A great start to the season mad many think that the Cumbrians were finally on their way out of the Fourth Division, but a poor second half of the season witnessed them slump to 20th in the final table and cost manager Clive Middlemass his position as manager in March. He was succeeded by Aidan McCaffrey, who was left needing a huge overhaul to get Carlisle's fortunes back on track. Carlisle endured one of the poorest seasons in their history as they finished bottom of the Fourth Division, however were lucky because an expansion to the Football League meant that there would be no demotion to the Vauxhall Conference this year. In any case, the fall of Aldershot would have saved them even if there had been a relegation place. Michael Knighton took Carlisle over prior the beginning of the season, and within weeks had sacked manager Aidan McCaffrey following a poor start to the new Division 3 campaign. David McCreery, 35, was named player-manager and guided Carlisle to safety as they finished 18th in the final table. Prior the season began, Michael Knighton announced his intention to deliver Premiership football to Carlisle by 2003. He re-organised the management team to appoint Mick Wadsworth as Director of Coaching, while David McCreery was given the role of head coach and 38-year-old goalkeeper Mervyn Day was named as assistant coach. This season was Carlisle's best in years, as the £121,000 record signing of striker David Reeves in October saw them acquire a much-needed prolific goalscorer. They won 10 of their final 14 league. Carlisle finally achieved their first huge success in thirteen years by lifting the Division 3 title. David Reeves netted in twenty five league goals to help Carlisle achieve their long-awaited success which finished their eight-year ordeal in the league's lowest division. They also reached the Autoglass Windscreens Trophy Final but missed out on the trophy after allowing a sudden death extra time goal against Birmingham City.

Mick Wadsworth's departure as manager in December was a huge blow to Carlisle, as was the mid-season sale of major players Paul Murray and Tony Gallimore. They finished the season clear of the relegation zone with more goals than 21st-placed York City, who had to replay a match against Brighton which had been called off due to crowd trouble. But a 3-1 victory for York sent Carlisle down, just one year after they had won promotion to Division Two.

Young players such as Rory Delap, Matt Jansen and Lee Peacock were crucial as Carlisle bounced back from demotion to achieve promotion back to Division Two at the first time of asking. The promotion happiness was accompanied by a penalty shoot-out triumph over Colchester United in the Auto Windscreens Trophy Final, in which Tony Caig pulled off some impressive goalkeeping saves.

Mervyn Day was dismissed just six games into Carlisle's Division Two campaign, and chairman Michael Knighton promptly installed himself as manager. They were still in the demotion zone come Christmas, but by the time Knighton departed the club several weeks later they had climbed clear. But nine losses from their final ten matches condemned Carlisle to relegation in 23rd place, with 17 goals from forward Ian Stevens not being quite enough to attain survival.