the Company's  option,  for three additional  five-year terms at a 15% increased
monthly  rental for each  successive  lease  term.  The lease  requires  monthly
payments  of $2,500 for the first five years of the  initial  term,  followed by
monthly payments of $2,875 for the last two years of the term.

Rental expense under these operating lease  agreements was $175,180 and $165,468
for the years ended December 31, 2004 and 2003, respectively.

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:

     2005                                                     175,180
     2006                                                     175,580
     2007                                                      90,898
     2008                                                      87,300
     2009                                                      87,300
     Thereafter                                               112,875
                                                            ---------
     Total minimum future rental payments                   $ 729,133
                                                            =========

NOTE 11 - 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 Bank.
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, 2004 and 2003, the Bank had related party
loans totaling $2,591,200 and $2,386,436, respectively. During 2004, advances on
related party loans totaled $391,202, and repayments were $186,438.


                                       29
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company may from time to time be 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.


NOTE 13 - STOCK WARRANTS

The directors of the Company  received stock  warrants  giving them the right to
purchase  two  shares for every  three  shares  they  purchased  in the  initial
offerings  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 Company will expire 90 days
after the  director  ceases to be a director or officer of the Company (365 days
if due to death or disability).  At December 31, 2004 and 2003, 200,555 warrants
had  been  granted.   At  December  31,  2004,  133,703  of  the  warrants  were
exercisable.


NOTE 14 - 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 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 granted a total of 44,000 stock  options to its  employees.
Of these,  40,200 were  granted on July 15,  2002,  100 were granted on July 17,
2002,  200 were granted on September 6, 2002,  2,000 were granted on January 21,
2004, and 1,500 were granted on January 31, 2004. These options will vest 30% at
the end of three years, 30% at the end of four years, and 40% at the end of five
years.  Years will be measured from the grant dates.  The options issued in 2004
have an  exercise  price of $11.00 per share and  terminate  ten years after the
date of grant.

A summary of the status of the  Company's  stock options as of December 31, 2004
and 2003, and changes during each year is presented below:

<TABLE>
<CAPTION>
                                                                     2004                        2003
                                                                     ----                        ----
                                                                            Weighted                     Weighted
                                                                             Average                      Average
                                                                            Exercise                     Exercise
                                                                Shares        Price         Shares         Price
                                                                ------        -----         ------         -----
<S>                                                             <C>            <C>        <C>               <C>
     Outstanding at beginning of year ......................    105,201        $10        105,201           $10
     Granted ...............................................      3,500         11              -
     Exercised .............................................          -                         -
     Forfeited .............................................    (18,400)        10              -
                                                                -------                   -------

     Outstanding at end of year ............................     90,301                   105,201
                                                                =======                   =======
</TABLE>

The following table summarizes information about stock options outstanding under
the Company's plan at December 31, 2004:
                                                 Outstanding    Exercisable
                                                 -----------    -----------
  Number of options                                 90,301           38,821
  Weighted average remaining life               7.79 years       7.54 years
  Weighted average exercise price                  $ 10.01          $ 10.00
  High exercise price                              $ 11.00          $ 10.00
  Low exercise price                               $ 10.00          $ 10.00




                                       30
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 15 - 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.  However,  due to
the net loss in 2004 and 2003,  the  outstanding  options and  warrants  are not
considered  common stock equivalents in these years;  therefore,  basic loss per
share and diluted loss per share were the same.

                                                        2004             2003
                                                        ----             ----
Net loss per share - basic computation:

Net loss to common shareholders .............        $ (432,770)    $(1,211,112)
                                                     ==========     ===========

Average common shares outstanding - basic ...         1,427,303       1,427,303
                                                     ==========     ===========

Basic loss per share ........................        $     (.30)    $     (0.85)
                                                     ==========     ===========


NOTE 16 - 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  condition.  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%.  For the  Bank,  Tier 1  capital  consists  of  common
shareholders'  equity,  excluding  the  unrealized  gain or  loss on  securities
available-for-sale,  minus  certain  intangible  assets.  For the  Bank,  Tier 2
capital consists of the allowance for loan losses and subordinated  debt 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, 2004,  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.


                                       31
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 16 - REGULATORY MATTERS - continued

The following  table  summarizes the capital  amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                                                                        To Be Well-
                                                                                                     Capitalized Under
                                                                                 For Capital         Prompt Corrective
                                                           Actual             Adequacy Purposes      Action Provisions
                                                           ------             -----------------      -----------------
                                                     Amount       Ratio        Amount    Ratio       Amount       Ratio
                                                     ------       -----        ------    -----       ------       -----
December 31, 2004
<S>                                               <C>             <C>       <C>           <C>       <C>          <C>
  Total capital (to risk-weighted assets) ......  $9,619,000      10.37%    $7,419,390    8.00%     $9,274,238   10.00%
  Tier 1 capital (to risk-weighted assets) .....   6,558,000       7.07      3,709,695    4.00       5,564,543    6.00
  Tier 1 capital (to average assets) ...........   6,558,000       6.88      3,813,280    4.00       4,766,600    5.00

December 31, 2003
  Total capital (to risk-weighted assets) ......  $8,019,000      14.24%    $4,504,800    8.00%     $5,631,000   10.00%
  Tier 1 capital (to risk-weighted assets) .....   7,314,000      12.99      2,252,400    4.00       3,378,600    6.00
  Tier 1 capital (to average assets) ...........   7,314,000      14.33      2,041,000    4.00       2,551,300    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 17 - UNUSED LINES OF CREDIT

As of December  31,  2004,  the  Company had unused  lines of credit to purchase
federal funds from unrelated  banks totaling  $5,550,000.  These lines of credit
are available on a one to fourteen day basis for general corporate purposes.  As
of December 31, 2004, we had not drawn on these lines of credit. The Company has
a line of credit to borrow  funds from the  Federal  Home Loan Bank up to 10% of
the Bank's total assets, which meant $9,800,000 was available as of December 31,
2004. As of December 31, 2004, the Bank had not drawn any advances on this line.
The  Company  also had a line of  credit  to  borrow  funds  from Bank One up to
$3,000,000  as of December  31, 2004.  As of December 31, 2004,  the Company had
borrowed $900,000 on this line.


NOTE 18 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

The ability of the Company to pay cash  dividends  is dependent  upon  receiving
cash in the form of dividends from the Bank. However,  there are restrictions on
the  ability of the Bank to  transfer  funds to the  Company 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,
2004 and 2003, the Bank had no retained earnings available for dividends.


                                       32
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 19 - 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.  Standby  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 standby letters of credit
varies  but  may  include  accounts  receivable,   inventory,  property,  plant,
equipment and income-producing commercial properties.

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

                                                       December 31,
                                                       ------------
                                                  2004             2003
                                                  ----             ----

Commitments to extend credit .............    $  22,908,305    $  16,768,802
                                              =============    =============

Standby letters of credit ................    $     610,000    $      10,000
                                              =============    =============


NOTE 20 - 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 - For securities available-for-sale, fair value equals the
carrying amount which is the quoted market price.  The fair values of securities
held to maturity are based on quoted market prices or dealer  quotes.  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.

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.


                                       33
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 20 - 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.

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

Note  Payable - The fair value of the note  payable  approximates  its  carrying
value because it reprices periodically.

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 and standby letters of credit 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:



<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                             2004                                  2003
                                                                             ----                                  ----
                                                                   Carrying         Estimated            Carrying        Estimated
Financial Assets:                                                  Amount           Fair Value            Amount         Fair Value
                                                                   ------           ----------            ------         ----------
<S>                                                             <C>                <C>                <C>                <C>
  Cash and due from banks ..............................        $ 1,614,863        $ 1,614,863        $ 2,459,441        $ 2,459,441
  Federal funds sold ...................................          1,767,000          1,767,000                  -                  -
  Securities held to maturity ..........................                  -                  -          3,302,131          3,306,188
  Nonmarketable equity securities ......................            392,400            392,400            315,500            315,500
  Securities available for sale ........................          2,969,063          2,969,063                  -                  -
  Loans receivable .....................................         90,515,050         90,234,148         55,030,473         55,098,669
  Accrued interest receivable ..........................            372,527            372,527            217,064            217,064

Financial Liabilities:
  Demand deposit, interest-bearing
    transaction, and savings accounts ..................        $41,184,456        $41,184,456        $30,426,907        $30,426,907
  Certificates of deposit and other
    time deposits ......................................         44,909,468         45,007,388         20,218,749         20,273,043
  Federal funds purchased ..............................                  -                  -            533,000            533,000
  Note payable .........................................            900,000            900,000                  -                  -
  Accrued interest payable .............................            289,089            289,089             97,181             97,181
</TABLE>

<TABLE>
<CAPTION>
                                                                    Notional       Estimated             Notional        Estimated
                                                                    Amount         Fair Value            Amount          Fair Value
                                                                    ------         ----------            ------          ----------
Off-Balance Sheet Financial Instruments:
<S>                                                              <C>               <C>                <C>               <C>
  Commitments to extend credit ...........................       $22,908,305       $        -         $16,768,802       $          -
  Standby letters of credit ..............................       $   610,000       $        -         $    10,000       $          -
</TABLE>


                                       34
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 21 - 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,
                                                               ------------
                                                          2004             2003
                                                          ----             ----
Assets
   Cash ............................................   $ 1,143,098   $ 1,003,256
   Investment in banking subsidiary ................     8,140,318     8,657,062
   Loans receivable ................................     2,542,810     1,747,109
      Less allowance for loan losses ...............        11,000        27,718
                                                       -----------   -----------
      Loans, net ...................................     2,531,810     1,719,391
                                                       -----------   -----------
   Other assets ....................................        37,815         4,011
                                                       -----------   -----------
      Total assets .................................   $11,853,041   $11,383,720
                                                       ===========   ===========

Liabilities and shareholders' equity
   Other liabilities ...............................   $    27,927   $       955
   Note payable ....................................       900,000             -
   Shareholders' equity ............................    10,925,114    11,382,765
                                                       -----------   -----------
      Total liabilities and shareholders' equity ...   $11,853,041   $11,383,720
                                                       ===========   ===========






                       Condensed Statements of Operations
                 For the years ended December 31, 2004 and 2003

                                                           2004          2003
                                                           ----          ----
Income ...........................................     $  73,446    $    48,736

Expenses
   Other expenses ................................        14,353         34,869
                                                       ---------    -----------

Income before income taxes and equity in
   undistributed losses of banking subsidiary ....        59,093         13,867

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

   Equity in undistributed losses
      of banking subsidiary ......................      (491,863)    (1,224,979)
                                                       ---------    -----------

Net loss .........................................     $(432,770)   $(1,211,112)
                                                       =========    ===========


                                       35
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 21 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY) - continued


                       Condensed Statements of Cash Flows

                 For the years ended December 31, 2004 and 2003


                                                           2004          2003
                                                           ----          ----
Cash flows from operating activities:
  Net loss .......................................   $  (432,770)   $(1,211,112)
  Adjustments to reconcile net loss to net cash
    provided by operating activities:
     Provision for loan losses ...................       (16,718)        27,718
     Increase (decrease) in other assets .........       (33,805)        (4,011)
     Equity in undistributed losses
         of banking subsidiary ...................       491,863      1,224,979
     (Decrease) increase in other liabilities ....        26,972        (33,045)
                                                     -----------    -----------
       Net cash provided by operating activities .        35,542          4,529
                                                     -----------    -----------

Cash flows from investing activities:
  Purchase of Bank stock .........................             -     (2,000,000)
  Net increase in loans ..........................      (795,700)    (1,747,109)
                                                     -----------    -----------
       Net cash used by operating activities .....      (795,700)    (3,747,109)
                                                     -----------    -----------

Cash flows from financing activities:
  Proceeds from notes payable ....................       900,000              -
                                                     -----------    -----------
       Net cash provided by financing activities .       900,000              -
                                                     -----------    -----------

Net (decrease) increase in
  cash and cash equivalents ......................       139,842     (3,742,580)

Cash and cash equivalents, beginning of year .....     1,003,256      4,745,836
                                                     -----------    -----------

Cash and cash equivalents, end of year ...........   $ 1,143,098    $ 1,003,256
                                                     ===========    ===========




                                       36