# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-KSB

(Mark One)

|X | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------

| | For the fiscal year ended December 31, 2004
| | -------------------------------------------

| | Or
| | --

| | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from __________ to ________                             

Commission File Number
333-117053

| | CommunitySouth Bancshsares, Inc. | 
| | -------------------------------- | 

| | (Name of Small Business Issuer in Its Charter) | 
| | ---------------------------------------------- | 

|South Carolina                    |  | 20-0934786         
|--------------------------------- |  | -------------------
|(State or Other Jurisdiction      |  | (I.R.S. Employer   
|of Incorporation or Organization) |  | Identification No.)

|6650 Calhoun Memorial Highway            |  |           
|---------------------------------------- |  | ----------
|Easley, South Carolina                   |  | 29640     
|(Address of Principal Executive Offices) |  | (Zip Code)

Issuers telephone number:  (864) 306-2540

Securities registered pursuant to Section 12(b) of the Act:  NoneSecurities registered pursuant to Section 12(g) of the
Act:  None

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
  Yes X  No

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[ X ]

The issuers revenue for the
year ended December 31, 2004 was $32,670.

The aggregate market value of the voting
stock held by non-affiliates (shareholders holding less than 5% of an outstanding class of
stock, excluding directors and executive officers) as of March 1, 2005 was approximately
$25,732,420. This calculation is based upon an estimate of the fair market value of the
common stock of $10.00 per share, which was the price of the last trade of which
management is aware as of this date. There is not an active trading market for the common
stock and it is not possible to identify precisely the market value of the common stock.

The number of shares outstanding of
the issuers common stock was 2,995,942 at March 15, 2005.

DOCUMENTS INCORPORATED
BY REFERENCENone.

Transitional Small Business Disclosure Format.
(Check one):  Yes   NoX

---

# Item 1.   Description of
Business

This
Report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934.
These statements are based on many assumptions and estimates and are not guarantees of
future performance. Our actual results may differ materially from those projected in any
forward-looking statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words may,
would, could, will, expect,
anticipate, believe, intend, plan, and
estimate, as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are not limited
to, those described below under Risk Factors.

# General

CommunitySouth
Bancshares, Inc. was incorporated in South Carolina in March 2004 for purposes of
operating as a bank holding company. Our wholly-owned subsidiary, CommunitySouth Bank
& Trust, commenced business on January 18, 2005, and is primarily engaged in the
business of accenting savings, demand, and time deposits and providing mortgage, consumer
and commercial loans to the general public.

# Risk Factors

# We are a new bank that
has incurred losses to date, and there is a risk we may never become profitable.

Our
bank is a de novo bank that began operations in January 2005. As is typical with most new
banks, we incurred substantial start-up expenses and are still operating with an
accumulated deficit. In order for us to become profitable, we will need to attract a
larger number of customers to deposit and borrow money. Our future profitability is also
dependent on numerous other factors including the continued success of the economy of the
community and favorable government regulation. While the economy in this area has been
strong in recent years, an economic downturn in the area would hurt our business. We are
also a highly regulated institution. Our ability to grow and achieve profitability may be
adversely affected by state and federal regulations that limit a banks right to make
loans and purchase securities. Although we expect to become profitable in our third year
of operation, there is a risk that a deterioration of the local economy or adverse
government regulation could affect our plans. If this happens, we may never become
profitable and you will lose part or all of your investment.

# We are dependent on key
individuals and the loss of one or more of these key individuals could curtail our growth and
adversely affect our prospects.

Allan
Ducker, our chief executive officer, and David Miller, our president, have extensive and
long-standing ties within our market area and substantial experience with our operations
which has contributed significantly to our growth. If we lose the services of Messrs.
Ducker or Miller, they would be difficult to replace and our business and development
could be materially and adversely affected. Our success also depends, in part, on our
continued ability to attract and retain experienced loan originators, as well as other
management personnel. The loss of the services of several of such key personnel could
adversely affect our growth strategy and prospects to the extent we are unable to replace
such personnel. We maintain key man life insurance policies in the amount of $1.0 million
on each of Messrs. Ducker and Miller.

# Our decisions regarding
credit risk and reserves for loan losses may materially and adversely affect our business.

Making
loans and other extensions of credit is an essential element of our business. Although we
seek to mitigate risks inherent in lending by adhering to specific underwriting practices,
our loans and other extensions of credit may not be repaid. The risk of nonpayment is
affected by a number of factors, including:

| | o | the duration of the credit;
| | - | ---------------------------

| | o | credit risks of a particular customer;
| | - | --------------------------------------

| | o | changes in economic and industry conditions; and
| | - | ------------------------------------------------

| | o | in the case of a collateralized loan, risks resulting from uncertainties about the future
value of the collateral.
| | - | ------------------------------------------------------------------------------------------------------------------

We
attempt to maintain an appropriate allowance for loan losses to provide for potential
losses in our loan portfolio. We periodically determine the amount of the allowance based
on consideration of several factors, including:

| | o | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

2

---

| | o | our historical loan loss experience;
| | - | ------------------------------------

| | o | evaluation of economic conditions;
| | - | ----------------------------------

| | o | regular reviews of loan delinquencies and loan portfolio quality; and
| | - | ---------------------------------------------------------------------

| | o | the amount and quality of collateral, including guarantees, securing the loans.
| | - | -------------------------------------------------------------------------------

There
is no precise method of predicting credit losses; therefore, we face the risk that
charge-offs in future periods will exceed our allowance for loan losses and that
additional increases in the allowance for loan losses will be required. Additions to the
allowance for loan losses would result in a decrease of our net income, and possibly our
capital.

# Lack of seasoning of our
loan portfolio may increase the risk of credit defaults in the future.

Due
to our short operating history, of the loans in our loan portfolio and of our lending
relationships are of relatively recent origin. In general, loans do not begin to show
signs of credit deterioration or default until they have been outstanding for some period
of time, a process we refer to as seasoning. As a result, a portfolio of older
loans will usually behave more predictably than a newer portfolio. Because our loan
portfolio is new, the current level of delinquencies and defaults may not be
representative of the level that will prevail when the portfolio becomes more seasoned,
which may be higher than current levels. If delinquencies and defaults increase, we may be
required to increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.

# An economic downturn,
especially one affecting Pickens and Spartanburg Counties, could reduce our customer base, our
level of deposits, and demand for financial products such as loans.

Our
success will significantly depend upon the growth in population, income levels, deposits,
and housing starts in our market of Pickens and Spartanburg Counties. If the community in
which we operate does not grow or if prevailing economic conditions locally or nationally
are unfavorable, our business may not succeed. An economic downturn would likely
contribute to the deterioration of the quality of our loan portfolio and reduce our level
of deposits, which in turn would hurt our business. If an economic downturn occurs in the
economy as a whole, or in Pickens and Spartanburg Counties, borrowers may be less likely
to repay their loans as scheduled. Moreover, the value of real estate or other collateral
that may secure our loans could be adversely affected. Unlike many larger institutions, we
are not able to spread the risks of unfavorable local economic conditions across a large
number of diversified economies. An economic downturn could, therefore, result in losses
that materially and adversely affect our business.

# Changes in prevailing
interest rates may reduce our profitability.

Our
results of operations depend in large part upon the level of our net interest income,
which is the difference between interest income from interest-earning assets, such as
loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and other borrowings. Depending on the terms and maturities
of our assets and liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. Many factors cause changes in interest
rates, including governmental monetary policies and domestic and international economic
and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our
efforts may not be effective and our financial condition and results of operations could
suffer. After operating in a historically low interest rate environment, the Federal
Reserve began raising short-term interest rates in the second quarter of 2004. We are
positioned to benefit from a rising interest rate environment in the immediate short-term
time frame. However, no assurance can be given that the Federal Reserve will actually
continue to raise interest rates or that the results we anticipate will actually occur.

# We are subject to
extensive regulation that could limit or restrict our activities.

We
operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by various regulatory agencies. Our compliance with these
regulations is costly and restricts certain of our activities, including payment of
dividends, mergers and acquisitions, investments, loans and interest rates charged,
interest rates paid on deposits, and locations of offices. We are also subject to
capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth.

The
laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial
banks and bank holding companies, our cost of compliance could adversely affect our
ability to operate profitably.

3

---

The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the
Securities and Exchange Commission that are now applicable to us, have increased the
scope, complexity, and cost of corporate governance, reporting, and disclosure practices.

# We
face strong competition for customers, which could prevent us from obtaining customers
and may cause us to payhigher interest rates to attract customers.

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual
funds, as well as other super-regional, national, and international financial institutions
that operate offices in our primary market areas and elsewhere. We compete with these
institutions both in attracting deposits and in making loans. In addition, we have to
attract our client base from other existing financial institutions and from new residents.
Many of our competitors are well-established, larger financial institutions. These
institutions offer some services, such as extensive and established branch networks, that
we do not currently provide. There is a risk that we will not be able to compete
successfully with other financial institutions in our market, and that we may have to pay
higher interest rates to attract deposits, resulting in reduced profitability. In
addition, competitors that are not depository institutions are generally not subject to
the extensive regulations that apply to us.

# We will face risks with
respect to future expansion and acquisitions or mergers.

Although
we do not have any current plans to do so, we may seek to acquire other financial
institutions or parts of those institutions. We may also expand into new markets or lines
of business or offer new products or services. These activities would involve a number of
risks, including:

| | o | taking additional time and creating expense associated with identifying and evaluating
potential acquisitions and merger partners;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | o | using inaccurate estimates and judgments to evaluate credit, operations, management, and
market risks with respect to the target institution or assets;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | diluting our existing shareholders in an acquisition;
| | - | -----------------------------------------------------

| | o | taking additional time and creating expense associated with evaluating new markets for
expansion, hiring experienced local management, and opening new offices, as there may be a
substantial time lag between these activities before we generate sufficient assets and
deposits to support the costs of the expansion;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | taking a significant amount of time negotiating a transaction or working on expansion
plans, resulting in managements attention being diverted from the operation of our
existing business;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | taking time and creating expense integrating the operations and personnel of the combined
businesses;
| | - | -----------------------------------------------------------------------------------------------------

| | o | creating an adverse short-term effect on our results of operations; and
| | - | -----------------------------------------------------------------------

| | o | losing key employees and customers as a result of an acquisition that is poorly received.
| | - | -----------------------------------------------------------------------------------------

We
have never acquired another institution before, so we lack experience in handling any of
these risks. There is also a risk that any expansion effort will not be successful.

# Marketing Focus

Most
of the banks in Pickens and Spartanburg Counties are now local branches of large regional
banks. Although size gives the larger banks certain advantages in competing for business
from large corporations, including higher lending limits and the ability to offer services
in other areas of South Carolina and in Pickens and Spartanburg Counties, we believe we
have a niche in the community banking market in our market area. As a result, we generally
do not attempt to compete for the banking relationships of large corporations, but
concentrate our efforts on small- to medium-sized businesses and professional concerns.
The bank advertises to emphasize the companys local ownership, community bank
nature, and ability to provide more personalized service than its competition.

# Location and Service Area

Our
main office will be located at the intersection of US Highway 123 and Williams Avenue. Our
address will be 6602 Calhoun Memorial Highway, Easley, South Carolina 29640. The site is
approximately 1.2 acres in size, and the building will be approximately 11,000 square
feet. We expect to complete construction in the first quarter of 2006. In the

4

---

interim period, we are leasing the
adjoining site and operating out of a temporary facility. We opened a loan production
office in Spartanburg, South Carolina and expect to have a full branch in Spartanburg by
the end of 2005. We are presently located at 6650 Calhoun Memorial Highway, Easley, South
Carolina 29640. Our telephone number is (864) 306-2540.

Pickens
County is located in the northwest portion of South Carolina along the I-85 corridor
between Atlanta, Georgia and Charlotte, North Carolina. Manufacturing is the countys
primary source of economic growth with approximately 150 facilities located in the
surrounding area. With its access to applied automobile materials research and technology
at Clemson University and location in the automobile hub of the southeast, the area is
also developing a reputation among leaders in the automobile industry. Major employers in
the area include Clemson University, Pickens County Schools, Aramark Campus, Inc., Alice
Manufacturing Company, and Palmetto Heath Alliance. The Pickens County Commerce Park, a
new 310 acre industrial park with 6,000 feet of prime frontage on US Highway 123, should
also generate additional jobs, housing, and continued growth in the area.

Spartanburg
County is also located in the northwest portion of South Carolina along the I-85
boom belt of the Upstate. Spartanburgs economic history is rooted in
agriculture and textiles. Today, the county is an internationally recognized business and
cultural center. More than 90 international firms representing 15 nations have joined the
business community. BMW Manufacturing Corporation, Milliken & Company, Extended Stay
America, and Dennys are just a few of the companies that call Spartanburg home. The
most well known of these companies is BMW, which began its assembly operation in
Spartanburg in 1994 and today is the sole producer of the Z4 and X5 vehicles for worldwide
distribution. Currently, BMW employs approximately 2,000 workers. The amenities and
opportunities Spartanburg County offers are wide-ranging from housing, education,
healthcare, shopping, recreation, and culture. We believe these factors make the quality
of life in the area attractive. Additionally, Spartanburgs mild climate and location
and access to the mountains, the coast, and larger cities such as Atlanta and Charlotte
add to the attractiveness of the area. The growth in the manufacturing base is
complemented by the countys population growth, which is expected to increase from
its current level of 254,000 to 282,000 in 2010.

# Lending Activities

General.
          We will emphasize a range of lending services, including real estate,
          commercial, and equity-line and consumer loans to individuals, small- to
          medium-sized businesses, and professional concerns that are located in or
          conduct a substantial portion of their business in our banks market area.

Real
Estate Loans. These loans generally fall into one of two categories: commercial real
estate loans or construction and development loans. We will also make residential real
estate loans secured by first or second mortgages on real estate. Each of these categories
is discussed in more detail below, including their specific risks. Interest rates for all
categories may be fixed or adjustable, and will more likely be fixed for shorter-term
loans. We will generally charge an origination fee for each loan.

Real
estate loans are subject to the same general risks as other loans. Real estate loans are
also sensitive to fluctuations in the value of the real estate securing the loan. On first
and second mortgage loans, we will not advance more than regulatory limits. We require a
valid mortgage lien on all real property loans along with a title lien policy which
insures the validity and priority of the lien. We also require borrowers to obtain hazard
insurance policies and flood insurance if applicable. Additionally, certain types of real
estate loans have specific risk characteristics that vary according to the collateral type
securing the loan and the terms and repayment sources for the loan.

We
will have the ability to originate some real estate loans for sale into the secondary
market. We can limit our interest rate and credit risk on these loans by locking the
interest rate for each loan with the secondary investor and receiving the investors
underwriting approval prior to originating the loan.

| | o | Commercial Real Estate Loans. Commercial real estate loans generally have terms of
five years or less, although payments may be structured on a longer amortization basis.
Inherent in commercial real estate loans credit risk is the risk that the primary
source of repayment, the operating commercial real estate company, will be insufficient to
service the debt. If a real estate loan is in default, we also run the risk that the value
of a commercial real estate loans secured real estate will decrease, and thereby be
insufficient to satisfy the loan. To mitigate these risks, we evaluate each borrower on an
individual basis and attempt to determine its business risks and credit profile. We
attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans
on owner-occupied office and retail buildings where the loan-to-value ratio is established
by independent appraisals. We typically review the personal financial statements of the
principal owners and require their personal guarantees. These reviews often reveal
secondary sources of payment and liquidity to support a loan request.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

---

| | o | Construction and Development Real Estate Loans.We will offer adjustable and fixed
rate residential and commercial construction loans to builders and developers and to
consumers who wish to build their own home. The term of construction and development loans
generally is be limited to 18 months, although payments may be structured on a longer
amortization basis. Most loans mature and require payment in full upon the sale of the
property. Construction and development loans generally carry a higher degree of risk than
long term financing of existing properties. Repayment usually depends on the ultimate
completion of the project within cost estimates and on the sale of the property. Specific
risks include:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | cost overruns;
| | - | --------------

| | o | mismanaged construction;
| | - | ------------------------

| | o | inferior or improper construction techniques;
| | - | ---------------------------------------------

| | o | economic changes or downturns during construction;
| | - | --------------------------------------------------

| | o | a downturn in the real estate market;
| | - | -------------------------------------

| | o | rising interest rates which may prevent sale of the property; and
| | - | -----------------------------------------------------------------

| | o | failure to sell completed projects in a timely manner.
| | - | ------------------------------------------------------

| | We will attempt to reduce risk by obtaining personal guarantees where possible, and by
keeping the loan-to-value ratio of the completed project below specified percentages. We
may also reduce risk by selling participations in larger loans to other institutions when
possible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Residential Real Estate Loans. These loans will generally have longer terms, up to
30 years. We will offer fixed and adjustable rate mortgages, and sell most or all of the
residential real estate loans that we generate in the secondary market soon after we
originate them. We will not retain servicing rights for these loans. Inherent in
residential real estate loans credit risk is the risk that the primary source of
repayment, the residential borrower, will be insufficient to service the debt. If a real
estate loan is in default, we also run the risk that the value of a residential real
estate loans secured real estate will decrease, and thereby be insufficient to
satisfy the loan. To mitigate these risks, we will evaluate each borrower on an individual
basis and attempt to determine its credit profile. By selling these loans in the secondary
market, we can significantly reduce our exposure to credit risk because the loans will be
underwritten through a third party agent without any recourse against the bank.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commercial
Loans. We will make loans for commercial purposes in various lines of businesses.
Equipment loans typically are made for a term of five years or less at fixed or variable
rates, with the loan fully amortized over the term and secured by the financed equipment.
We will focus our efforts on commercial loans of less than $1,000,000. Working capital
loans typically have terms not exceeding one year and are usually be secured by accounts
receivable, inventory, or personal guarantees of the principals of the business. For loans
secured by accounts receivable or inventory, principal will typically be repaid as the
assets securing the loan are converted into cash, and in other cases principal will
typically be due at maturity. Trade letters of credit, standby letters of credit, and
foreign exchange are handled through a correspondent bank as agent for the bank.
Commercial loans primarily have risk that the primary source of repayment, the borrowing
business, will be insufficient to service the debt. Often this occurs as the result of
changes in local economic conditions or in the industry in which the borrower operates
which impact cash flow or collateral value.

Consumer
Loans. We will make a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment loans and revolving lines of credit
such as credit cards. Installment loans typically carry balances of less than $50,000 and
are amortized over periods up to 60 or more months. Consumer loans are offered on a single
maturity basis where a specific source of repayment is available. Revolving loan products
typically require monthly payments of interest and a portion of the principal.

We
will also have the ability to offer small business loans utilizing government enhancements
such as the Small Business Administrations 7(a) program and SBAs 504 and
LowDoc programs. These loans will typically be partially guaranteed by the
government which may help to reduce the banks risk. Government guarantees of SBA
loans will not exceed 80% of the loan value, and will generally be less.

Consumer
loans are generally considered to have greater risk than first or second mortgages on real
estate because the value of the secured property may depreciate rapidly, they are often
dependent on the borrowers employment status as the sole source of repayment, and
some of them are unsecured. To mitigate these risks, we will analyze selective

6

---

underwriting criteria for each
prospective borrower, which may include the borrowers employment history, income
history, credit bureau reports, or debt to income ratios. If the consumer loan is secured
by property, such as an automobile loan, we also attempt to offset the risk of rapid
depreciation of the collateral with a shorter loan amortization period. Despite these
efforts to mitigate our risks, consumer loans have a higher rate of default that real
estate loans. For this reason, we will attempt to reduce our loss exposure to these types
of loans by limiting their sizes relative to other types of loans.

We
will also offer home equity loans. Our underwriting criteria for and the risks associated
with home equity loans and lines of credit will generally be the same as those for first
mortgage loans. Home equity lines of credit will typically have terms of 15 years or less,
carry balances less than $125,000, and may extend up to 90% of the available equity of
each property.

Relative
Risks of Loans. Each category of loan has a different level of credit risk. Real
estate loans are generally safer than loans secured by other assets because the value of
the underlying security, real estate, is generally ascertainable and does not fluctuate as
much as some other assets. Certain real estate loans are less risky than others.
Residential real estate loans are generally the least risky type of real estate loan,
followed by commercial real estate loans and construction and development loans.
Commercial loans, which can be secured by real estate or other assets, or which can be
unsecured, are generally more risky than real estate loans, but less risky than consumer
loans. Finally, consumer loans, which can also be secured by real estate or other assets,
or which can also be unsecured, are generally considered to be the most risky of these
categories of loans. Any type of loan which is unsecured is generally more risky than
secured loans. These levels of risk are general in nature, and many factors including the
creditworthiness of the borrower or the particular nature of the secured asset may cause
any type of loan to be more or less risky than another. Additionally, these levels of risk
are limited to an analysis of credit risk, and they do not take into account other risk
factors associated with making loans such as the interest rate risk inherent in long-term,
fixed-rate loans.

Loan
Approval and Review. Our loan approval policies will provide for various levels of
officer lending authority. When the amount of aggregate loans to a single borrower exceeds
that individual officers lending authority, the loan request is considered and
approved by an officer with a higher lending limit or the board of directors loan
committee. We will not make any loans to any director of the bank unless the loan is
approved by the board of directors of the bank and is made on terms not more favorable to
the person than would be available to a person not affiliated with the bank. We adhere to
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
guidelines in its mortgage loan review process, but we may choose to alter this policy in
the future.

Lending
Limits. Our lending activities are subject to a variety of lending limits imposed by
federal law. In general, we will be subject to a legal limit on loans to a single borrower
equal to 15% of the banks capital and unimpaired surplus. Different limits may apply
based on the type of loan or the nature of the borrower, including the borrowers
relationship to the bank. These limits will increase or decrease as the banks
capital increases or decreases.

# Banking Services

We
will offer a full range of deposit services that are typically available in most banks and
savings and loan associations, including checking accounts, NOW accounts, commercial
accounts, savings accounts, and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The transaction accounts and
time certificates are tailored to our principal market area at rates competitive to those
offered in the Easley area. In addition, offer certain retirement account services,
including IRAs.

# Other Banking Services

We
will also offer safe deposit boxes, cashiers checks, banking by mail, direct deposit
of payroll and social security checks, U.S. Savings Bonds, and travelers checks. This bank
is associated with the Star and Plus ATM networks that may be used by the banks
customers throughout the country. We believe that by being associated with a shared
network of ATMs, we will be better able to serve our customers and will be able to attract
customers who are accustomed to the convenience of using ATMs. We also offer a debit card
and credit card services through a correspondent bank as an agent for the bank.

# Competition

The
banking business is highly competitive. We will compete as a financial intermediary with
other commercial banks, savings banks, credit unions, finance companies, and money market
mutual funds operating in Pickens and

7

---

Spartanburg Counties. The competition
among the various financial institutions is based upon a variety of factors, including
interest rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services rendered, the convenience of banking facilities
and, in the case of loans to large commercial borrowers, relative lending limits. In
addition to banks and savings associations, we compete with other financial institutions
including securities firms, insurance companies, credit unions, leasing companies and
finance companies. Size gives larger banks certain advantages in competing for business
from large corporations. These advantages include higher lending limits and the ability to
offers services in other areas of South Carolina. As a result, we do not generally attempt
to compete for the banking relationships of large corporations, but concentrate our
efforts on small- to medium-sized businesses and individuals. We believe we have competed
effectively in this market by offering quality and personal service.

# Employees

As
of March 23, 2005, we had 18 full-time employees and 2 part-time employees.

# SUPERVISION AND
REGULATION

Both
the company and the bank are subject to extensive state and federal banking laws and
regulations that impose specific requirements or restrictions on and provide for general
regulatory oversight of virtually all aspects of our operations. These laws and
regulations are generally intended to protect depositors, not shareholders. The following
summary is qualified by reference to the statutory and regulatory provisions discussed.
Changes in applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institutions Reform Recovery and
Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and the
Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have been
placed on the banking industry in the past several years, and additional changes have been
proposed. Our operations may be affected by legislative changes and the policies of
various regulatory authorities. We cannot predict the effect that fiscal or monetary
policies, economic control, or new federal or state legislation may have on our business
and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# USA PATRIOT Act of 2002

In
October 2002, the USA PATRIOT Act of 2002 was enacted in response to the terrorist attacks
in New York, Pennsylvania, and Washington D.C. that occurred on September 11, 2001. The
PATRIOT Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the PATRIOT Act on financial institutions is significant and wide
ranging. The PATRIOT Act contains sweeping anti-money laundering and financial
transparency laws and imposes various regulations, including standards for verifying
client identification at account opening, and rules to promote cooperation among financial
institutions, regulators, and law enforcement entities in identifying parties who may be
involved in terrorism or money laundering.

# Check 21

On
October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century
Act, also known as Check 21. The new law gives substitute checks, such as a
digital image of a check and copies made from that image, the same legal standing as the
original paper check. Some of the major provisions include:

| | o | allowing check truncation without making it mandatory;
| | - | ------------------------------------------------------

| | o | demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | legalizing substitutions for and replacements of paper checks without agreement from
consumers;
| | - | -----------------------------------------------------------------------------------------------

| | o | retaining in place the previously mandated electronic collection and return
of checks between financial institutions only when individual agreements are in place;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | requiring that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and demonstrate
that the account debit was accurate and valid; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

| | o | requiring recrediting of funds to an individuals account on the next business day
after a consumer proves that the financial institution has erred.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

This
new legislation will likely affect bank capital spending as many financial institutions
assess whether technological or operational changes are necessary to stay competitive and
take advantage of the new opportunities presented by Check 21.

# CommunitySouth
Bancshares, Inc.

We
own 100% of the outstanding capital stock of the bank, and therefore we are considered to
be a bank holding company under the federal Bank Holding Company Act of 1956 and the South
Carolina Banking and Branching Efficiency Act.

The
Bank Holding Company Act. Under the Bank Holding Company Act, we are subject to
periodic examination by the Federal Reserve and are required to file periodic reports of
our operations and any additional information that the Federal Reserve may require. Our
activities at the bank and holding company levels are limited to:

| | o | banking and managing or controlling banks;
| | - | ------------------------------------------

| | o | furnishing services to or performing services for our subsidiaries; and
| | - | -----------------------------------------------------------------------

| | o | engaging in other activities that the Federal Reserve determines to be so closely related
to banking and managing or controlling banks as to be a proper incident thereto.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investments,
Control, and Activities. With certain limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal Reserve
before:

| | o | acquiring substantially all the assets of any bank;
| | - | ---------------------------------------------------

| | o | acquiring direct or indirect ownership or control of any voting shares of any bank if
after the acquisition it would own or control more than 5% of the voting shares of such
bank (unless it already owns or controls the majority of such shares); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | merging or consolidating with another bank holding company.
| | - | -----------------------------------------------------------

In
addition, and subject to certain exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, together with regulations promulgated thereunder, require Federal
Reserve approval prior to any person or company acquiring control of a bank
holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of a bank holding company. Control
is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of
any class of voting securities and either the company has registered securities under
Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater
percentage of that class of voting securities immediately after the transaction. We expect
that we will register our common stock under the Securities Exchange Act of 1934 in early
April 2006. The regulations provide a procedure for rebutting control when ownership of
any class of voting securities is below 25%.

Under
the Bank Holding Company Act, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities unless the Federal Reserve Board, by order or
regulation, has found those activities to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the business
of a bank holding company include:

| | o | making or servicing loans and certain types of leases;
| | - | ------------------------------------------------------

| | o | engaging in certain insurance and discount brokerage activities;
| | - | ----------------------------------------------------------------

| | o | performing certain data processing services;
| | - | --------------------------------------------

| | o | acting in certain circumstances as a fiduciary or investment or financial adviser;
| | - | ----------------------------------------------------------------------------------

| | o | owning savings associations; and
| | - | --------------------------------

| | o | making investments in certain corporations or projects designed primarily to promote
community welfare.
| | - | -------------------------------------------------------------------------------------------------------

The
Federal Reserve Board imposes certain capital requirements on the company under the Bank
Holding Company Act, including a minimum leverage ratio and a minimum ratio of
qualifying capital to risk-weighted assets. These requirements are described
below under CommunitySouth Bank & Trust  Capital Regulations.
Subject to our capital requirements and certain other restrictions, we are able to borrow
money to make a capital contribution to the bank,

9

---

and these loans may be repaid from
dividends paid from the bank to the company. Our ability to pay dividends will be subject
to regulatory restrictions as described below in CommunitySouth Bank & Trust
 Dividends. We are also able to raise capital for contribution to the bank by
issuing securities without having to receive regulatory approval, subject to compliance
with federal and state securities laws.

Source
of Strength; Cross-Guarantee. In accordance with Federal Reserve Board policy, we are
expected to act as a source of financial strength to the bank and to commit resources to
support the bank in circumstances in which we might not otherwise do so. Under the Bank
Holding Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Boards determination that such
activity or control constitutes a serious risk to the financial soundness or stability of
any depository institution subsidiary of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiaries if the agency determines that
divestiture may aid the depository institutions financial condition.

The
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was signed into law on November 12,
1999. Among other things, the Act repealed the restrictions on banks affiliating with
securities firms contained in sections 20 and 32 of the Glass-Steagall Act. The Act also
permits bank holding companies that become financial holding companies to engage in a
statutorily provided list of financial activities, including insurance and securities
underwriting and agency activities, merchant banking, and insurance company portfolio
investment activities. The Act also authorizes activities that are
complementary to financial activities. We have not elected to become a
financial holding company.

The
Act is intended, in part, to grant to community banks certain powers as a matter of right
that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may
have the result of increasing the amount of competition that we face from larger
institutions and other types of companies. In fact, it is not possible to predict the full
effect that the Act will have on us.

South
Carolina State Regulation. As a South Carolina bank holding company under the South
Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or
merger and to regulation by the South Carolina Board of Financial Institutions. We are not
required to obtain the approval of the Board prior to acquiring the capital stock of a
national bank, but we must notify them at least 15 days prior to doing so. We must receive
the Boards approval prior to engaging in the acquisition of a South Carolina
state-chartered bank or another South Carolina bank holding company.

# CommunitySouth Bank
& Trust

The
bank operates as a state bank incorporated under the laws of the State of South Carolina
and is subject to examination by the South Carolina Board of Financial Institutions.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.

The
South Carolina Board of Financial Institutions and the FDIC regulate or monitor virtually
all areas of the banks operations, including:

| | o | security devices and procedures;
| | - | --------------------------------

| | o | adequacy of capitalization and loss reserves;
| | - | ---------------------------------------------

| | o | loans;
| | - | ------

| | o | investments;
| | - | ------------

| | o | borrowings;
| | - | -----------

| | o | deposits;
| | - | ---------

| | o | mergers;
| | - | --------

| | o | issuances of securities;
| | - | ------------------------

| | o | payment of dividends;
| | - | ---------------------

| | o | interest rates payable on deposits;
| | - | -----------------------------------

| | o | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| | o | establishment of branches;
| | - | --------------------------

| | o | corporate reorganizations;
| | - | --------------------------

| | o | maintenance of books and records; and
| | - | -------------------------------------

| | o | adequacy of staff training to carry on safe lending and deposit gathering practices.
| | - | ------------------------------------------------------------------------------------

10

---

The
South Carolina Board of Financial Institutions requires the bank to maintain specified
capital ratios and imposes limitations on the banks aggregate investment in real
estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial
Institutions also requires the bank to prepare quarterly reports on the banks
financial condition in compliance with its minimum standards and procedures.

Under
the FDIC Improvement Act, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the FDIC, their federal regulatory
agency, and their state supervisor when applicable. The FDIC Improvement Act directs the
FDIC to develop a method for insured depository institutions to provide supplemental
disclosure of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. The FDIC Improvement Act also
requires the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding companies
relating, among other things, to the following:

| | o | internal controls;
| | - | ------------------

| | o | information systems and audit systems;
| | - | --------------------------------------

| | o | loan documentation;
| | - | -------------------

| | o | credit underwriting;
| | - | --------------------

| | o | interest rate risk exposure; and
| | - | --------------------------------

| | o | asset quality.
| | - | --------------

Holding
companies which have been registered or have undergone a change in control within the past
two years or which have been deemed by the Federal Reserve Board to be troubled
institutions must give the Federal Reserve Board 30 days prior notice of the
appointment of any senior executive officer or director. Within the 30 day period, the
Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.

Deposit
Insurance. The FDIC has adopted a risk-based assessment system for determining an
insured depository institutions insurance assessment rate. The system takes into
account the risks attributable to different categories and concentrations of assets and
liabilities. An institution is placed into one of three capital categories: (1) well
capitalized; (2) adequately capitalized; or (3) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subgroups, based on the FDICs determination
of the institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institutions capital group and supervisory subgroup. In addition, the FDIC imposes
assessments to help pay off the $780 million in annual interest payments on the $8 billion
Financing Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC assessment rate on our bank deposits currently is zero but
may change in the future. The FDIC may increase or decrease the assessment rate schedule
on a semiannual basis. An increase in the BIF assessment rate could have a material
adverse effect on our earnings, depending on the amount of the increase.

Transactions
With Affiliates and Insiders.The bank is subject to the provisions of Section 23A of
the Federal Reserve Act, which places limits on the amount of loans or extensions of
credit to, or investments in, or certain other transactions with, affiliates and on the
amount of advances to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the banks capital and surplus and, as to all affiliates
combined, to 20% of the banks capital and surplus. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to avoid the
taking of low quality assets.

The
bank is subject to the provisions of Section 23B of the Federal Reserve Act which, among
other things, prohibits an institution from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies. The bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has recently issued Regulation W, which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with
respect to affiliate transactions. Regulation W

11

---

incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. In addition, under Regulation W:

| | o | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
| | - | -----------------------------------------------------------------------------------

| | o | covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices;
and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation
W generally excludes all nonbank and nonsavings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. Concurrently with the adoption of Regulation W,
the Federal Reserve Board has proposed a regulation which would further limit the amount
of loans that could be purchased by a bank from an affiliate to not more than 100% of the
banks capital and surplus. This regulation has not yet been adopted.

Dividends.       
          A South Carolina state bank may not pay dividends from its capital. All
          dividends must be paid out of undivided profits then on hand, after deducting
          expenses, including reserves for losses and bad debts. The bank is authorized to
          pay cash dividends up to 100% of net income in any calendar year without
          obtaining the prior approval of the South Carolina Board of Financial
          Institutions, provided that the bank received a composite rating of one or two
          at the last federal or state regulatory examination. The bank must obtain
          approval from the South Carolina Board of Financial Institutions prior to the
          payment of any other cash dividends. In addition, under the FDICIA, the bank may
          not pay a dividend if, after paying the dividend, the bank would be
          undercapitalized.

Branching.       
          Under current South Carolina law, we may open branch offices throughout South
          Carolina with the prior approval of the South Carolina Board of Financial
          Institutions. In addition, with prior regulatory approval, the bank will be able
          to acquire existing banking operations in South Carolina.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, a financial
institutions primary regulator, which is the FDIC for the bank, shall evaluate the
record of each financial institution in meeting the credit needs of its local community,
including low and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility. Failure
to adequately meet these criteria could impose additional requirements and limitations on
our bank.

The
Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act, subject to certain
conditions imposed by their respective banking regulators, national and state-chartered
banks are permitted to form financial subsidiaries that may conduct financial
or incidental activities, thereby permitting bank subsidiaries to engage in certain
activities that previously were impermissible. The Gramm-Leach-Bliley Act imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a
bank and its financial subsidiaries similar to restrictions applicable to transactions
between banks and nonbank affiliates.

The
Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy. These
provisions require financial institutions to disclose their policy for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated third parties
except for third parties that market an institutions own products and services.
Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other
marketing to the consumer.

Other
Regulations. Interest and other charges collected or contracted for by the bank are
subject to state usury laws and federal laws concerning interest rates. The banks
loan operations are also subject to federal laws applicable to credit transactions, such
as:

| | o | the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
| | - | ----------------------------------------------------------------------------------------------

| | o | the Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it serves;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

| | o | the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | o | the Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies;
| | - | -------------------------------------------------------------------------------------------------------------------

| | o | the Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| | o | the rules and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws.
| | - | ----------------------------------------------------------------------------------------------------------------------------

In
addition, the deposit operations of the bank are subject to:

| | o | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital
Regulations. The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. We have not received any notice
indicating that either the company or the bank is subject to higher capital requirements.
The current guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance
for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves for loan and
lease losses up to 1.25% of risk-weighted assets.

Under
these guidelines, banks and bank holding companies assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are
given credit conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight applies. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.

The
federal bank regulatory authorities have also implemented a leverage ratio, which is equal
to Tier 1 capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the leverage ratio
is to place a constraint on the maximum degree to which a bank holding company may
leverage its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional cushion
of at least 100 to 200 basis points.

The
FDIC Improvement Act established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks which requires the FDIC to choose the least
expensive resolution of bank failures. The new capital-based regulatory framework contains
five categories of compliance with regulatory capital requirements, including well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
To qualify as a well capitalized institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any order or
directive from the appropriate regulatory agency to meet and maintain a specific capital
level. Following the completion of our initial public offering in February 2005, based on
our calculations, we qualified as well capitalized.

Under
the FDIC Improvement Act regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a
financial

13

---

institution increases, and the
permissible activities of the institution decreases, as it moves downward through the
capital categories. Institutions that fall into one of the three undercapitalized
categories may be required to do some or all of the following:

| | o | submit a capital restoration plan;
| | - | ----------------------------------

| | o | raise additional capital;
| | - | -------------------------

| | o | restrict their growth, deposit interest rates, and other activities;
| | - | --------------------------------------------------------------------

| | o | improve their management;
| | - | -------------------------

| | o | eliminate management fees; or
| | - | -----------------------------

| | o | divest themselves of all or a part of their operations.
| | - | -------------------------------------------------------

These
capital guidelines can affect us in several ways. If we grow at a rapid pace, our capital
may be depleted too quickly, and a capital infusion from the holding company may be
necessary, which could impact our ability to pay dividends. Our capital levels currently
are more than adequate; however, rapid growth, poor loan portfolio performance, poor
earnings performance, or a combination of these factors could change our capital position
in a relatively short period of time.

Failure
to meet these capital requirements would mean that a bank would be required to develop and
file a plan with its primary federal banking regulator describing the means and a schedule
for achieving the minimum capital requirements. In addition, such a bank would generally
not receive regulatory approval of any application that requires the consideration of
capital adequacy, such as a branch or merger application, unless the bank could
demonstrate a reasonable plan to meet the capital requirement within a reasonable period
of time. A bank that is not well capitalized is also subject to certain
limitations relating to so-called brokered deposits. Bank holding companies
controlling financial institutions can be called upon to boost the institutions
capital and to partially guarantee the institutions performance under their capital
restoration plans.

Enforcement
Powers. The Financial Institutions Reform Recovery and Enforcement Act expanded and
increased civil and criminal penalties available for use by the federal regulatory
agencies against depository institutions and certain institution-affiliated
parties. Institution-affiliated parties primarily include management, employees, and
agents of a financial institution, as well as independent contractors and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs. These practices can include the failure of an institution to
timely file required reports or the filing of false or misleading information or the
submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for
such violations. Criminal penalties for some financial institution crimes have been
increased to 20 years. In addition, regulators are provided with greater flexibility to
commence enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance. Furthermore,
banking agencies power to issue cease-and-desist orders were expanded. Such orders
may, among other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or guarantees
against loss. A financial institution may also be ordered to restrict its growth, dispose
of certain assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.

Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed
Legislation and Regulatory Action. New regulations and statutes are regularly proposed
that contain wide-ranging proposals for altering the structures, regulations, and
competitive relationships of the nations financial institutions. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.

14

---

# Item 2.   Description of
Property

Our
main office will be located at the intersection of US Highway 123 and Williams Avenue. Our
address will be 6602 Calhoun Memorial Highway, Easley, South Carolina 29640. The site is
approximately 1.2 acres in size, and the building will be approximately 11,000 square
feet. We own this site and expect to complete construction of our main office in the first
quarter of 2006. In the interim period, are leasing the adjoining site and operating out
of a temporary facility. We opened a loan production office in Spartanburg, South Carolina
in January 2005 and expect to have a full branch in Spartanburg by the end of 2005. We are
presently located at 6650 Calhoun Memorial Highway, Easley, South Carolina 29640.

# Item 3.   Legal
Proceedings.

We
are not a party to, nor are any of our properties subject to, any material legal
proceedings, other than routine litigation incidental to our business.

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

No
matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.

# Part II.Item 5.   Market for
Common Equity and Related Stockholder Matters.

There
is no established market for our common stock. We do not expect to qualify for listing on
Nasdaq or any other exchange for at least several years. We are currently considering
whether to seek a sponsoring broker-dealer to match buy and sell orders for our common
stock in order to be quoted on the OTC Bulletin Board. Even if we become quoted, the
trading markets on the OTC Bulletin Board lack the depth, liquidity, and orderliness
necessary to maintain a liquid market. The decision of whether to seek a sponsoring
broker-dealer has not yet been made and remains wholly within our discretion.

As
of March 1, 2005, there were 2,995,942 shares of common stock outstanding held by
approximately 1,300 shareholders of record. All of our currently issued and outstanding
common stock was issued in our initial public offering which was completed in February
2005. The price per share in our initial public offering was $10.00. We are not aware of
any trades of our common stock.

We
have not declared or paid any cash dividends on our common stock since our inception. For
the foreseeable future we do not intend to declare cash dividends. We intend to retain
earnings to grow our business and strengthen our capital base. Our ability to pay
dividends depends on the ability of our subsidiary, CommunitySouth Bank & Trust, to
pay dividends to us. As a South Carolina state bank, CommunitySouth may only pay dividends
out of its net profits, after deducting expenses, including losses and bad debts. In
addition, the bank is prohibited from declaring a dividend on its shares of common stock
until its surplus equals its stated capital. At December 31, 2004, the bank was prohibited
from declaring a dividend because it had an accumulated deficit of $528,873.

Our
registration statement on Form SB-2 (file no. 333-117053), which registered the issuance
of the shares to be sold in our initial public offering, was declared effective on
September 10, 2004. The offering commenced on September 16, 2004 and terminated on
February 15, 2005. We registered the issuance of a total of 3,107,500 shares in the
offering and 107,500 warrants for an aggregate offering price of $31,075,000. We sold
2,995,942 shares of common stock at an offering price of $10.00 per share for aggregate
proceeds of $29,959,420. The warrants will be issued to the organizers of the bank.

We
incurred $511,861 in expenses in connection with the issuance and distribution of the
common stock in the offering. All of these expenses were paid directly or indirectly to
persons or entities other than directors, officers, persons owning 10% or more of the
companys securities, or affiliates of the company.

We
used $20,500,000 of the proceeds to capitalize the bank, $185,152 to pay the offering expenses, and $326,708
to pay the sales agent fee.  The remaining proceeds were placed in the holding companys bank
account.

15

---

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

# General

CommunitySouth Bancshares,
Inc., a bank holding company, was formed to organize and own all of the
capital stock of CommunitySouth Bank and Trust. On June 1, 2004, organizers filed
applications with the South Carolina Board of Financial Institutions to charter the Bank
as a South Carolina state bank and with the Federal Deposit Insurance Corporation to
receive federal deposit insurance. On January 18, 2005, with final regulatory approvals,
the Bank opened for business and the Company used $20.5 million to capitalize the Bank. As
of December 31, 2004, the Company had met all of the requirements to close the stock
offering and this allowed for release of funds from escrow. These amounts were released
from escrow on January 14, 2005.

The Company sold 2,995,942 shares of
common stock at $10 per share in an initial public offering that was completed on February
15, 2005. The offering raised $29,512,993, net of offering expenses. The directors and
officers of the Company purchased 422,100 shares at $10 per share for a total of
$4,221,000.

# Managements
Discussion and Analysis

This discussion is intended to assist
in understanding the financial condition and results of operations of the Company. The
following is a discussion of our financial condition as of December 31, 2004, and the
results of operations for the period March 30 (date of inception) through December 31,
2004. These comments should be read in conjunction with the financial statements and
related notes contained elsewhere in this report.

Our principal activities through
December 31, 2004 related to our organization, the conducting of our initial public
offering, the pursuit of approvals from the South Carolina State Board of Financial
Institutions for our application to charter the Bank, our pursuit of approvals from the
FDIC for our application for deposit insurance, and our pursuit of approvals from the
Federal Reserve Board to form a holding company.

# Critical Accounting
Policies

The Company has adopted various
accounting policies, which govern the application of accounting principles generally
accepted in the United States of America in the preparation of the Companys
financial statements. The significant accounting policies of the Company are described in
the notes to the financial statements.

Certain accounting policies involve
significant judgments and assumptions by management, which have a material impact on the
carrying value of certain assets and liabilities. Management considers such accounting
policies to be critical accounting policies. The judgments and assumptions used by
management 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
made by management, actual results could differ from these judgments and estimates, which
could have a material impact on the carrying values of assets and liabilities and the
results of operations of the Company.

The Company believes the allowance
for loan losses will be a critical accounting policy that will require the most
significant judgments and estimates used in preparation of its financial statements upon
organization of the Bank. Refer to section Allowance for Loan Losses for a
more detailed description of the methodology related to the allowance for loan losses.

Management uses assumptions and
estimates in determining income taxes payable or refundable for the current year, deferred
income tax liabilities and assets for events recognized differently in its financial
statements and income tax returns, and income tax expense. Determining these amounts
requires analysis of certain transactions and interpretation of tax laws and regulations.
Management exercises judgment in evaluating the amount and timing of recognition of
resulting tax liabilities and assets. These judgments and estimates are reevaluated on a
continual basis as regulatory and business factors change. No assurance can be given that
either the tax returns submitted by management or the income tax reported on the financial
statements will not be adjusted by either adverse rulings by the United States Tax Court,
changes in the tax code, or assessments made by the Internal Revenue Service. The Company
is subject to potential adverse adjustments, including, but not limited to, an increase in
the statutory federal or state income tax rates, the permanent nondeductibility of amounts
currently considered deductible either now or in future periods, and the dependency on the
generation of future taxable income, including capital gains, in order to ultimately
realize deferred income tax assets.

16

---

# Forward Looking
Statements

This report contains
forward-looking statements relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and projections of
revenues and other financial items that are based on the beliefs of management, as well as
assumptions made by and information currently available to management. The words
may, will, anticipate, should,
would, believe, contemplate, expect,
estimate, continue, may, and intend, as
well as other similar words and expressions of the future, are intended to identify
forward-looking statements. Potential risks and uncertainties include, but are not limited
to those described under the heading Risk Factors in our Form 10-KSB for the
year ended December 31, 2004.

# Financial Results

At December 31, 2004, we had total
assets of $29,828,557, consisting of cash and cash equivalents of $28,811,921, furniture
and equipment of $48,553, prepaid assets of $138,738 and restricted cash of $829,345.

Our liabilities at December 31, 2004
were $844,437, consisting of subscriptions to be refunded totaling $829,345 and payroll
taxes payable of $15,092. We had shareholders equity of $28,984,120 at December 31,
2004. Although we had not broken escrow as of December 31, 2004 and still had only one
shareholder of record at that date, because we had satisfied all the conditions to
breaking escrow and because we actually did break escrow in early January 2005, under
generally accepted accounting principles we are reporting all the subscription funds that
were held in escrow as of December 31, 2004 as part of our shareholders equity as of
that date.

We had a net loss of $528,873 for the
period March 30, 2004 (date of inception) to December 31, 2004. These losses resulted from
expenses incurred in connection with activities related to our organization and that of
the Bank. These activities included the preparation and filing of an application with the
State Board to charter the Bank, the preparation and filing of an application with the
FDIC to obtain insurance of the deposits of the Bank, the preparation and filing of an
application the Federal Reserve Board to form a holding company, responding to questions
and providing additional information to the State Board, the FDIC, and the Federal Reserve
in connection with the application process, the selling of our common stock in the
offering, meetings and discussions among various organizers regarding application
information, target markets, and capitalization issues, and planning and organizing for
the opening of the Bank. Because we are in the organization stage, we have had no
operations from which to generate revenues. Operations have been funded through
contributions from our organizers.

Initially, we anticipate deriving
income principally from interest charged on loans and, to a lesser extent, from interest
earned on investments, from fees received in connection with the origination of loans, and
from other services. Our principal expenses are anticipated to be interest expense on
deposits and operating expenses.

# Expenses

As of December 31, 2004, we incurred
approximately $332,000 in salaries and employee benefits expense, approximately $43,601 in
occupancy and equipment expense, approximately $72,500 in consulting expense, and
approximately $113,007 in other expense. Prior to our completion of the offering, these
expenses were funded by organizer contributions and investments from our organizers. We
also established a line of credit in the amount of up to $700,000 at a rate of prime minus
0.5%. We used the proceeds of the offering to repay the organizer contributions and the
amounts due under our line of credit. We anticipate that the proceeds of the offering will
be sufficient to satisfy the Companys financial needs for at least the next two
years.

# Liquidity and Interest
Rate Sensitivity

CommunitySouth Bank and Trust, like
most banks, will depend on its net interest income for its primary source of earnings. Net
interest income is roughly the difference between the interest we charge on our loans and
receive from our investments, our assets, and the interest we pay on deposits, our
liabilities. Movements in interest rates will cause our earnings to fluctuate. To lessen
the impact of these margin swings, we intend to structure our balance sheet so that we can
reprice the rates applicable to our assets and liabilities in roughly equal amounts at
approximately the same time. We will manage the Banks asset mix by regularly
evaluating the yield, credit quality, funding sources, and liquidity of its assets. We
will manage the Banks liability mix by expanding our deposit base and converting
assets to cash as necessary. If there is an imbalance in our ability to reprice assets and
liabilities at any point in time, our earnings may increase or decrease with changes in
the interest rates, creating interest rate sensitivity. Interest rates have historically
varied widely, and we cannot control or predict them.

17

---

Despite the measures we plan to take
to lessen the impact of interest rate fluctuations, large moves in interest rates may
decrease or eliminate our profitability.

Prior to the completion of the
offering, we used organizer contributions and investments from our organizers to pay
pre-opening expenses of the Company and the Bank. We also established a line of credit in
the amount of up to $700,000 at a rate of prime minus 0.5% that was available to pay
pre-opening expenses. We believe that the net proceeds of $29,512,993 from the offering
will satisfy the cash requirements for at least the first two years for both the Company
and the Bank. We will manage our liquidity by actively monitoring the Banks sources
and uses of funds to meet cash flow requirements and maximize profits.

# Impact of Inflation

The financial statements presented
herein have been prepared in accordance with accounting principles generally accepted in
the United States of America which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institutions performance than does the effect of inflation.

While the effect of inflation on a
bank is normally not as significant as its influence on those businesses that have large
investments in plant and inventories, it does have an effect. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in rates may
not be the same. While interest rates have traditionally moved with inflation, the effect
on income is diminished because both interest earned on assets and interest paid on
liabilities vary directly with each other. Also, increases in the price of goods and
services will generally result in increased operating expenses.

# Capital Adequacy

Bank holding companies, such as us,
and their banking subsidiaries are required by banking regulators to meet certain minimum
levels of capital adequacy, which are expressed in the form of certain ratios. Capital is
separated into Tier 1 capital (essentially common shareholders equity less
intangible assets) and Tier 2 capital (essentially the allowance for loan losses limited
to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of
credit risk in our assets, provide the weighting of assets based on assigned risk factors
and include off-balance sheet items such as loan commitments and stand-by letters of
credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the
ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must
be at least 8.0%. The capital leverage ratio supplements the risk-based capital
guidelines.

The Federal Reserve guidelines also
contain an exemption from the capital requirements for bank holding companies with less
than $150 million in consolidated assets. Because CommunitySouth Bancshares, Inc. has less
than $150 million in assets, we are not yet required to maintain these minimum capital
requirements at the holding company level. However, CommunitySouth Bank & Trust falls
under these rules as set by bank regulatory agencies.

Banks and bank holding companies are
required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total
assets of 3.0%. The bank was well capitalized when it opened on January 18, 2005.

# Allowance for Loan Losses

The allowance will be maintained at a
level that we believe to be sufficient to cover losses in the loan portfolio at a specific
point in time. Assessing the adequacy of the allowance will require considerable judgment.
The adequacy of the allowance will be analyzed using an internal analysis model. For
purposes of this analysis, adequacy will be defined as a level sufficient to absorb
probable losses in the portfolio. The methodology will rely upon our judgment. Our
judgments will be based on our assessment of various issues, including, but not limited
to, the pace of loan growth, emerging portfolio concentrations, the risk management system
relating to lending activities, entry into new markets, new product offerings, loan
portfolio quality trends, and uncertainty in current economic and business conditions. An
allowance model will be used that takes into account factors including the composition of
the loan portfolio such as risk grade classifications, historical asset quality trends
including, but not limited to, previous loss experience ratios, our assessment of current
economic conditions, and reviews of specific high risk sectors of the portfolio. Loans
will be graded at inception and will be reviewed on a periodic basis to ensure that
assigned risk grades are proper based on the definition of such classification. The value
of underlying collateral will also be considered during such analysis. The resulting
monthly model and the related conclusions will be reviewed and approved by Senior
Management. Our analysis of allowance adequacy will include consideration for loan
impairment. While we will use

18

---

the best information available at the
time to make evaluations, future adjustments to the allowance may be necessary if results
differ substantially from the assumptions used in making the evaluations.

The methodology for assessing the
adequacy of the allowance will establish both an allocated and unallocated component of
the contra asset balance. The allocated component will be based principally on current
loan grades and historical loss rates. The unallocated component will be the result of the
portion of the assessment that estimates probable losses in the portfolio that are not
fully captured in the allocated allowance. This analysis will include, but will not
necessarily be limited to, industry concentrations, future market expansions, model
imprecision, and the estimated impact of then current economic conditions on historical
loss rates. We will monitor trends within the portfolio, both quantitative and
qualitative, and assess the reasonableness of the unallocated component.

The allowance will also be subject to
examination and adequacy testing by regulatory agencies. In addition, such regulatory
agencies could require allowance adjustments based on information available to them at the
time of their examination.

# Income Taxes

Income taxes are provided for the tax
effects of transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the financial
reporting and income tax bases of assets and liabilities. At December 31, 2004, no taxable
income had been generated and therefore, no tax provision has been included in these
financial statements.

# Recently Issued
Accounting Standards

The following is a summary of recent
authoritative pronouncements that affect accounting, reporting, and disclosure of
financial information by the Company:

In December 2004, the Financial
Accounting Standards Board (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 December 2003, the FASB issued
FASB Interpretation 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 apply to the Companys existing variable interest entities
in the first quarter of 2005. Certain of the disclosure requirements applied to all
financial statements issued after December 31, 2003, regardless of when the variable
interest entity was established.

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

19

---

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.

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 Public Company Accounting Oversight Board
(PCAOB) or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon
adoption.

20

---

# Item 7.   Financial
Statements

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and
Board of Directors CommunitySouth Bancshares, Inc.Easley, South Carolina

We
have audited the accompanying balance sheet of CommunitySouth Bancshares, Inc.(a development stage enterprise)(the
Company) as of December 31, 2004, and the related statement of operations,
shareholders equity, and cash flows for the period from March 30, 2004 (date of
inception) through December 31, 2004. 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 audit.

We
conducted our audit in accordance with the 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 audit
provides 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 CommunitySouth Bancshares, Inc.(a development stage enterprise) as of December 31, 2004 and the results of
its operations and its cash flows for the period from March 30, 2004 (date of inception)
through December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.

/s/ Elliott Davis, LLCElliott
Davis, LLCGreenville, South Carolina March 9, 2005

21

---

# COMMUNITYSOUTH BANCSHARES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)BALANCE SHEETDECEMBER 31, 2004

|                                                                         | 
|------------------------------------------------------------------------ | 
|ASSETS                                                                   | 
|                                                                         | 
|CASH AND CASH EQUIVALENTS                                                | 
|Interest earning deposits in other banks                                 | 
|Cash and due from banks                                                  | 
|                                                                         | 
|Total cash and cash equivalents                                          | 
|Restricted cash                                                          | 
|Prepaid assets                                                           | 
|Premises and equipment, net                                              | 
|                                                                         | 
|Total assets                                                             | 
|                                                                         | 
|                                                                         | 
|LIABILITIES                                                              | 
|Subscriptions to be refunded                                             | 
|Other                                                                    | 
|                                                                         | 
|Total liabilities                                                        | 
|                                                                         | 
|                                                                         | 
|COMMITMENTS AND CONTINGENCIES - NOTE 3                                   | 
|                                                                         | 
|SHAREHOLDERS' EQUITY                                                     | 
|Preferred stock, par value $.01 per share, 10,000,000 shares authorized, | 
|no shares issued                                                         | 
|Common stock, par value $.01 per share, 10,000,000 shares authorized,    | 
|2,995,942 shares issued                                                  | 
|Additional paid-in capital                                               | 
|Deficit accumulated during the development stage                         | 
|                                                                         | 
|Total shareholders' equity                                               | 
|                                                                         | 
|Total liabilities and shareholders' equity                               | 
|                                                                         | 

The accompanying notes are an integral part of these financial statements.

22

---

# COMMUNITYSOUTH BANCSHARES, INC.(A DEVELOPMENT STAGE ENTERPRISE)STATEMENT OF OPERATIONS
For the period March 30, 2004 (date of inception)through December 31, 2004

|                               | 
|------------------------------ | 
|EXPENSES                       | 
|Salaries and employee benefits | 
|Occupancy and equipment        | 
|Consulting expenses            | 
|Other                          | 
|                               | 
|Total expenses                 | 
|                               | 
|INTEREST INCOME                | 
|                               | 
|Loss before income taxes       | 
|                               | 
|INCOME TAX EXPENSE             | 
|                               | 
|Net loss                       | 
|                               | 

The accompanying notes are an integral part of these financial statements.

23

---

# COMMUNITYSOUTH BANCSHARES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)STATEMENT OF SHAREHOLDERS' EQUITYFor the period March 30, 2004 (date of inception)
through December 31, 2004

|                                  |  |  |  | Deficit   | 
|--------------------------------- |  |  |  | --------- | 
|
|
|
|
|
|Proceeds from sale of stock (less |  |  |  |           | 
|offering expenses of $446,427)    |  |  |  | 2,995,942 | 
|                                  |  | 
|Net loss                          |  |  |  | -         | 
|                                  |  |  |  |           | 
|Balance, December 31, 2004        |  |  |  | 2,995,942 | 
|                                  |  |  |  |           | 

The accompanying notes are an integral part of these financial statements.

24

---

# COMMUNITYSOUTH BANCSHARES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
For the period March 30, 2004 (date of inception)
through December 31, 2004

|                                           | 
|------------------------------------------ | 
|NET CASH USED FOR PRE-OPERATING ACTIVITIES | 
|Net loss                                   | 
|Other                                      | 
|Prepaid assets                             | 
|                                           | 
|Net cash used in pre-operating activities  | 
|                                           | 
|INVESTING ACTIVITIES                       | 
|Purchase of premises and equipment         | 
|                                           | 
|FINANCING ACTIVITIES                       | 
|Subscriptions to be refunded               | 
|Restricted cash                            | 
|Net proceeds from sale of stock            | 
|                                           | 
|Net cash provided by financing activities  | 
|                                           | 
|Net increase in cash and cash equivalents  | 
|                                           | 
|CASH AND CASH EQUIVALENTS, BEGINNING       | 
|OF PERIOD                                  | 
|                                           | 
|CASH AND CASH EQUIVALENTS, END OF PERIOD   | 
|                                           | 

The accompanying notes are an integral part of these financial statements.

25

---

# COMMUNITYSOUTH
BANCSHARES, INC. (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

CommunitySouth
Bancshares, Inc. (a development stage enterprise) (the
Company), a bank holding company, was formed to organize and own all of the
capital stock of CommunitySouth Bank and Trust (the Bank). On June 1, 2004,
organizers filed applications with the South Carolina Board of Financial Institutions to
charter the Bank as a South Carolina state bank and with the Federal Deposit Insurance
Corporation (FDIC) to receive federal deposit insurance. Whether the charter
is issued and deposit insurance granted will depend upon, among other things, compliance
with legal requirements imposed by the South Carolina Board of Financial Institutions and
the FDIC, including capitalization of the Bank with at least a specified amount of
capital, which is estimated to be $11,000,000. As of December 31, 2004 the Company had
received preliminary approval from the South Carolina Board of Financial Institutions and
the FDIC. The Bank opened for business January 18, 2005.

The
Company is a development stage enterprise as defined by Statement of Financial Accounting
Standard (SFAS) No. 7, Accounting and Reporting by Development Stage
Enterprises, as it devotes substantially all of its efforts to establishing a new
business. The Companys planned principal operations have not commenced and revenue
has not been recognized from the planned principal operations.

On
January 18, 2005, with final regulatory approvals, the Bank opened for business and the
Company used $20.5 million to capitalize the Bank. As of December 31, 2004, the
Company had met all of the requirements to close the stock offering and this allowed for
release of funds from escrow. These amounts were released from escrow on January 14, 2005.

The
Company sold 2,995,942 shares of common stock at $10 per share in an initial public
offering that was completed on February 15, 2005. The offering raised $29,512,993, net of
offering expenses. The directors and officers of the Company purchased 422,100 shares at
$10 per share for a total of $4,221,000.

For
financial statement presentation, in accordance with accounting principles generally
accepted in the United States of America (GAAP), the shares issued and funds
raised have been included as though they had already been issued and released from escrow,
respectively as of December 31, 2004.

# Stock offering costs

Stock offering costs represent
expenses incurred by the Company in connection with the offering and issuance of its
stock. These costs were charged against the Companys additional paid-in capital
after the successful completion of the stock offering.

# Year-end

The Company has adopted a fiscal year
ending on December 31 effective for the period ending December 31, 2004.

# Estimates

The financial statements include
estimates and assumptions that affect the Companys financial position and results of
operations and disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.

# Cash equivalents

The Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with financial
institutions, and at times, such investments may be in excess of the FDIC insurance
limits.

(Continued)

26

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

Organization costs 
Organization costs include incorporation, legal and consulting fees incurred in connection with establishing the
Company. In accordance with Statement of Position (SOP) No. 98-5, Reporting
on the Costs of Start-UpActivities, organization costs are expensed when incurred.

Income taxesIncome taxes are provided for the tax
effects of transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the financial
reporting and income tax bases of assets and liabilities. At December 31, 2004, no taxable
income had been generated and therefore, no tax provision has been included in these
financial statements.

Warrants and stock
optionsUpon completion of the offering, the Company agreed to issue warrants to the organizing directors for the purchase of one share
of common stock at $10.00 per share for every two shares purchased in the stock offering,
up to a maximum of 10,000 warrants per director. Total warrants issued were 109,700. In
addition, the Company plans to adopt a stock option plan after the offering of the common
stock is complete. The Company will account for the warrants and stock options under the
recognition and measurement principals of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based compensation cost will be reflected in the net income, as
all warrants and stock options granted under these plans will have the exercise price
equal to the market value of the underlying common stock on the date of grant.

Recently issued
accounting standardsThe following is a summary of recent
authoritative pronouncements that affect accounting, reporting, and disclosure of
financial information by the Company:

In December 2004, the Financial
Accounting Standards Board (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 December 2003, the FASB issued
FASB Interpretation 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 apply to the Companys existing variable interest entities
in the first quarter of 2005. Certain of the disclosure requirements applied to all
financial statements issued after December 31, 2003, regardless of when the variable
interest entity was established.

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

(Continued)

27

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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.

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 Public Company Accounting Oversight Board
(PCAOB) or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon
adoption.

# NOTE 2 
SUBSCRIPTIONS TO BE REFUNDED

As
of December 31, 2004, the Company had received subscriptions to purchase shares of stock
in excess of the maximum amount of shares registered with the Securities and Exchange
Commission in its registration statement on Form SB-2. These amounts have classified as
restricted cash and with a corresponding liability for subscriptions to be refunded
recorded in the accompanying balance sheet. As a result, the excess subscriptions were
refunded after the total subscribed amounts were released from escrow.

# NOTE 3  COMMITMENTS
AND CONTINGENCIES

The
Company engaged a law firm to assist in preparing and filing all organizational,
incorporation, and bank applications and to assist in preparing stock offering documents
and consummating the Companys initial offering. The aggregate cost of the services
is expected to approximately $40,000 to $85,000. Through December 31, 2004, $76,700 had
been included in the balance sheet as deferred stock issuance costs which are included in
additional paid-in capital in the accompanying balance sheet.

The Company entered into an agreement
with a sales agent who will assist in the selling of the common stock. The agreement
requires the payment of an amount equal to 1.5% of the gross minimum offering or $171,000,
a fixed fee of $37,500 per month, and engagement fee of $10,000, and reimbursement for out
of pocket expenses. As of December 31, 2004, the company paid $311,708 under this
agreement.

(Continued)

28

---

# NOTE 3  COMMITMENTS
AND CONTINGENCIES, Continued

On
August 18, 2004, the Company entered into a purchase option agreement for the purchase of
land on which the headquarters office will be constructed. The $10,000 option expires six
months from closing. The purchase option price on the land will be based upon the average
of two MAI appraisals. The Company leases an adjoining site on a month-to-month basis for
$3,443 per month. This site houses the temporary modular banking facility being used
during the construction of the main office. The Company leased the modular facility,
including furniture and equipment for $3,711 a month. The Company purchased the land March
16, 2005 for $775,000.

The
Company entered into a lease agreement for its Spartanburg office. The lease term is for
six months with monthly rental payments of $2,528, which began in October 2004.

The
Company entered into Master Loan Purchase Agreement with a third party which requires that
within ninety days after the Bank receives its charter and FDIC insurance it will purchase
all loans allowable by law and conforming with loan policy which are outstanding and
funded by the third party. The purchase commitment will not exceed $15 million in loans.

The
Company engaged a bank consultant to assist in establishing the Bank and bank holding
company. The aggregate cost of the services is expected to approximate $80,000. Through
December 31, 2004, $80,000 has been expensed.

The
Company entered into employment agreements with its president/chief lending officer, its
chief executive officer and its chief financial officer. The agreements include provisions
regarding term, compensation, benefits, annual bonus, incentive program, stock option plan
and non-compete upon early termination.

# NOTE 4  UNUSED
LINES OF CREDIT

The
Company had an unused line of credit agreement with a bank to borrow up to $700,000. The
line matures July 18, 2005 with the outstanding principal amount due at maturity. Interest
on the outstanding balance is payable monthly at the prime interest rate less 0.50
percent. The line is guaranteed by the organizers. Upon completion of the offering, the
line was closed.

# NOTE 5  SUMMARY
RELATED PARTY TRANSACTIONS

One
of the organizers of the Company owns the land the Company plans to buy under the purchase
option agreement, owns the adjoining property which will be leased as the site for the
temporary facility and also owns the facility being leased as temporary office space.

# NOTE 6  SUBSEQUENT
EVENTS

In
January 2005, the Bank received its charter from the South Carolina Board of Financial
Institutions as well as federal deposit insurance from the FDIC. As a result, the Company
capitalized the Bank with $20.5 million through the purchase of its capital stock with net
proceeds of $29,512,993. Upon capitalization on January 18, 2005, the Company commenced
its principal operations of engaging in providing domestic banking services from their
headquarters in Easley, South Carolina and from a loan production office in Spartanburg,
South Carolina. The Company and the Bank now operate under the supervision, rules and
regulations of the Federal Reserve Board, FDIC and South Carolina State Board of Financial
Institutions.

In
March 2005, the Bank opened an additional loan production office in Greenwood, South
Carolina.

29

---

# Item 8.   Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

None.

# Item 8A.   Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of December 31, 2004. There have been
no significant changes in our internal controls over financial reporting during the fourth
fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# Item 8B.   Other
Information

# PART III

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

The
following sets forth information regarding our executive officers and directors. Our
articles of incorporation provide for a classified board of directors, so that, as nearly
as possible, one-third of the directors are elected each year to serve three-year terms.
The terms of office of the classes of directors expire as follows: Class I at the 2005
annual meeting of shareholders, Class II at the 2006 annual meeting of shareholders, and
Class III at the 2007 annual meeting of shareholders. Our executive officers serve at the
discretion of our board of directors.

|                       |  | Year First |  |   
|---------------------- |  | ---------- |  | --
|
|
|
|David Larry Brotherton |  |            |  | 54
|G. Dial DuBose         |  |            |  | 43
|C. Allan Ducker, III   |  |            |  | 42
|David W. Edwards       |  |            |  | 58
|R. Wesley Hammond      |  |            |  | 55
|John W. Hobbs          |  |            |  | 42
|David A. Miller        |  |            |  | 36
|                       |  |            |  |   
|Arnold J. Ramsey       |  |            |  | 56
|W. Michael Riddle      |  |            |  | 62
|Joanne M. Rogers       |  |            |  | 55
|B. Lynn Spencer        |  |            |  | 44
|J. Neal Workman, Jr    |  |            |  | 57
|Daniel E. Youngblood   |  |            |  | 49

David
Larry Brotherton, is the owner and president of Ortec, Inc., a custom chemical
manufacturer, which he founded in 1980. Mr. Brotherton graduated from Tusculum College in
1970 with a B.S. degree in chemistry and the University of Tennessee in 1974 with a Ph.D.
in chemistry. Mr. Brotherton has been active in

30

---

both professional and community
organizations. He currently serves as a Trustee and the Chair of the Audit Committee of
Tusculum College and on the advisory board of the University of Tennessee College of Arts
& Science and Department of Chemistry. In addition, he is past president of the
Pickens County YMCA. Mr. Brotherton has also been active in Brushy Creek Baptist Church
since 1979. He has served as Decon, Chair of Deacons, Trustee, Chair of Trustees, Chair of
Finance Committee, Sunday School Teacher, Chair of Personnel Committee, and Chair of
Annuity Committee. Mr. Brotherton also served as a local advisory board member of American
Federal and Central Carolina Bank from 1996 to 2004.

G. Dial
          DuBose has served as the vice president of operations for Town and
          Country Realty of Easley, Inc. since 1987, and as president of Nalley Garrett
          Motels, Inc. since 1987. Mr. DuBose graduated from Wofford College in 1983 with
          a B.S. degree in psychology. Currently, Mr. Dubose serves as a director of the
          South Carolina Public Service Authority, a director of the Upstate Alliance,
          chairman of the South Carolina Hospitality Association, and Trustee of the
          Palmetto Economic Development Association. He is past vice chairman of the
          Pickens County Council. In addition, Mr. DuBose served on the Easley and Upstate
          advisory boards for First Union and Wachovia from 1998 to 2004.

C. Allan
          Ducker, III is our chief executive officer. He has over 20 years
          experience as a banker. Most recently, he served as senior vice president and
          Pickens County executive for Carolina First Bank for six months until he left to
          form our bank. Prior to his employment with Carolina First Bank, Mr. Ducker
          served as executive vice president and South Carolina state president for
          MountainBank for one year. Before joining MountainBank, Mr. Ducker served as
          senior vice president and regional executive for Bank of America for six years.
          Mr. Ducker graduated from the Citadel in 1984 with a B.S. degree in business
          administration. He has also been active in various civic organizations in the
          Pickens County area. Since 1994, Mr. Ducker has served as a director of the
          Pickens County YMCA and he is a member of the Easley Rotary Club. He is past
          treasurer of the Pickens County YMCA, past director of the United Way, and past
          chairman of Pickens County Friends of Scouting.

David
W. Edwards is the owner and president of Dave Edwards Toyota, a Toyota dealership that
he established 1982. Mr. Edwards has been involved in the automotive sales business for
over 36 years. He received a B.S. degree in business administration from Mars Hill College
in 1968. Mr. Edwards is Deacon of First Baptist Church in Spartanburg and has served on
the board for Mobile Meals and the YMCA. He also served on the local advisory board of
Palmetto Bank from 1999 to 2002.

R. Wesley
          Hammond has been the president of HBJ Home Furnishings, a family
          owned business that was established in 1907, since 1989. Mr. Hammond graduated
          in 1973 from Wofford College with a B.S. degree in English. He is a board member
          of the Southern Home Furnishings Association and past president and past
          chairman of the executive committee. He was also past chairman of the
          associations Insurance Trust. Mr. Hammond served on board of First Federal
          Savings and Loan from 1992 to 2000 and was a member of its audit, community
          reinvestment, and conflict of interest committees. He has also served on the
          board for the Spartanburg Chamber of Commerce and is a graduate of Leadership
          Spartanburg.

John
W. Hobbs is our chief financial officer. Mr. Hobbs is a CPA with over 15 years of
banking experience, most recently as chief financial officer of Carolina National Bank
from February 2002 until May 2004. Prior to joining Carolina National Bank, he served as
the chief financial officer of First National Bank of the Carolinas from July 1996 until
February 2002. Mr. Hobbs began his banking career as the controller of Standard Federal
Savings Bank. He graduated from the University of South Carolina in 1984 with a B.S.
degree in accounting.

David
A. Miller is our president and the proposed chief lending officer of our bank. Mr.
Miller has over 14 years of banking experience, most recently serving as city executive
and senior vice president of Arthur State Bank from March 2003 until March 2004. Prior to
his employment with Arthur State Bank, Mr. Miller served as team leader and vice president
of SouthTrust Bank from June 1999 until March 2003. From June 1993 until June 1999, he
served as a commercial lender and vice president of CCB Financial Corporation. Mr. Miller
graduated from the University of South Carolina in 1989 with a B.S. degree in business
administration and the University of

31

---

Oklahoma National Commercial Lending
School in 1995. He is active in Rotary, Sertoma, and other civic organizations in the
Spartanburg community.

Arnold
J. Ramsey has been the owner and president of Ramsey Appraisal Service since 1993. Mr.
Ramsey has been valuing property for over 30 years and has been involved with numerous
residential development projects in the Upstate of South Carolina. Mr. Ramsey began his
career as a lender and staff appraiser for First Federal Savings and Loan and has seven
years of banking experience. He graduated in 1970 from Clemson University with a B.S.
degree in industrial management. Mr. Ramsey is a member of the Spartanburg Homebuilders
Association and the Spartanburg Board of Realtors.

W. Michael
          Riddle has been an oral and maxillofacial surgeon in Easley, South
          Carolina since 1984. Dr. Riddle graduated from Wofford College in 1964 with a
          B.S. degree in biology, the Medical College of Virginia School of Dentistry in
          1968 with a D.D.S., and the Duke University Medical Center with a certificate of
          completion of residency in oral and maxillofacial surgery in 1984. He has been
          active in the community through business, civic, and church activities. Dr.
          Riddle was past president of the South Carolina Society of Oral and
          Maxillofacial Surgeons. He was also past president and 25 year member of the
          Easley Rotary Club and was designated a Paul Harris Fellow. Dr. Riddle is a
          founding member of St. Matthias Lutheran Church and was the original secretary
          and treasurer. He is also a committee member of the Blue Ridge Council of the
          Boy Scouts of America. Dr. Riddle also served as a local advisory board member
          for Bank of America (Pickens County) from 1998 to 2001.

Joanne
M. Rogers has been the president of Lakeview Partners and Palmetto Storage since June
2003. Prior to her employment with Lakeview Partners and Palmetto Storage, Ms. Rogers
spent over 30 years as a public school educator and administrator in Spartanburg Districts
1 and 3 and achieved her principal and supervisory certifications. She was the director
for the gifted and talented services in District 3. Ms. Rogers was also active in
the grant programs and became the administrator for the after school program that served
five districts across South Carolina. Ms. Rogers graduated in 1971 from Limestone College
with a B.A. degree in elementary education and received her masters degree in
education from the University of South Carolina  Spartanburg/Columbia in 1988. Ms.
Rogers has served on the board of directors of the Hollywild Animal Park and the Adoption
Advocacy. She has also volunteered with Mobile Meals. Ms. Rogers is a member of
Hollysprings Baptist Church.

B. Lynn
          Spencer has been a broker with Spencer/Hines Properties, a commercial
          real estate firm located in Spartanburg, South Carolina, since 1994. Mr. Spencer
          is a member of the state and national CCIM Chapter, is a graduate of Leadership
          Spartanburg, and served as president for the State CCIM Chapter in 2001. He has
          also served on the advisory board for The National Bank of South Carolina from
          2001 to 2004.

J. Neal
          Workman, Jr. has been the president and owner of Trehel Corporation, a
          general contractor serving the commercial and industrial segment of the entire
          Upstate, since 1982. Mr. Workman is also the vice president of Pendleton Homes,
          a design and build firm serving the Upstate, and president of Pendleton
          Properties, a metal buildings company. He graduated from Wofford College in 1969
          with a B.A. degree in economics. Mr. Workman is active in the Upstate community.
          He currently serves as the Area Commissioner for Tri-County Technical College,
          as the State Chair of Heritage Corridor, and on Clemson University Industry
          Advisory Board for College of Architecture and Humanities. Mr. Workman is also a
          director of the Anderson Chamber of Commerce and a member of the Seneca, Greater
          Greenville, and Spartanburg Chambers of Commerce. He is past chairman of the
          Anderson County Economic Development Partnership and a former member of the
          Walhalla and Clemson Chambers of Commerce. Mr. Workman was also the 1999 Clemson
          Area Chamber of Commerce Business Person of the Year. He also served on the
          local advisory board of First Citizens Bank in Clemson from 1999 to 2004.

Daniel
E. Youngblood serves as chairman of our board, and has been owner and president of
Century 21 Flynn & Youngblood, Inc., a real estate company with sales offices in
Greenville, Pickens, and Anderson Counties, since 1983, and Youngblood Development Corp.,
a real estate development company, since 1983. He is also the managing partner of
Mainstream Golf, LLC, a company that operates a golf course. Mr. Youngblood

32

---

graduated from Clemson University in
1977 with a B.S. degree in administrative management. He is active in our community,
including service as chairman of the board of the Economic Alliance of Pickens County for
the past eight years. He has also served on the regional/local advisory boards for Central
Carolina Bank & Trust Company from 1994 to 2004 and Wachovia from 1983 to 1993.

# Audit Committee
Financial Expert

Our
audit committee has three members, R. Wesley Hammond, W. Michael Riddle, and Joanne M.
Rogers. None of the current members of the audit committee nor any other member of our
board qualifies as an audit committee financial expert as defined under the
rules of the Securities and Exchange Commission. As a relatively small public company, it
is difficult to identify potential qualified candidates that are willing to serve on our
board and otherwise meet our requirements for service. At the present, we do not know if
or when we will appoint a new board member that qualifies as an audit committee financial
expert. Although none of audit committee members qualify as financial experts
as defined in the SEC rules, each of our members has made valuable contributions to the
company and its shareholders as members of the audit committee. The board has determined
that each member is fully qualified to monitor the performance of management, the public
disclosures by the company of its financial condition and performance, our internal
accounting operations, and our independent auditors.

Our
board of directors has implemented a process for shareholders of the company to send
communications to the board. Any shareholder desiring to communicate with the board, or
with specific individual directors, may so do by writing to the secretary of the company,
at CommunitySouth Bancshares, Inc., 6650 Calhoun Memorial Parkway, Easley, South Carolina
29640. The secretary has been instructed by the board to promptly forward all such
communications to the addressees indicated thereon.

We
do not have a class of securities registered under Section 12 of the Securities Exchange
Act of 1934. Therefore, our directors, executive officers, promoters and control persons
are not required to comply with Section 16(a) of the Exchange Act.

# Code of Ethics

We
have adopted a Code of Ethics that applies to the Directors, officers and employees of our
company. The Code of Ethics is available without charge to shareholders upon request.
Shareholders should contact John Hobbs at our main office to obtain a copy.

33

---

# Item 10.   Executive
Compensation

The
following table shows the cash compensation we paid to our chief executive officer for the
year ended December 31, 2004, including total annual compensation, including salary and
bonus. None of our other executives earned total annual compensation, including salary and
bonus, in excess of $100,000 in 2004.

# Summary Compensation
Table

|                        |  |  |  |      | Long-Term | 
|----------------------- |  |  |  | ---- | --------- | 
|
|
|
|
|
|
|
|C. Allan Ducker, III    |  |  |  | 2004 |           | 
|Chief Executive Officer |  |  |  |      |           | 

(1)        
          Represents the reimbursement of moving expenses of $40,000 and family health
          coverage of $5,974. (2)        Represents insurance premiums of $310.

# Employment Agreements

In
March 2004, we entered into an employment agreement with Mr. Ducker, which includes the
following principal terms:

| | o | Serves as chief executive officer of CommunitySouth Bancshares and CommunitySouth Bank and
Trust;
| | - | -------------------------------------------------------------------------------------------------

| | o | Base salary of $115,000, which may be increased annually by the board of
directors;
| | - | -----------------------------------------------------------------------------------

| | o | Term of three years, which is extended automatically at the end of each day
so that the remaining term continues to be three years;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| | o | Entitled to options to purchase a number of shares of common stock equal to 4% of the
number of shares sold in the offering;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | o | Entitled to family medical, dental, vision, life, and disability insurance, and a
reasonable car allowance not to exceed $750 per month;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | o | Entitled to relocation expenses in the amount of $40,000;
| | - | ---------------------------------------------------------

| | o | Participates in our retirement, welfare, and other benefit programs;
| | - | --------------------------------------------------------------------

| | o | Receives reimbursement for club dues and travel and business expenses;
| | - | ----------------------------------------------------------------------

| | o | Prohibited from disclosing our trade secrets or confidential information;
| | - | -------------------------------------------------------------------------

| | o | If we terminate Mr. Duckers employment without cause, he will be entitled to
severance equal to 24 months of his then base salary;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| | o | Following a change in control, if Mr. Ducker terminates his employment for a good reason
within a 90-day period beginning on the 30th day following a change in control
or within a 90-day period beginning on the one year anniversary of the change in control,
he will be entitled to severance equal to 36 months of his then base salary; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | During his employment and for a period of 24 months thereafter, Mr. Ducker may not,
subject to limited exceptions, (a) compete with us by forming, serving as an organizer,
director, or officer of, or acquiring or maintaining an ownership interest in, a
depository financial institution or holding company of a depository financial institution,
if the depository institution or holding company has one or more offices or branches
within our territory, (b) solicit our customers for a competing business, or (c) solicit
our employees for a competing business.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

# Director Compensation

Our
bylaws permit our directors to receive reasonable compensation as determined by a
resolution of the board of directors. We did not pay any directors fees during the
fiscal year ended December 31, 2004. However, we may, pursuant to our bylaws, begin to
compensate our directors at some time in the future.

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

The
following table shows how much common stock in our company is owned by the directors,
certain executive officers, and owners of more than 5% of the outstanding common stock, as
of March 15, 2005. Unless otherwise indicated, the address of each beneficial owner is c/o
CommunitySouth Bancshares, Inc., 6650 Calhoun Memorial Highway, Easley, South Carolina
29640.

| |  | Number of |                                     | % of Beneficial
| |  | --------- | ----------------------------------- | ---------------
|
| |  |           | David Larry Brotherton              |                
| |  |           | G. Dial DuBose                      |                
| |  |           | C. Allan Ducker, III                |                
| |  |           | David W. Edwards                    |                
| |  |           | R. Wesley Hammond                   |                
| |  |           | David A. Miller                     |                
| |  |           | John W. Hobbs                       |                
| |  |           | Arnold J. Ramsey                    |                
| |  |           | W. Michael Riddle                   |                
| |  |           | Joanne M. Rogers                    |                
| |  |           | B. Lynn Spencer                     |                
| |  |           | J. Neal Workman, Jr.                |                
| |  |           | Daniel E. Youngblood                |                
| |  |           | All executive officers as directors |                
| |  |           | (13 persons)                        |                

_______________*Indicates less than 1% ownership.

|(1) | Includes shares for which the named person has sole voting and investment power,
          has shared voting and investment power, or holds in an IRA or other retirement
          plan program, unless otherwise indicated in these footnotes.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes shares that may be acquired within the next 60 days of March 15, 2005
          by exercising vested stock options or warrants but does not include any unvested
          stock options or warrants.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For each individual, this percentage is determined by assuming the named person
          exercises all options and warrants which he or she has the right to acquire
          within 60 days, but that no other persons exercise any options or warrants. For
          the directors and executive officers as a group, this percentage is determined
          by assuming that each director and executive officer exercises all options or
          warrants which he or she has the right to acquire within 60 days, but that no
          other persons exercise any options. The calculations are based on 2,995,942
          shares of common stock outstanding on March 15, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 12.   Certain
Relationships and Related Transactions

We
enter into banking and other transactions in the ordinary course of business with our
directors and officers and their affiliates. It is our policy that these transactions be
on substantially the same terms (including price, or interest rates and collateral) as
those prevailing at the time for comparable transactions with unrelated parties. We do not
expect these transactions to involve more than the normal risk of collectibility nor
present other unfavorable features to us. Loans to individual directors and officers must
also comply with our banks lending

35

---

policies and statutory lending
limits, and directors with a personal interest in any loan application are excluded from
the consideration of the loan application. We intend for all of our transactions with our
affiliates to be on terms no less favorable to us than could be obtained from an
unaffiliated third party and to be approved by a majority of disinterested directors.

We
purchased the site for the permanent branch office in Easley on March 16, 2005 from one of
our directors, Daniel E. Youngblood. The purchase price for the property is $775,000. We
received two MAI appraisals that valued the property at the purchase price. In addition,
we will lease the adjoining site from Mr. Youngblood for $3,443 per month. This will serve
as the site for the modular facility during the construction of the permanent building.

# Item 13.   Exhibits.

|3.1. | Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the
          Companys Form SB-2, File No. 333-117053).
|---- | -------------------------------------------------------------------------------------------------------------------------------

|3.2. | Bylaws (incorporated by reference to Exhibit 3.2 of the Companys Form
          SB-2, File No. 333-117053).
|---- | ------------------------------------------------------------------------------------------------------------

|4.1. | See Exhibits 3.1 and 3.2 for provisions in CommunitySouth
          Bancshares, Inc.s Articles of Incorporation and Bylaws defining the
          rights of holders of the common stock (incorporated by reference to Exhibit 4.1
          of the Companys Form SB-2, File No. 333-117053).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2. | Form of certificate of common stock (incorporated by reference to Exhibit 4.2 of
          the Companys Form SB-2, File No. 333-117053).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|10.1 | Employment Agreement between CommunitySouth Bancshares, Inc. and C. Allan Ducker, III dated March 29, 2004
(incorporated by reference to Exhibit 10.1 of the Companys Form SB-2, File No.33117053).*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Employment Agreement between CommunitySouth Bancshares, Inc. and David A. Miller dated March 29, 2004
         (incorporated by reference to Exhibit 10.2 of the Company's Form SB-2, File No. 333-117053).*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 | Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.3 of the Company's Form SB-2,
         File No. 333-117053).*
|---- | --------------------------------------------------------------------------------------------------------------------------------------

|10.4 | Master Loan Purchase Agreement between Bank of Tennessee and CommunitySouth Bank and Trust (incorporated by reference to
Exhibit 10.6 of the Companys Form SB-2, File No. 333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 | Employment Agreement between CommunitySouth Bancshares, Inc. and John W. Hobbs dated August 17, 2004
         (incorporated by reference to Exhibit 10.7 of the Company's Form SB-2, File No. 333-117053).*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 | Commercial Loan Agreement between Nexity Bank and Community Bancshares, Inc. dated July 26, 2004
         (incorporated by reference to Exhibit 10.9 of the Company's Form SB-2, File    No. 333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 | Option and Agreement of Sale dated August 18, 2004 by and between CommunitySouth Bancshares, Inc. and
         Daniel E. Youngblood (incorporated by reference to Exhibit 10.10 of the Company's Form SB-2 as, File No.
         333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 | Ground Lease Agreement dated August 18, 2004 by and between CommunitySouth Bancshares, Inc. and Daniel
         E. Youngblood (incorporated by reference to Exhibit 10.11 of the Company's Form SB-2, File No.
         333-117053).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

|10.9 | CommunitySouth Bancshares, Inc. 2005 Stock Incentive Plan and Form of Option Agreement.*
|---- | ----------------------------------------------------------------------------------------

|21.1 | Subsidiaries of the Company.
|---- | ----------------------------

|24.1 | Power of Attorney (filed as part of the signature page herewith).
|---- | -----------------------------------------------------------------

|31.1 | Rule 15d-14(a) Certification of the Chief Executive Officer.
|---- | ------------------------------------------------------------

|31.2 | Rule 15d-14(a) Certification of the Chief Financial Officer.
|---- | ------------------------------------------------------------

|32 | Section 1350 Certifications.
|-- | ----------------------------

|______________ | 
|-------------- | 

|* | Management contract of compensatory plan or arrangement required to be filed as an Exhibit
to this Annual Report on Form 10-KSB.
|- | --------------------------------------------------------------------------------------------------------------------------------

# Item 14.   Principal
Accountant Fees and Services

Elliott
Davis LLC was our auditor during the fiscal year ended December 31, 2004. The following
table shows the fees that we paid for services performed in fiscal years ended December
31, 2004:

| |  | Year Ended
| |  | ----------
|
|
| |  |           
| |  |           
| |  |           
| |  |           
| |  |           
| |  |           
| |  |           

Audit
Fees. This category includes the aggregate fees billed for professional services
rendered by the independent auditors during the companys 2004 fiscal year for the
audit of the companys consolidated annual financial statements.

Audit-Related
Fees. This category includes the aggregate fees billed for non-audit services,
exclusive of the fees disclosed relating to audit fees, during the fiscal year ended
December 31, 2004. These services principally related to the audit of the development
stage financial statements and procedures related to SEC filing of Form SB-2 in connection
with the Companys registration statement.

Tax
Fees. This category includes the aggregate fees billed for tax services rendered in
the preparation of federal and state income tax returns for the company and its
subsidiaries.

Oversight
of Accountants; Approval of Accounting Fees.Under the provisions of its charter, the
audit committee is responsible for the retention, compensation, and oversight of the work
of the independent auditors. The charter provides that the audit committee must
pre-approve the fees paid for the audit. The policy specifically prohibits certain
non-audit services that are prohibited by securities laws from being provided by an
independent auditor. All of the accounting services and fees reflected in the table above
were reviewed and approved by the audit committee, and none of the services were performed
by individuals who were not employees of the independent auditor.

37

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                      |  | COMMUNITYSOUTH BANCSHARES, INC.      
|--------------------- |  | -------------------------------------
|                      |  |                                      
|Date:  March 28, 2005 |  | By:   /s/  C. Allan Ducker, III      
|                      |  | C. Allan Ducker, III                 
|                      |  | President and Chief Executive Officer

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints c. Allan Ducker, III, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB,
and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and
agent full power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.

|Signature | Title | Date
|--------- | ----- | ----

|/s/  David Larry BrothertonDavid Larry Brotherton | Director | March 28, 2005
|------------------------------------------------- | -------- | --------------

|/s/  G. Dial DuboseG. Dial Dubose | Director | March 28, 2005
|--------------------------------- | -------- | --------------

|/s/  C. Allan Ducker, IIIC. Allan Ducker, III | Chief Executive Officer, Director | March 28, 2005
|--------------------------------------------- | --------------------------------- | --------------

|/s/  David W. EdwardsDavid W. Edwards | Director | March 28, 2005
|------------------------------------- | -------- | --------------

|/s/  R. Wesley HammondR. Wesley Hammond | Director | March 28, 2005
|--------------------------------------- | -------- | --------------

|/s/  David A. MillerDavid A. Miller | President, Director | March 28, 2005
|----------------------------------- | ------------------- | --------------

|/s/  John W. HobbsJohn W. Hobbs | Chief Financial Officer andprincipal accounting officer | March 28, 2005
|------------------------------- | ------------------------------------------------------- | --------------

|/s/  Arnold J. Ramsey*Arnold J. Ramsey* | Director | March 28, 2005
|--------------------------------------- | -------- | --------------

|/s/  W. Michael RiddleW. Michael Riddle | Director | March 28, 2005
|--------------------------------------- | -------- | --------------

38

---

|/s/  Joanne M. RogersJoanne M. Rogers | Director | March 28, 2005
|------------------------------------- | -------- | --------------

|/s/  B. Lynn SpencerB. Lynn Spencer | Director | March 28, 2005
|----------------------------------- | -------- | --------------

|/s/  J. Neal Workman, Jr.J. Neal Workman, Jr. | Director | March 28, 2005
|--------------------------------------------- | -------- | --------------

|/s/  Daniel E. YoungbloodDaniel E. Youngblood | Director | March 28, 2005
|--------------------------------------------- | -------- | --------------

39

---

# Exhibit Index

|3.1. | Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the
          Companys Form SB-2, File No. 333-117053).
|---- | -------------------------------------------------------------------------------------------------------------------------------

|3.2. | Bylaws (incorporated by reference to Exhibit 3.2 of the Companys Form
          SB-2, File No. 333-117053).
|---- | ------------------------------------------------------------------------------------------------------------

|4.1. | See Exhibits 3.1 and 3.2 for provisions in CommunitySouth
          Bancshares, Inc.s Articles of Incorporation and Bylaws defining the
          rights of holders of the common stock (incorporated by reference to Exhibit 4.1
          of the Companys Form SB-2, File No. 333-117053).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2. | Form of certificate of common stock (incorporated by reference to Exhibit 4.2 of
          the Companys Form SB-2, File No. 333-117053).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|10.1 | Employment Agreement between CommunitySouth Bancshares, Inc. and C. Allan Ducker, III dated March 29, 2004
(incorporated by reference to Exhibit 10.1 of the Companys Form SB-2, File No.33117053).*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Employment Agreement between CommunitySouth Bancshares, Inc. and David A. Miller dated March 29, 2004
         (incorporated by reference to Exhibit 10.2 of the Company's Form SB-2, File No. 333-117053).*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 | Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.3 of the Company's Form SB-2,
         File No. 333-117053).*
|---- | --------------------------------------------------------------------------------------------------------------------------------------

|10.4 | Master Loan Purchase Agreement between Bank of Tennessee and CommunitySouth Bank and Trust (incorporated by reference to
Exhibit 10.6 of the Companys Form SB-2, File No. 333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 | Employment Agreement between CommunitySouth Bancshares, Inc. and John W. Hobbs dated August 17, 2004
         (incorporated by reference to Exhibit 10.7 of the Company's Form SB-2, File No. 333-117053).*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 | Commercial Loan Agreement between Nexity Bank and Community Bancshares, Inc. dated July 26, 2004
         (incorporated by reference to Exhibit 10.9 of the Company's Form SB-2, File    No. 333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 | Option and Agreement of Sale dated August 18, 2004 by and between CommunitySouth Bancshares, Inc. and
         Daniel E. Youngblood (incorporated by reference to Exhibit 10.10 of the Company's Form SB-2 as, File No.
         333-117053).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 | Ground Lease Agreement dated August 18, 2004 by and between CommunitySouth Bancshares, Inc. and Daniel
         E. Youngblood (incorporated by reference to Exhibit 10.11 of the Company's Form SB-2, File No.
         333-117053).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 | CommunitySouth Bancshares, Inc. 2005 Stock Incentive Plan and Form of Option Agreement.*
|---- | ----------------------------------------------------------------------------------------

|21.1 | Subsidiaries of the Company.
|---- | ----------------------------

|24.1 | Power of Attorney (filed as part of the signature page herewith).
|---- | -----------------------------------------------------------------

|31.1 | Rule 15d-14(a) Certification of the Chief Executive Officer.
|---- | ------------------------------------------------------------

|31.2 | Rule 15d-14(a) Certification of the Chief Financial Officer.
|---- | ------------------------------------------------------------

|32 | Section 1350 Certifications.
|-- | ----------------------------

40