Bank of the Carolinas (BCAR)

General

Directors’ Fees.    Our and the Bank’s Boards generally meet jointly, and our outside directors serve and are compensated for their services as directors of the Bank. They do not receive any additional cash compensation for their services as our directors unless our Board meets separately. The following table describes our standard schedule of fees paid to our directors for their service during 2008.

Mr. Marziano, Mr. Larrowe and Mr. Talbert are compensated as officers of the Bank, and they receive no additional compensation for their service as directors.

Stock Options.    From time to time in the past we have granted options to our directors to purchase shares of our common stock under our Director Stock Option Plan. As described above under the caption “Plan Based Awards,” during 2007 our shareholders approved our Omnibus Equity Plan which replaced the Director Stock Option Plan and which authorizes the grant of nonqualified stock options and restricted stock awards to our non-employee directors in a manner similar to that described in the discussion of the plan above under the heading “Executive Compensation—Plan-Based Awards.” In addition to stock options granted under our plans, our directors who previously served as directors of BOC Financial Corporation have stock options that were granted by that company and which we assumed at the time of our merger with that company in 2001. As described below, during 2008 we granted a stock option under the plan to each of our outside directors. We have not granted any restricted stock awards to directors under the plan.

Each stock option gives the director who holds it the right to buy shares of our common stock during a stated period of time (ordinarily ten years) at a fixed price per share that is equal to the market value of our stock on the date the option was granted.

New Awards During 2008.    During October 2008, we granted a stock option to each of our outside directors for 1,500 shares at an exercise price of $5.25 per share. Each option was exercisable as to all the covered shares at the time of grant. The “grant date fair value” of each option, calculated as of the date of grant pursuant to FAS 123R based on the Black-Scholes option pricing model, was $1,997, assuming 23.197% volatility, a 3.001% risk-free rate of return, an expected annual dividend yield of 1.50%, and an expected life of seven years.

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Table of Contents

GENERAL

We are a North Carolina-chartered bank holding company that was incorporated on May 30, 2006, for the sole purpose of serving as the parent bank holding company for the Bank. The Bank is an insured, North Carolina-chartered bank that began operations on December 7, 1998, under the name “Bank of Davie.” On August 18, 2006, we completed a corporate reorganization and share exchange in which the Bank became our wholly-owned bank subsidiary.

The Bank’s directors and executive officers also serve as our directors and officers and, when the reorganization was completed, the Bank’s shareholders became our shareholders owning the same percentages of our common stock as they previously owned of the Bank’s stock.

We currently have no separate operations and conduct no business on our own other than owning all the Bank’s outstanding common stock and supporting its business. Our headquarters are located in the Bank’s main offices, at 135 Boxwood Village Drive, Mocksville, North Carolina, and our telephone number at that address is (336) 751-5755. Through the Bank, we engage in a general, community-oriented commercial and consumer banking business. The Bank’s deposits are insured by the FDIC to the maximum amount permitted by law.

General

A proposal will be submitted to shareholders at the Annual Meeting to approve an amendment (the “Proposed Amendment”) to our Articles of Incorporation (“Charter”) to authorize a new class of capital stock. Section 2 of our Charter currently provides that our authorized capital stock consists of 15,000,000 shares of common stock, all of one class and having a par value of $5.00 per share. The Proposed Amendment would amend Section 2 so that it also authorizes us to issue up to 3,000,000 shares of no par preferred stock (“Preferred Stock”) as an additional class of capital stock. Our Board of Directors would be authorized to issue shares of Preferred Stock from time to time, to create separate series of shares within the new class, and to determine the number of shares, designations, terms, relative rights, preferences and limitations of the Preferred Stock, or of shares within each series of Preferred Stock, at the time of issuance, all by its resolution and without further shareholder approval.

A copy of the Proposed Amendment, which includes the text of Section 2 of our Charter as it is proposed to be amended, is attached as Appendix A to this proxy statement. If the proposal is approved by our shareholders, our Board of Directors would retain the authority to make any and all changes to the Proposed Amendment it deemed necessary to give it effect and cause the North Carolina Secretary of State to accept it for filing.

GENERAL

We are a North Carolina-chartered bank holding company that was incorporated on May 30, 2006, for the sole purpose of serving as the parent bank holding company for the Bank. The Bank is an insured, North Carolina-chartered bank that began operations on December 7, 1998, under the name “Bank of Davie.” On August 18, 2006, we completed a corporate reorganization and share exchange in which the Bank became our wholly-owned bank subsidiary.

The Bank’s directors and executive officers also serve as our directors and officers and, when the reorganization was completed, the Bank’s shareholders became our shareholders owning the same percentages of our common stock as they previously owned of the Bank’s stock. Our consolidated capitalization, assets, liabilities, income and expenses immediately are substantially the same as those of the Bank.

We currently have no separate operations and conduct no business on our own other than owning all the Bank’s outstanding common stock and supporting its business. Our headquarters are located in the Bank’s main offices, at 135 Boxwood Village Drive, Mocksville, North Carolina, and our telephone number at that address is (336) 751-5755. Through the Bank, we engage in a general, community-oriented commercial and consumer banking business. The Bank’s deposits are insured by the FDIC to the maximum amount permitted by law.

General

At its March 28, 2007 meeting, our Board of Directors, upon the recommendation of our Corporate Governance Committee, adopted the 2007 Omnibus Equity Plan, subject to the approval of our stockholders. We will submit a proposal to approve the Plan for your consideration and vote at the Annual Meeting because doing so is consistent not only with our historical practices, but also with principles of good corporate governance. Additionally, the tax-advantaged treatment of incentive stock options provided by Internal Revenue Code Section 422 is conditioned upon approval of the plan by stockholders. Lastly, the exemption for performance-based compensation from the $1,000,000 tax deduction limitation of Internal Revenue Code Section 162(m) likewise is conditioned upon stockholder approval. Additional information about the tax treatment of incentive stock options under Section 422 and performance-based compensation under Section 162(m) is contained in this discussion under the caption “Federal Income Tax Consequences.”

The goal of the Plan is to promote the long-term financial success of our company and our subsidiaries, including the Bank, and to increase stockholder value. In contrast to our existing stock option plans, which provide only for stock option awards, the proposed new Plan gives us authority to make awards of stock options, as well as restricted stock and performance share awards. Awards may be made to our employees as well as employees of our subsidiaries. Awards of stock options and restricted stock may also be made to our directors who are not employees of our company or any of our subsidiaries. The Plan will enhance our ability to attract and retain the services of employees and directors upon whose judgment, skill, and efforts the successful conduct of our business depends. The variety of awards that may be made under the Plan gives us flexibility to respond to changes in equity compensation practices in the market for banking talent in which we compete.

The Plan contains provisions that we believe are consistent with the interests of stockholders and principles of good corporate governance. For example, stock options must have an exercise price equal to or greater than the fair market value of our common stock on the date the award is made. Similarly, the Plan prohibits repricing of stock options without stockholder approval. In other words, if the fair market value of our stock experiences a sustained decline to a price less than the exercise price of a stock option, for example, we cannot freely adjust the exercise price of the option to compensate for the loss of the option’s value.

The following is a summary of the Plan. However, the summary is qualified in its entirety by reference to Plan itself which is attached as Appendix A to this proxy statement. We encourage you to read the Plan in its entirety. References in this summary to the Code mean the Internal Revenue Code of 1986, as amended.

GENERAL

We are a North Carolina-chartered bank holding company that was incorporated on May 30, 2006, for the sole purpose of serving as the parent bank holding company for the Bank. The Bank is an insured, North Carolina-chartered bank that began operations on December 7, 1998, under the name “Bank of Davie.” On August 18, 2006, we completed a corporate reorganization and share exchange in which the Bank became our wholly-owned bank subsidiary. Upon completion of the reorganization, each of the 3,825,192 outstanding shares of the Bank’s $5.00 par value common stock was converted into and exchanged for one newly issued share of our $5.00 par value common stock.

The Bank’s directors and executive officers also serve as our directors and officers and, when the reorganization was completed, the Bank’s shareholders became our shareholders owning the same percentages of our common stock as they previously owned of the Bank’s stock. The reorganization had no impact on the Bank’s banking operations. Our consolidated capitalization, assets, liabilities, income and expenses immediately following the reorganization were substantially the same as those of the Bank immediately prior to the reorganization.

We currently have no separate operations and conduct no business on our own other than owning all the Bank’s outstanding common stock and supporting its business. Our headquarters are located in the Bank’s main offices in Mocksville, North Carolina, and, through the Bank, we engage in a general, community-oriented commercial and consumer banking business. The Bank’s deposits are insured by the FDIC to the maximum amount permitted by law.