SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

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

For the Fiscal Year Ended December 31, 2002                File Number 000-31937

                            GRANDSOUTH BANCORPORATION
                 (Name of Small Business Issuer in its Charter)

             South Carolina                              57-1104394
    (State or Other Jurisdiction            (IRS Employer Identification Number)
      of Incorporation or Organization)

              327 Fairview Road, Simpsonville, South Carolina 29681
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 770-1000

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

      Securities Registered Pursuant to Section 12(g) of the Exchange Act:
                           Common Stock, No Par Value
                                (Title of Class)

         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 the past 90 days.

          Yes [X] No [ ]

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

         The issuer's revenues for its most recent fiscal year were $8,297,113.

         There is no  established  market  for the  Registrant's  voting  common
equity.  The  Registrant  has  no  non-voting  common  equity  outstanding.  The
aggregate book value of the voting common equity held by non-affiliates on March
1, 2003,  was  approximately  $7,383,191.  (In the absence of an active  trading
market for the  Registrant's  common  equity,  book value is used as a proxy for
market  value.)  As of  March  1,  2003,  there  were  1,969,095  shares  of the
Registrant's  Common  Stock,  no par value,  outstanding.  For  purposes  of the
foregoing  calculation  only,  all  directors  and  executive  officers  of  the
Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
     Shareholders - Part III


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

<PAGE>



                          10-KSB CROSS REFERENCE INDEX

                                     Part I                                 Page
Item 1   Description of Business ........................................      2
Item 2   Description of Property ........................................      8
Item 3   Legal Proceedings ..............................................      8
Item 4   Submission of Matters to a Vote of Security Holders ............      8
                                     Part II
Item 5   Market for Common Equity and Related Stockholder Matters .......      9
Item 6   Management's Discussion and Analysis or Plan of Operation ......     10
Item 7   Financial Statements ...........................................     23
Item 8   Changes In and Disagreements with Accountants
           on Accounting and Financial Disclosure .......................     47
                                    Part III
Item 9   Directors and Executive Officers, Promoters and Control
         Persons; Compliance With Section 16(a) of the Exchange Act .....      *
Item 10  Executive Compensation .........................................      *
Item 11  Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters ................................     47
Item 12  Certain Relationships and Related Transactions .................      *
                                     Part IV
Item 13  Exhibits and Reports on  Form 8-K
Item 14  Controls and Procedures

     * Incorporated  by reference to the  Registrant's  Proxy  Statement for the
     2003 Annual Meeting of Shareholders

<Page>


                                     PART I

Forward-Looking Statements

         This  Report on Form  10-KSB  may  contain  forward-looking  statements
relating  to  such  matters  as  anticipated  financial  performance,   business
prospects,   technological  developments,  new  products  and  similar  matters.
Statements included in this report that are not historical facts are intended to
be  and  are  hereby  identified  as  "forward-looking"  statements.  The  words
"estimate", "project", "intend", "expect", "believe",  "anticipate", "plan", and
similar expressions identify forward-looking  statements. The Private Securities
Litigation  Reform  Act of  1995  provides  a safe  harbor  for  forward-looking
statements.  In order to  comply  with  terms  of the  safe  harbor,  GrandSouth
Bancorporation  (the "Company")  notes that a variety of factors could cause the
Company's   actual  results  and  experience  to  differ   materially  from  the
anticipated   results  or  other   expectations   expressed  in  the   Company's
forward-looking  statements.  The risks and  uncertainties  that may  affect the
operations,  performances,  development  and results of the  Company's  business
include,  but are not limited to, the following:  risks from changes in economic
and industry  conditions;  changes in interest  rates;  risks inherent in making
loans,  including repayment risks and value of collateral;  dependence on senior
management;  and recently-enacted or proposed legislation.  Statements contained
in this filing regarding the demand for GrandSouth Bank's products and services,
changing  economic  conditions,  interest rates,  consumer spending and numerous
other factors may be forward-looking statements and are subject to uncertainties
and risks.

Item 1.  Description of Business.

General

         The Company is a South Carolina corporation organized in 2000 under the
laws of South Carolina for the purpose of being a holding company for GrandSouth
Bank (the "Bank").  On October 2, 2000,  pursuant to a Plan of Exchange approved
by the shareholders,  all of the outstanding shares of capital stock of the Bank
were  exchanged for shares of common stock of the Company and the Company became
the  owner of all of the  outstanding  capital  stock of the Bank.  The  Company
presently  engages in no business  other than that of owning the Bank and has no
employees.

         The Bank is a South  Carolina  state  bank which was  incorporated  and
commenced  operations as a commercial  bank in 1998.  The Bank operates from its
offices in Greenville,  Fountain Inn and Simpsonville,  South Carolina. The main
office is located at 381 Halton Road, in Greenville,  South Carolina, and branch
offices are located at 325 South Main Street,  in Fountain Inn, South  Carolina,
and 327  Fairview  Road,  Simpsonville,  South  Carolina.  The  main  office  in
Greenville opened in the third quarter of 2002.

         The Bank  offers a full  array of  commercial  bank  services.  Deposit
services include business and personal checking accounts, NOW accounts,  savings
accounts,  money market  accounts,  various term  certificates  of deposit,  IRA
accounts, and other deposit services.  Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services.

         The Bank  offers  secured  and  unsecured,  short-to-intermediate  term
loans,  with  floating and fixed  interest  rates for  commercial,  consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans  (secured  by first and second  mortgages),  personal  expenditure  loans,
education  loans,  overdraft  lines of credit,  and the like.  Commercial  loans
include short term  unsecured  loans,  short and  intermediate  term real estate
mortgage  loans,  loans  secured by listed  stocks,  loans  secured by equipment
inventory,  accounts  receivable,  and the like.  Management  believes  that the
credit staff possesses  knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.

         Management of the Bank  believes that the loan  portfolio is adequately
diversified.  There are no significant concentrations of loans in any particular
individuals,  industries or groups of related  individuals or industries and the
Bank has no foreign  loans.  The loan portfolio  consists  primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within  Greenville  County,  South  Carolina.   The  economy  of  this  area  is


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<Page>

diversified  and does  not  depend  on any one  industry  or  group  of  related
industries.  Management has established loan policies and practices that include
set limitations on  loan-to-collateral  value for different types of collateral,
requirements  for  appraisals,  obtaining  and  maintaining  current  credit and
financial information on borrowers, and credit approvals.

         Other services  offered by the Bank include safe deposit  boxes,  night
depository service,  VISA(R) and MasterCard(R)  charge cards, tax deposits,  and
traveler's checks.

         At February  28,  2003,  the Bank  employed 31 persons  full-time.  The
Company has no  employees.  Management  of the Bank  believes  that its employee
relations are excellent.

Competition

         The Bank competes in the South Carolina county of Greenville, for which
the most recent  market share data  available  is as of June 30,  2002.  At that
time,  20 banks,  and  savings  banks  with 147  branch  locations  competed  in
Greenville County for aggregate deposits of approximately $6.1 billion.

         Banks generally compete with other financial  institutions  through the
savings  products and services  offered,  the pricing of services,  the level of
service provided,  the convenience and availability of services,  and the degree
of expertise  and  personal  concern  with which  services  are  offered.  South
Carolina law permits statewide branching by banks and savings institutions,  and
many financial  institutions  in the state have branch  networks.  Consequently,
commercial  banking  in  South  Carolina  is  highly  competitive.  Furthermore,
out-of-state  banks may commence  operations  and compete in the Bank's  primary
service area. Many large banking organizations,  several of which are controlled
by out-of-state ownership, currently operate in the Bank's market area.


         In the conduct of certain areas of its business, the Bank competes with
commercial banks, savings and loan associations, credit unions, consumer finance
companies,  insurance  companies,  money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation and
restriction  imposed upon the Bank. Many of these competitors have substantially
greater  resources and lending limits than the Bank and offer certain  services,
such as international  banking  services and trust services,  that the Bank does
not provide.  Moreover,  most of these  competitors  have more  numerous  branch
offices located throughout their market areas, a competitive  advantage that the
Bank  does  not  have to the  same  degree.  Such  competitors  may also be in a
position to make more effective use of media advertising,  support services, and
electronic technology than can the Bank.

         The banking industry is significantly  affected by prevailing  economic
conditions as well as by government policies and regulations  concerning,  among
other things,  monetary and fiscal affairs,  the housing  industry and financial
institutions.  Deposits at banks are influenced by a number of economic factors,
including interest rates, competing  instruments,  levels of personal income and
savings,  and the extent to which interest on retirement savings accounts is tax
deferred.  Lending  activities  are  also  influenced  by a number  of  economic
factors,  including  demand  for  and  supply  of  housing,  conditions  in  the
construction  industry,  and availability of funds. Primary sources of funds for
lending  activities  include savings  deposits,  income from  investments,  loan
principal  repayments,   and  proceeds  from  sales  of  loans  to  conventional
participating lenders.

Effect of Government Regulation

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


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<Page>

General

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

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

Obligations of the Company to its Subsidiary Bank

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

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

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank


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<Page>

regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and State Banks

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

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

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

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

Payment of Dividends

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

Certain Transactions by the Company with its Affiliates

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

FDIC Insurance Assessments

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

Regulation of the Bank

         The Bank is subject to examination by the State Board. In addition, the
Bank is  subject  to  various  other  state and  federal  laws and  regulations,
including state usury laws,  laws relating to  fiduciaries,  consumer credit and
laws relating to branch banking.  The Bank's loan operations are also subject to


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

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

Other Safety and Soundness Regulations

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

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

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

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate


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bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

Gramm-Leach-Bliley Act

         On November 12, 1999, the President signed the Gramm-Leach-Bliley  Act,
which  makes it easier for  affiliations  between  banks,  securities  firms and
insurance companies to take place. The Act removes Depression-era  barriers that
had separated  banks and securities  firms,  and seeks to protect the privacy of
consumers' financial information.  Most of the provisions of the Act require the
applicable   regulators  to  adopt  regulations  in  order  to  implement  these
provisions and a significant number of regulations have already been adopted.

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

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

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

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

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.

         The  Company  anticipates  that  the Act and  the  regulations  adopted
pursuant to the Act will be likely to create new  opportunities  for it to offer
expanded  services to  customers  in the future,  though the Company has not yet


                                       7
<Page>

determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company  further  expects that the Act
will increase competition from larger financial  institutions that are currently
more capable than the Company of taking  advantage of the opportunity to provide
a broader range of services.  However, the Company continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.

Legislative Proposals

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

Fiscal and Monetary Policy

           Banking is a business  which  depends to a large  extent on  interest
rate  differentials.  In general,  the difference between the interest paid by a
bank on its deposits and its other  borrowings,  and the interest  received by a
bank on its loans and securities  holdings,  constitutes  the major portion of a
bank's  earnings.  Thus, the earnings and growth of the Company and the Bank are
subject to the  influence of economic  conditions  generally,  both domestic and
foreign,  and also to the monetary and fiscal  policies of the United States and
its agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates
the supply of money through  various means,  including  open market  dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve  requirements on deposits.  The nature
and timing of any changes in such  policies  and their impact on the Company and
the Bank cannot be predicted.

Item 2.    Description of Property.

         The Bank owns a lot at the  intersection of Halton Road and Rocky Slope
Road in Greenville, South Carolina on which its main office facility is located.
This  facility,  which was  completed in August 2002,  is a 20,000  square foot,
three story  building.  The cost of building  and  furnishing  the new  facility
totaled $2.9 million.

           The Bank  leases a lot at the  corner of South  Main  Street and East
Knight  Street in Fountain Inn. The lot is leased for 20 years for $9,000 a year
from Blake P. Garrett, Jr., Trustee, with four five year renewal options.  Lease
payments  are subject to increase to reflect  increases  in the  Consumer  Price
Index.  Blake P. Garrett,  Jr., is the brother of Mason Y. Garrett,  Chairman of
the Board of  Directors  of the Bank.  Blake P.  Garrett,  Jr., is trustee for a
partnership  which  owns  the  property.  The  Bank  completed  construction  in
December,  1998 of a 3,000 square foot one story  office  building on the lot at
the cost of approximately $500,000.

           Since its  opening,  the Bank has  operated  in a  building  formerly
operated as a branch office by NationsBank in Simpsonville, South Carolina. That
office is leased from Blake P.  Garrett,  Jr., as Trustee,  for $3,000 per month
for 3 years with three five year  renewal  options.  Mason Y. Garrett is a 10.3%
partner in the  partnership. The Bank also  leases a store  front  office in the
adjoining shopping center.

Item 3.    Legal Proceedings.

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

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

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


                                       8
<Page>

                                     PART II

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

         Although the common stock of the Company is traded from time to time on
an individual  basis,  no  established  trading market has developed and none is
expected to develop in the foreseeable future. The common stock is not traded on
the NASDAQ  National  Market  System,  nor are there any market  makers known to
management.  During 2002, management is aware of a few transactions in which the
Company's  common stock has been  transferred  for prices  ranging from $6.19 to
$7.00 per share. However, management has not ascertained that these transactions
are the result of arm's length negotiations  between the parties, and because of
the limited number of shares involved,  such prices may not be indicative of the
market value of the common stock.

         As of February 28, 2003, there were approximately 630 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         The  Company  has never paid any cash  dividends,  and to  support  its
continued  capital  growth,  does not expect to pay cash  dividends  in the near
future.  The  Company's  principal  source  of funds  with  which  it could  pay
dividends is the Bank. The dividend policy of the Company as well as the Bank is
subject to the  discretion of their  respective  Boards of Directors and depends
upon a number of factors, including earnings,  financial conditions,  cash needs
and   general   business   conditions,   as   well  as   applicable   regulatory
considerations.  South Carolina banking regulations  restrict the amount of cash
dividends  that can be paid to the  Company  by the Bank,  and all of the Bank's
cash  dividends  to the Company  are subject to the prior  approval of the South
Carolina Commissioner of Banking.

         In January  2003,  the Company  issued a 5% stock  dividend.  The trade
prices above have been adjusted to reflect this stock dividend.

         The information  required by Item 201(d) of Regulation S-B is set forth
in Item 11 of this Form 10-KSB.



                                       9
<PAGE>

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

                           FORWARD LOOKING STATEMENTS

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

         These  forward-looking  statements  are based on current  expectations,
estimates and projections about the banking industry,  management's beliefs, and
assumptions made by management.  Such information includes,  without limitation,
discussions  as to estimates,  expectations,  beliefs,  plans,  strategies,  and
objectives  concerning  future  financial  and  operating   performance.   These
statements  are not guarantees of future  performance  and are subject to risks,
uncertainties  and  assumptions  that are difficult to predict,  particularly in
light of the fact that the Company is a new company with no  operating  history.
Therefore,  actual  results  may  differ  materially  from  those  expressed  or
forecasted  in such  forward-looking  statements.  The risks  and  uncertainties
include,  but are not limited to: the  Company's  growth and ability to maintain
growth;  governmental  monetary and fiscal policies,  as well as legislative and
regulatory  changes;  the  effect  of  interest  rate  changes  on the level and
composition  of deposits,  loan demand and the value of the loan  collateral and
securities;  the  effects  of  competition  from  other  financial  institutions
operating in the Company's  market areas and elsewhere,  including  institutions
operating locally,  regionally,  nationally and  internationally,  together with
competitors  that offer  banking  products and services by mail,  telephone  and
computer   and/or  the  Internet;   failure  of   assumptions   underlying   the
establishment  of  the  allowance  for  loan  losses,  including  the  value  of
collateral  securing  loans;  and  loss  of  consumer  confidence  and  economic
disruptions resulting from terrorist activities.

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

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

General

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

Critical Accounting Policies

 The  Company  has  adopted  various   accounting   policies  which  govern  the
application of accounting  principles generally accepted in the United States in
the  preparation  of  the  Company's  financial   statements.   The  significant
accounting  policies  of the  Company  are  described  in the  footnotes  to the
consolidated financial statements.

Certain  accounting  policies involve  significant  estimates and assumptions by
management  which have a material impact on the carrying value of certain assets


                                       10
<PAGE>

and liabilities;  management  considers such accounting  policies to be critical
accounting policies.  The estimates 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 is a critical  accounting
policy that  requires  the most  significant  judgments  and  estimates  used in
preparation of its consolidated  financial  statements.  Refer to the "Provision
for Loan Losses" and "Allowance  for Loan Losses"  sections below for a detailed
description of the Company's  estimation process and methodology  related to the
allowance for loan losses.

Financial Condition

         At December  31, 2002 the  Company had total  assets of $141.5  million
composed  primarily  of loans of $109.5  million,  securities,  investments  and
Federal Funds sold of $23.3 million and cash and due from banks of $2.7 million.
Liabilities  were $132.2  million at December  31, 2002,  composed  primarily of
deposits of $118.5 million, Federal Home Loan Bank advances of $8.5 million, and
subordinated  debentures of $3.5 million.  Shareholders' equity was $9.3 million
at December 31, 2002.

         The Company's loan  portfolio at December 31, 2002 consisted  primarily
of $45.1 million of  commercial  loans,  $44.8  million of real estate  mortgage
loans,  $13.6  million of real  estate  construction  loans and $7.4  million of
consumer  loans.  The allowance for loan losses totaled $1.4 million at December
31, 2002.  Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio as of December 31, 2002.

Earnings Performance

         The Bank had net income from operations for the year ended December 31,
2002 of $600,882,  or $0.31 basic earnings per share and $0.26 diluted  earnings
per share,  compared to $295,814  or $0.15  basic  earnings  per share and $0.15
diluted  earnings per share for the year ended  December 31, 2001.  The Bank had
net interest income (the difference  between interest earned on interest earning
assets  and  interest  paid  on  interest  bearing  liabilities,  excluding  the
provision for loan losses) of  $4,738,333 in 2002 as compared to $3,590,637  for
2001. The Bank also had other operating  income  (principally  service  charges,
fees and  commissions)  of  $440,809  in 2002  and  $277,061  in 2001.  The Bank
provided $805,000 and $722,500 to its allowance for loan losses in 2002 and 2001
respectively,  and  had  other  operating  expenses  (principally  salaries  and
benefits,  occupancy and  equipment  expenses and data  processing  expenses) of
$3,312,790 in 2002 and $2,978,440 in 2001.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of
interest rates,  volume and mix of interest  earning assets and interest bearing
liabilities and the relative funding of these assets.

         During the year ended December 31, 2002,  net interest  income was $4.7
million.  For the year ended  December  31, 2001,  net interest  income was $3.6
million.  This increase was primarily  attributable  to an increase in volume as
average  interest  earning assets increased to $120.1 million in 2002 from $97.2
million in 2001. The average yield on interest earning assets decreased to 6.91%
from 8.65% in 2002 compared to 2001,  while the average cost of interest bearing
liabilities  decreased  to 3.20% from 5.47%.  The net yield on average  interest
earning assets increased to 3.95% in 2002 from 3.70% in 2001.


                                       11
<PAGE>

The table "Average Balances,  Yields and Rates," provides a detailed analysis of
the effective  yields and rates on the categories of interest earning assets and
interest bearing liabilities for the years ended December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                             Average Balances, Yields and Rates
                                                                                   (Dollars in Thousands)
                                                              Year Ended December 31, 2002        Year Ended December 31, 2001
                                                              ----------------------------        ----------------------------
                                                                         Interest                             Interest
                                                             Average      Income/    Yields/     Average       Income/     Yields/
                                                           Balances(1)    Expense     Rates    Balances(1)     Expense      Rates
                                                           -----------    -------     -----    -----------     -------      -----
Assets
<S>                                                         <C>           <C>         <C>       <C>             <C>         <C>
Federal funds sold and interest bearing deposits .......    $  9,391      $  148      1.58%     $  7,420        $  331      4.47%
Investment securities ..................................      12,031         609      5.06        10,263           682      6.64
Loans (2) (3) ..........................................      99,820       7,540      7.55        79,475         7,392      9.30
                                                            --------      ------      ----      --------        ------
  Total interest earning assets ........................     121,242       8,297      6.84        97,158         8,405      8.65
Cash and due from banks ................................       2,263                               3,121
Allowance for loan losses ..............................     (1,246)                             (1,073)
Premises and equipment .................................       3,291                               1,561
Other assets ...........................................       2,700                               1,649
                                                            --------                            --------
  Total assets .........................................    $128,250                            $102,416
                                                            ========                            ========
Liabilities and shareholders' equity
  Interest bearing deposits ............................      99,160       3,092      3.12      $ 82,996         4,552      5.48
  FHLB advances ........................................       8,500         371      4.36         1,593            68      4.29
  Subordinated debentures ..............................       3,500          96      2.75         3,500           194      5.53
                                                            --------      ------      ----      --------        ------
    Total interest bearing liabilities .................     111,160       3,559      3.20        88,089         4,814      5.47
Noninterest bearing demand deposits ....................       7,090                               5,212
Other liabilities ......................................       1,363                               2,036
                                                            --------                            --------
    Total liabilities ..................................     119,613                              95,337
Shareholders' equity ...................................       8,637                               7,079
                                                            --------                            --------
  Total liabilities and  shareholders' equity ..........    $128,250                            $102,416
                                                            ========                            ========
Interest rate spread (4) ...............................                              3.64                                  3.18
Net interest income and net yield
  on earning assets  (5) ...............................                   4,738      3.91                       3,591      3.70
Interest free funds supporting earning
  assets (6) ...........................................     $12,419                            $  9,069
</TABLE>
(1)  Average balances are computed on a daily basis.
(2)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis.
(3)  Loan fees are included in the  computation  of interest  income.  Loan fees
     generated must be netted against the  incremental  direct costs incurred in
     originating a loan to establish a net loan fee. The net loan fees generated
     during the periods presented are not material.
(4)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets less total interest bearing liabilities.


                                       12
<PAGE>

Rate/Volume Analysis of Net Interest Income

  The  effect of  changes in average  balances  (volume)  and rates on  interest
income,  interest expense and net interest income, for the periods indicated, is
shown below.  The effect of a change in average  balance has been  determined by
applying the average rate in the earlier period to the change in average balance
in the later period, as compared with the earlier period. The effect of a change
in the average rate has been  determined by applying the average  balance in the
earlier  period  to the  change in the  average  rate in the  later  period,  as
compared with the earlier period.  The effect of changes in volume/rate has been
determined  by applying the amount of the change in average  rates to the amount
of the change in average volumes.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31, 2002 compared to 2001
                                                                                        Increase (Decrease) Due to
                                                                                        --------------------------
                                                                            Volume          Rate       Volume/ Rate         Change
                                                                            ------          ----       ------------         ------
Interest earned on:                                                                      (Dollars in Thousands)
<S>                                                                        <C>            <C>              <C>               <C>
       Federal funds sold and interest bearing
         deposits ...............................................              88            (214)         $   (57)         $  (183)
       Investments ..............................................             120            (163)             (31)             (74)
       Gross Loans ..............................................           1,892          (1,388)            (355)             149
                                                                          -------         -------          -------          -------

Total Interest Income ...........................................           2,100          (1,765)            (443)            (108)

Interest paid on:
       Deposits .................................................             887          (1,965)            (383)          (1,461)
       FHLB advances ............................................             296               1                5              302
       Subordinated debentures ..................................               -             (97)               -              (97)
                                                                          -------         -------          -------          -------
Total Interest Expense ..........................................           1,183          (2,061)            (378)          (1,256)

Change in Net Interest Income ...................................             917             296          $   (65)         $ 1,148
                                                                          =======         =======          =======          =======
</TABLE>

         During  2003,  management  expects  that  interest  rates  will  remain
relatively  flat during the entire  year.  Therefore,  any  improvements  in net
interest  income for 2003 are  expected to be largely the result of increases in
the volume and changes in the mix of interest  earning  assets and  liabilities.
Management  expects  to  continue  to use  aggressive  marketing  strategies  to
increase the Bank's  market share for both deposits and quality loans within its
service area in the Greenville,  South Carolina area. These  strategies  involve
offering  attractive  interest  rates and  continuing  the Bank's  commitment to
providing outstanding customer service.

Interest Rate Sensitivity

         Interest rate  sensitivity  management is concerned with the timing and
magnitude of repricing  assets  compared to liabilities and is an important part
of asset/liability  management. It is the objective of interest rate sensitivity
management to generate stable growth in net interest income,  and to control the
risks  associated  with interest rate movement.  Management  constantly  reviews
interest rate risk exposure and the expected  interest rate  environment so that
adjustments in interest rate sensitivity can be timely made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative  basis through twelve months,  rate  sensitive  assets  exceeded rate


                                       13
<PAGE>

sensitive liabilities,  resulting in an asset sensitive position at December 31,
2002 of $5.4  million  for a  cumulative  gap ratio of  106.31%.  When  interest
sensitive assets exceed interest sensitive  liabilities for a specific repricing
"horizon", a positive interest sensitivity gap results. The gap is negative when
interest sensitive liabilities exceed interest sensitive assets. For a bank with
a positive gap,  such as the Bank,  rising  interest  rates would be expected to
have a  positive  effect on net  interest  income  and  falling  rates  would be
expected to have the opposite effect.

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts  of fixed  rate  loans are  reflected  at the  earlier  of their
contractual  maturity  date or the  date at  which  the  loans  may be  repriced
contractually.  Time  deposits in other  banks are  reflected  in the  deposits'
maturity dates.  Repurchase agreements and other borrowed funds are reflected in
the earliest  contractual  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity,  such as interest bearing  transaction  accounts and savings deposits,
are reflected in the earliest repricing interval due to contractual arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits are reflected at their  contractual  maturity  dates.  Fixed rate
advances are reflected at their  contractual  maturity dates,  and variable rate
advances  are  reflected  in the  earliest  repricing  interval  since they were
borrowed under the daily rate credit option, and reprice daily.

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                         December 31, 2002
                                                                                         -----------------
                                                               Within           4-12         Over 1-5        Over 5
                                                              3 Months         Months         Years          Years          Total
                                                              --------         ------        --------        ------         -----
                                                                                        (Dollars in thousands)
Interest earning assets
<S>                                                          <C>             <C>             <C>               <C>          <C>
   Federal funds sold ................................       $  5,197        $      -        $      -           $   -       $  5,197
   Investments and FHLB stock ........................          3,552           1,986           6,078           6,467         18,083
   Loans .............................................         60,432          20,578          28,880           1,049        110,939
                                                             --------        --------        --------        --------       --------

        Total interest earning assets ................         69,181          22,564          34,958           7,516        134,219
                                                             ========        ========        ========        ========       ========
Interest bearing liabilities
   Interest bearing deposits
      Interest bearing transaction accounts ..........            665               -           1,796               -          2,461
      Savings and money market accounts ..............         26,169               -          12,315               -         38,484
      Time deposits over $100M .......................          7,669          10,487           4,607               -         22,763
      Other time deposits ............................         11,264          26,543           9,672               -         47,479
                                                             --------        --------        --------        --------       --------
        Total interest bearing deposits ..............         45,767          37,030          28,390               -        111,187
                                                             --------        --------        --------        --------       --------

   Other borrowings ..................................          3,500               -           8,500               -         12,000
                                                             --------        --------        --------        --------       --------
        Total interest bearing liabilities ...........       $ 49,267        $ 37,030        $ 36,890        $      -       $123,187
                                                             ========        ========        ========        ========       ========

Interest sensitivity gap .............................       $ 19,914         (14,466)         (1,932)          7,516
Cumulative interest sensitivity gap ..................         19,914           5,448          (3,516)         11,032

Gap ratio ............................................         140.42%          60.93           94.76          100.00
Cumulative gap ratio .................................         140.42          106.31          102.85          108.96
</TABLE>

Provision for Loan Losses

         The allowance for loan losses,  established  through charges to expense
in the form of a provision for loan losses,  allows for loan losses  inherent in
the Bank's loan  portfolio.  Loan losses or  recoveries  are charged or credited
directly to the  allowance.  The level of the allowance for loan losses is based
on  management's  judgment as to the amount  required  to maintain an  allowance
adequate to provide for inherent losses. The Bank provided $805,000 and $722,500
to  the  allowance   during  the  years  ended   December  31,  2002  and  2001,
respectively.  The increase in the  provision for loan loss for 2002 versus 2001
was the result of growth in the loan portfolio and net charge-offs.


                                       14
<PAGE>

Other Income

         In 2002, the Bank had other income of $440,809 principally from service
charges,  fees and  commissions  as compared to $277,061 of such income in 2001.
The  increase in 2002 was the result of  increases of $83,666 in service fees on
deposit  accounts,  $22,499 in Bank-owned  life  insurance,  $16,390 in mortgage
origination fees and $7,500 in rental income.

Other Expenses

         Other expenses consist of salaries and employee  benefits of $1,789,615
and  $1,676,062  for  2002  and  2001,  respectively.  The  increase  in 2002 is
primarily due to increased staff at the Greenville  location.  Net occupancy and
data processing expenses,  totaled $731,336 for the year ended December 31, 2002
as compared to $542,315 for the year ended  December  31, 2001.  The increase in
data processing  expenses was due to increased  volume of  transactions  and new
accounts  generated from asset growth. The increase in net occupancy expense was
the result of increased  depreciation expense and moving expenses related to the
construction  of the  new  Greenville  office  and  the  related  furniture  and
equipment.  In 2002, the Bank also recorded  write-downs  of assets  acquired in
settlement of loans of $44,000 and $151,495 in 2001.

Income Taxes

         During the years ended  December 31, 2002 and 2001,  the Bank  recorded
income  tax  expense  of  $460,470  and  an  income  tax  benefit  of  $129,056,
respectively. The Bank accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes."  Certain items of income and expense  (principally  provision
for loan  losses and  depreciation)  are  included in one  reporting  period for
financial accounting purposes and another for income tax purposes.

Investment Portfolio

         As of December 31, 2002,  the Bank's  investment  portfolio,  excluding
investments  required  for  membership  in the Federal Home Loan Bank of Atlanta
("FHLB"), comprised approximately 12.5% of its total assets. The following table
summarizes the carrying value amounts of securities held by the Bank at December
31, 2002 and at December 31, 2001.  Available-for-sale  securities are stated at
estimated fair value. The Bank had no held for investment securities at December
31, 2002 or 2001.

                        Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                    December 31, 2002                   December 31, 2001
                                                                    -----------------                   -----------------
                                                                           Net                                   Net
                                                                        Unrealized                            Unrealized
                                                               Book      Holding      Fair        Book         Holding       Fair
                                                              Value    Gain/(Loss)    Value       Value      Gain/(Loss)     Value
                                                              -----    -----------    -----       -----      -----------     -----
                                                                                    (Dollars in thousands)
Available for sale:
<S>                                                       <C>          <C>          <C>          <C>          <C>           <C>
         U. S. Agency obligations ...................     $  5,992     $     61     $  6,053     $  3,483     $     80      $  3,563
         Mortgage-backed securities .................       11,391          214       11,605        7,391          (33)        7,358
                                                          --------     --------     --------     --------     --------      --------
                                                          $ 17,383     $    275     $ 17,658     $ 10,874     $     47      $ 10,921
                                                          ========     ========     ========     ========     ========      ========
</TABLE>

         The Bank also holds stock of the FHLB. This stock is recorded at a cost
of $425,000  at December  31,  2002 and 2001,  and has no quoted  market  value.
However, redemption of this stock has historically been at par value.


The following  table  presents  maturities  and weighted  average yields of debt
securities  available for sale at December 31, 2002.  All of the  securities are
categorized  as  available-for-sale  securities and are stated at estimated fair
value.



                                       15
<PAGE>

                   Securities Portfolio Maturities and Yields

                                                        December 31, 2002
                                                        -----------------
                                                  Fair value            Yield
                                                  ----------            -----
                                                      (Dollars in thousands)
U. S. Government Agency obligations
         Due within one year ................      1,034,375               5.97%
         Due from one to five years .........      5,018,320               3.20
                                               -------------
                                                   6,052,695

Mortgage-backed securities
         Due from five to ten years .........      7,382,362               4.09%
         Due after ten years ................      4,223,133               5.07
                                               -------------
                                                  11,605,495
                                               -------------
                                                  17,658,190               4.17%
                                               =============

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries, and there are no foreign
loans.

         The amount of loans  outstanding  at December  31,  2002 and 2001,  are
shown in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                                   ------------
                                                                                    2002          %           2001              %
                                                                                    ----         ---          ----             ---
                                                                                         (Dollars in thousands)
<S>                                                                             <C>            <C>          <C>              <C>
Commercial, financial and industrial .......................................    $  45,122       40.7%       $  36,800         39.7%
Real estate - Construction .................................................       13,627       12.3            6,846          7.4
Real estate - Mortgage .....................................................       44,840       40.4           41,924         45.2
Consumer ...................................................................        7,350        6.6            7,120          7.7
                                                                                ---------      -----        ---------        -----
    Total loans ............................................................      110,939      100.0%          92,690        100.0%
Less allowance for loan losses .............................................       (1,395)                     (1,176)
                                                                                ---------                   ---------
                                                                                $ 109,544                   $  91,514
                                                                                =========                   =========
</TABLE>

         A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and  amounts of risks  assumed and to  ultimately  minimize  losses.  Such
policies include limitations on  loan-to-collateral  values for various types of
collateral,  requirements for appraisals of real estate collateral, problem loan
management  practices and collection  procedures,  and nonaccrual and charge-off
guidelines.

         Commercial loans primarily represent loans made to businesses,  and may
be made on  either a secured  or an  unsecured  basis.  When  taken,  collateral
usually consists of liens on receivables,  equipment, inventories, furniture and


                                       16
<PAGE>

fixtures.  Unsecured  business loans are generally  short-term  with emphasis on
repayment  strengths and low debt to worth ratios.  Commercial  lending involves
significant risk because  repayment  usually depends on the cash flows generated
by a  borrower's  business,  and the debt  service  capacity  of a business  can
deteriorate because of downturns in national and local economic  conditions.  To
control  risk,  initial  and  continuing  financial  analysis  of  a  borrower's
financial information is required.

         Real estate  construction  loans  generally  consist of  financing  the
construction  of 1-4 family  dwellings  and some  nonfarm,  nonresidential  real
estate.  Usually, loan to cost ratios are limited to 80% and permanent financing
commitments are required prior to the advancement of loan proceeds.

         Loans secured by real estate  mortgages  comprised  40.4% of the Bank's
loan  portfolio  at December  31, 2002.  Residential  real estate loans  consist
mainly  of first  and  second  mortgages  on  single  family  homes,  with  some
multifamily  loans.  Loan-to-value  ratios for these  instruments  are generally
limited  to 80%.  Nonfarm,  nonresidential  loans are  secured by  business  and
commercial  properties with  loan-to-value  ratios generally limited to 80%. The
repayment  of both  residential  and  business  real estate  loans is  dependent
primarily  on the income and cash flows of the  borrowers,  with the real estate
serving as a secondary or liquidation source of repayment.

         Consumer  loans  generally  involve  more credit risks than other loans
because of the type and nature of the  underlying  collateral  or because of the
absence  of any  collateral.  Consumer  loan  repayments  are  dependent  on the
borrower's  continuing  financial  stability  and  are  likely  to be  adversely
affected by job loss,  divorce and  illness.  Furthermore,  the  application  of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency  laws,  may limit the amount  which can be recovered on such loans in
the case of default. In most cases, any repossessed  collateral will not provide
an adequate source of repayment of the outstanding loan balance.

Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's  loans, by type, at December 31, 2002, as well as the type of interest
requirement on such loans.

<TABLE>
<CAPTION>
                                                                             December 31, 2002
                                                                             -----------------
                                                         One Year          One to        Five Years
                                                          Or Less        Five Years       Or More          Total
                                                          -------        ----------       -------          -----
                                                                          (Dollars in thousands)

<S>                                                         <C>             <C>               <C>          <C>
Commercial, financial and industrial ...............        28,922          15,995            205          45,122
Real estate - construction .........................        10,912           2,668             47          13,627
Real estate - mortgage .............................        20,938          23,570            332          44,840
Consumer installment ...............................         1,964           5,313             73           7,350
                                                            ------          ------            ---         -------
         Total loans ...............................        62,736          47,546            657         110,939
                                                            ======          ======            ===         =======

                                                   Predetermined rate                                     $56,806
                                                                                                          =======

                                                   Variable rate                                          $54,133
                                                                                                          =======
</TABLE>

Nonperforming Loans; Other Problem Assets

         When a loan is 90 days past due as to interest or principal or there is
serious doubt as to collectibility,  the accrual of interest income is generally
discontinued  unless  the  estimated  net  realizable  value  of  collateral  is
sufficient to assure  collection of the principal  balance and accrued interest.
When the  collectibility  of a  significant  amount of  principal  is in serious
doubt,  the  principal  balance  is  reduced  to the  estimated  fair  value  of
collateral by  charge-off  to the  allowance for loan losses and any  subsequent
collections  are credited first to the remaining  principal  balance and then to
the  allowance  for loan  losses as a  recovery  of the  amount  charged  off. A
nonaccrual loan is not returned to accrual status unless  principal and interest
are current and the borrower  has  demonstrated  the ability to continue  making
payments as agreed.  At December  31, 2002 and 2001,  the Bank had  $855,270 and
$1,362,265,  respectively, of nonaccrual loans. Gross interest income that would
have been recorded  with respect to nonaccrual  loans in 2002 and 2001 under the
original  terms of the loans was $27,430 and  $195,396,  respectively.  Interest
income for 2002 and 2001 in the amount of $26,473 and $25,323, respectively, was
recognized for nonaccrual loans. At December 31, 2002 and 2001 there were $0 and
$626,000,  respectively,  of loans 90 days or more past due and  still  accruing
interest.


                                       17
<PAGE>

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans. These are loans that are not included in nonaccrual status, or loans that
are  past  due 90  days or more  and  still  accruing.  A loan is  added  to the
potential  problem  list when  management  becomes  aware of  information  about
possible  credit  problems of  borrowers  that causes  serious  doubts as to the
ability of such  borrowers to comply with the current loan repayment  terms.  At
December 31, 2002, no loans were past due ninety days or more and still accruing
interest.  There  were $4.0  million of loans  determined  by  management  to be
potential problem loans at December 31, 2002.

Assets Acquired in Foreclosure

         At  December  31,  2002  and  2001,  the Bank had  assets  acquired  in
settlements of loans of approximately $243,000 and $574,000,  respectively.  For
both years,  those amounts  represented  100% of real estate owned.  Real estate
owned is initially  recorded at the lower of net loan  principal  balance or its
estimated  fair market value less estimated  selling  costs.  The estimated fair
value is determined by appraisal at the time of acquisition.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the
period in which  management has determined  that it is more likely than not such
loans have become uncollectible.  Recoveries of previously charged off loans are
credited  to the  allowance.  The  table,  "Summary  of Loan  Loss  Experience,"
summarizes loan balances at the end of each period indicated,  averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.

         In reviewing the adequacy of the allowance for loan losses at each year
end,  management took into  consideration the historical loan losses experienced
by the Bank,  current economic  conditions  affecting the borrowers'  ability to
repay,  the volume of loans,  and the  trends in  delinquent,  nonaccruing,  and
potential  problem loans, and the quality of collateral  securing  nonperforming
and problem loans. After charging off all known losses, management considers the
allowance for loan losses adequate to cover its estimate of loan losses inherent
in the loan portfolio as of December 31, 2002.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio,  as well as
other  off-balance-sheet  credit  risks  such as loan  commitments  and  standby
letters of credit. Also, the calculation provides for management's assessment of
trends in national and local economic  conditions  that might affect the general
quality of the loan portfolio.  Regulators  review the adequacy of the allowance
for loan  losses  as part of  their  examination  of the  Bank  and may  require
adjustments  to the allowance  based upon  information  available to them at the
time of the examination.

         During 2002,  the Bank  experienced  net  charge-offs  in the amount of
approximately $586,000.  Management believes that it has adequately provided for
losses  considering  its  assessment  of  collateral  values  and other  factors
affecting  collectibility.  In addition,  Management  feels that  procedures  to
monitor  extensions  of  credit,   construction  draws,  and  current  financial
condition of borrowers  have  improved  during the last two years as compared to
previous periods.

         The allowance is not allocated to different  segments of the portfolio.
The Bank  charges  losses from any  segment of the  portfolio  to the  allowance
without any allocation.


                                       18
<PAGE>

                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                           Year Ended
                                                                                                           ----------
                                                                                            December 31, 2002      December 31, 2001
                                                                                            -----------------      -----------------
                                                                                                         (Dollars in thousands)
<S>                                                                                             <C>                      <C>
Total gross loans outstanding at end of period ...................................              $ 110,939                $  92,690
Average amount of loans outstanding, gross .......................................                 99,820                   78,318
                                                                                                ---------                ---------

Balance of allowance for loan losses - beginning .................................                  1,176                      958
                                                                                                ---------                ---------
Loans charged off:
     Real estate loans ...........................................................                   (529)                    (247)
     Consumer loans ..............................................................                    (54)                     (94)
     Commercial and other loans ..................................................                    (25)                    (164)
                                                                                                ---------                ---------
        Total charge-offs ........................................................                   (608)                    (505)

Recoveries of loans previously charged-off .......................................                     22                        -
                                                                                                ---------                ---------
Net charge-offs ..................................................................                   (586)                    (505)

Additions to allowance charged to expense ........................................                    805                      723
                                                                                                ---------                ---------

Balance of allowance for loan losses - ending ....................................              $   1,395                $   1,176
                                                                                                =========                =========

Ratios
     Net charge-offs during period to average
        loans outstanding during period ..........................................                   0.59%                    0.64%
     Net charge-offs to loans at end of period ...................................                   0.53                     0.54
     Allowance for loan losses to average loans ..................................                   1.40                     1.50
     Allowance for loan losses
         to loans at end of period ...............................................                   1.26                     1.27
     Allowance for loan losses to nonperforming loans
        at end of period .........................................................                   1.63                     86.3
     Net charge-offs to allowance for loan losses ................................                   42.0                     42.9
     Net charge-offs to provision for loan losses ................................                   72.8                     69.9
</TABLE>

Deposits

The amounts and  composition  of total deposits as of December 31, 2002 and 2001
were as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                        ------------
                                                                             2002                                 2001
                                                                             ----                                 ----
                                                                 Amount                Percent           Amount             Percent
                                                                 ------                -------           ------             -------
<S>                                                            <C>                     <C>              <C>                   <C>
Noninterest bearing ..............................             $  7,286                  6.1%           $  4,763                5.0%
NOW accounts .....................................                2,461                  2.1               2,198                2.3
Money market accounts ............................               38,037                 32.1              21,771               22.9
Savings ..........................................                  447                  0.4                 494                0.5
Time, less than $100,000 .........................               47,479                 40.1              44,772               47.1
Time, $100,000 and over ..........................               22,763                 19.2              21,040               22.2
                                                               --------                -----            --------              -----
                                                               $118,473                100.0%           $ 95,038              100.0%
                                                               ========                =====            ========              =====
</TABLE>



                                       19
<PAGE>

The average  amounts and average rate paid on deposits  held by the Bank for the
years ended December 31, 2002 and 2001 are summarized below:

<TABLE>
<CAPTION>
                                                                                                     Deposits
                                                                                              (Dollars in Thousands)
                                                                                December 31, 2002                December 31, 2001
                                                                                -----------------                -----------------
                                                                                 Amount           Rate         Amount          Rate
                                                                                ------           ----         ------          ----
<S>                                                                            <C>               <C>        <C>               <C>
Noninterest bearing demand ...........................................         $  7,090             -       $  5,245             -
Interest bearing transaction accounts ................................            2,317          0.60          1,878          1.54
Savings ..............................................................              455          0.93            303          1.18
Money market accounts ................................................           25,274          2.08         17,312          3.70
Certificates of deposit and individual  retirement
accounts .............................................................           71,114          3.58         63,470          6.11
                                                                               --------          ----       --------          ----

         Total average deposits ......................................         $106,250          2.91%      $ 82,208          5.16%
                                                                               ========          ====       ========          ====
</TABLE>

         As of December 31, 2002,  the Bank held $22.8  million in time deposits
of $100,000 or more,  with  approximately  $7.9 million with  maturities  within
three months,  $4.9 million with maturities over three through six months,  $5.4
million with  maturities  over six through twelve months,  and $3.7 million with
maturities  over twelve  months  through  three  years,  and $0.9  million  with
maturities over three years.  Brokered deposits as of December 31, 2002 amounted
to approximately $7,422,000.

         It is a common  industry  practice  not to  consider  time  deposits of
$100,000 and over or brokered  deposits as core deposits because their retention
can be expected to be heavily influenced by rates offered, and, therefore,  such
deposits may have characteristics of shorter-term purchased funds. Such deposits
require  maintenance of an  appropriate  matching of maturity  distribution  and
diversification of sources to achieve an appropriate level of liquidity.

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average  assets),  return on equity  (net  income  divided by  average  equity),
dividend  payout ratio  (dividends  declared per share divided by net income per
share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for the years ended December 31, 2002 and 2001.

                                                 Years Ended December 31,
                                                 ------------------------
                                                   2002            2001
                                                   ----            ----

               Return on average assets             0.47%           0.29%
               Return on average equity             6.96            4.18
               Average equity to average
                 asset ratio                        6.73            6.91

Liquidity


         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less time deposits greater than $100,000 and less brokered  deposits)  provide a


                                       20
<PAGE>

relatively  stable  funding  base,  and were  equal to 62.4% of total  assets at
December 31, 2002. Asset liquidity is provided from several  sources,  including
amounts due from banks and federal funds sold,  and funds from  maturing  loans.
The Bank is a member of the FHLB of Atlanta  and,  as such,  has the  ability to
borrow against the security of its 1-4 family  residential  mortgage  loans.  At
December 31,  2002,  the Bank had the ability to borrow up to 15% of assets from
the FHLB. $8.5 million of borrowings were  outstanding from the FHLB at December
31, 2002.  The  borrowings  bear  interest at rates ranging from 4.33% to 4.38%.
$6.5 million matures in 2006, and $2.0 million matures in 2011. The $6.5 million
advance is a fixed rate  borrowing,  but the $2 million  advance is callable and
may reprice prior to its final maturity date. The FHLB requires that securities,
qualifying  single family mortgage loans and stock of the FHLB owned by the Bank
be pledged to secure any advances from the FHLB. The unused  borrowing  capacity
currently available from the FHLB assumes that the Bank's $425,000 investment in
FHLB stock as well as  certain  securities  and  qualifying  mortgages  would be
pledged to secure any future  borrowings.  The maximum amount of FHLB borrowings
outstanding at the end of any month in 2002 was $8.5 million.  The Bank believes
that it could obtain additional  borrowing capacity from the FHLB by identifying
additional qualifying collateral that could be pledged.

The Bank also has $1,000,000  available through lines of credit with other banks
as an  additional  source of liquidity  funding.  Management  believes  that the
Bank's overall liquidity sources are adequate to meet its operating needs in the
ordinary course of business.

Off-Balance Sheet Risk

The Company,  through the operations of the Bank, makes contractual  commitments
to  extend  credit in the  ordinary  course of its  business  activities.  These
commitments  are legally  binding  agreements  to lend money to customers of the
Bank at predetermined interest rates for a specified period of time. At December
31, 2002,  the Bank had issued  commitments  to extend  credit of $17.0  million
through  various  types of lending.  Commitments  at variable  rates of interest
totaled $10.3 million and commitments at fixed rates totaled $6.7 million.

The commitments  generally expire over one year. Past experience  indicates that
many of these  commitments  to extend  credit will expire  unused.  However,  as
described in "Liquidity",  the Company  believes that is has adequate sources of
liquidity to fund commitments that are drawn upon by borrowers.

In addition  to  commitments  to extend  credit,  the Bank also  issues  standby
letters of credit which are  assurances to a third party that it will not suffer
a loss if the Bank's  customer fails to meet its  contractual  obligation to the
third party.  Standby  letters of credit totaled  $667,870 at December 31, 2002.
Past  experience  indicates  that many of these  standby  letters of credit will
expire  unused.  However,  through its various  sources of  liquidity,  the Bank
believes  that it will have the  necessary  resources to meet these  obligations
should the need arise.

Neither the Company nor its  subsidiary is involved in other  off-balance  sheet
contractual relationships, unconsolidated related entities that have off-balance
sheet arrangements or transactions that could result in liquidity needs or other
commitments or significantly  impact earnings.  Obligations under  noncancelable
operating lease agreements totaled approximately $ 537,000 at December 31, 2002.
These  obligations  are payable  over  several  years as shown in Note 10 to the
Company's consolidated financial statements.

Capital Resources

         The equity capital of the Company  increased by $756,176 during 2002 as
the result of net operating  income of $600,882,  and unrealized  gains,  net of
tax, in the investment portfolio of $155,294.

         The Bank is subject to regulatory  capital  adequacy  standards.  Under
these standards, financial institutions are required to maintain certain minimum
ratios of capital to  risk-weighted  assets and average total assets.  Under the
provisions of the Federal  Deposit  Insurance  Corporation  Improvements  Act of
1991,  federal  financial  institution  regulatory  authorities  are required to
implement  prescribed "prompt corrective  actions" upon the deterioration of the
capital position of a bank. If the capital  position of an affected  institution
were to fall below certain levels,  increasingly stringent regulatory corrective
actions are mandated.



                                       21
<PAGE>

The Bank's  December 31, 2002  capital  ratios are  presented  in the  following
table,  compared with the "well  capitalized"  and minimum ratios under the FDIC
regulatory definitions and guidelines:
<TABLE>
<CAPTION>
                                                                                                              To be well capitalized
                                                                                                                   under prompt
                                                                                          For capital               corrective
                                                                 Actual                adequacy purposes         action provisions
                                                                 ------                -----------------         -----------------
                                                                                            Minimum                  Minimum
                                                                                            -------                  -------
                                                        Amount           Ratio       Amount       Ratio        Amount          Ratio
                                                        ------           -----       ------       -----        ------          -----
                                                                                   (Amounts in thousands)
As of December 31, 2002
<S>                                                     <C>              <C>        <C>             <C>       <C>             <C>
  Total Capital (to risk weighted
     assets) ...................................        $13,743          11.62%     $ 9,463         8.0%      $11,829         10.0%
  Tier 1 Capital (to risk weighted
     assets) ...................................         12,348          10.44        4,732         4.0         7,097          6.0
  Tier 1 Capital (to average assets)
     (leverage) ................................         12,348           8.81        5,606         4.0         7,008          5.0
</TABLE>

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those  businesses  which have large  investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are  normally  corresponding  increases  in the money  supply,  and  banks  will
normally experience  above-average  growth in assets,  loans and deposits.  Also
general  increases in the prices of goods and services  will result in increased
operating expenses.



                                       22
<PAGE>

Item 7.  Financial Statements.

         The following  financial  statements of GrandSouth  Bancorporation  are
included herewith:

          Report of Independent  Certified Public Accountants

          Balance Sheets at December 31, 2002 and 2001

          Consolidated Statements of Operations for the years ended December 31,
          2002, 2001 and 2000

          Consolidated  Statements of  Shareholders'  Equity for the years ended
          December 31, 2002, 2001 and 2000

          Consolidated Statements of Cash Flows for the years ended December 31,
          2002, 2001 and 2000

          Notes to Consolidated Financial Statements


                                       23
<Page>








               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
GrandSouth Bancorporation and Subsidiary
Greenville, South Carolina


         We  have  audited  the  accompanying  consolidated  balance  sheets  of
GrandSouth Bancorporation and Subsidiary (the "Company") as of December 31, 2002
and 2001 and the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for each of the years in the three year
period ended December 31, 2002. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the GrandSouth  Bancorporation  and Subsidiary at December 31, 2002 and 2001 and
the  results  of their  operations  and cash  flows for each of the years in the
three year period  ended  December  31,  2002,  in  conformity  with  accounting
principles generally accepted in the United States of America.



                                        Elliott Davis, LLC



Greenville, South Carolina
February 7, 2003





                                       24
<PAGE>



                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                               DECEMBER 31,
                                                                                                               ------------
                                                                                                        2002                  2001
                                                                                                        ----                  ----
                                                            ASSETS
<S>                                                                                                  <C>                <C>
Cash and due from banks ......................................................................       $  2,669,420       $  2,207,293
Federal funds sold ...........................................................................          5,197,000          8,138,000
                                                                                                     ------------       ------------

           Total cash and cash equivalents ...................................................          7,866,420         10,345,293

Investment securities available for sale .....................................................         17,658,190         10,921,166
Other investments, at cost ...................................................................            425,000            425,000
Loans, net ...................................................................................        109,544,338         91,514,192
Property and equipment, net ..................................................................          3,993,030          2,117,214
Bank owned life insurance ....................................................................            785,649            749,968
Assets acquired in settlement of loans .......................................................            242,835            573,526
Other assets .................................................................................            967,935            993,966
                                                                                                     ------------       ------------

           Total assets ......................................................................       $141,483,397       $117,640,325
                                                                                                     ============       ============

                                             LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits
     Noninterest bearing .....................................................................       $  7,285,699       $  4,762,844
     Interest bearing ........................................................................        111,186,823         90,275,216
                                                                                                     ------------       ------------

           Total deposits ....................................................................        118,472,522         95,038,060

Federal Home Loan Bank advances ..............................................................          8,500,000          8,500,000
Subordinated debentures ......................................................................          3,500,000          3,500,000
Other liabilities ............................................................................          1,699,603          2,047,169
                                                                                                     ------------       ------------

           Total liabilities .................................................................        132,172,125        109,085,229
                                                                                                     ------------       ------------

COMMITMENTS AND CONTINGENCIES - Notes 10 and 14

SHAREHOLDERS' EQUITY
     Common stock, no par value, 20,000,000 shares authorized,
        1,875,329 shares issued at December 31, 2002 and 2001 ................................          8,464,227          8,464,227
     Retained earnings .......................................................................            660,001             59,119
     Accumulated other comprehensive income ..................................................            187,044             31,750
                                                                                                     ------------       ------------

           Total shareholders' equity ........................................................          9,311,272          8,555,096
                                                                                                     ------------       ------------

           Total liabilities and shareholders' equity ........................................       $141,483,397       $117,640,325
                                                                                                     ============       ============
</TABLE>






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


                                       25
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                                                For the years ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                    2002                 2001                2000
                                                                                    ----                 ----                ----
INTEREST INCOME
<S>                                                                               <C>                <C>                 <C>
   Loans and fees on loans ...............................................        $ 7,540,240        $ 7,391,647         $ 6,691,021
   Investment securities .................................................            756,873          1,013,624             991,607
                                                                                  -----------        -----------         -----------

        Total interest income ............................................          8,297,113          8,405,271           7,682,628

INTEREST EXPENSE
   Deposits ..............................................................          3,092,067          4,552,670           4,304,240
   Federal Home Loan Bank advances .......................................            370,463             68,409                   -
   Subordinated notes ....................................................             96,250            193,555                   -
                                                                                  -----------        -----------         -----------

        Total interest expense ...........................................          3,558,780          4,814,634           4,304,240
                                                                                  -----------        -----------         -----------

        Net interest income ..............................................          4,738,333          3,590,637           3,378,388

PROVISION FOR POSSIBLE LOAN LOSSES .......................................            805,000            722,500             865,000
                                                                                  -----------        -----------         -----------

        Net interest income after provision for
           possible loan losses ..........................................          3,933,333          2,868,137           2,513,388
                                                                                  -----------        -----------         -----------

NONINTEREST INCOME
   Service fees on deposit accounts ......................................            293,119            209,453              90,100
   Other .................................................................            147,690             67,608              25,187
                                                                                  -----------        -----------         -----------

        Total noninterest income .........................................            440,809            277,061             115,287
                                                                                  -----------        -----------         -----------

NONINTEREST EXPENSES
   Salaries and benefits .................................................          1,789,615          1,676,062           1,218,919
   Printing and supplies .................................................             97,586             86,665              63,584
   Data processing .......................................................            293,868            242,656             181,513
   Occupancy and equipment ...............................................            437,468            299,659             211,078
   Professional services .................................................            159,845            142,698             104,112
   Writedowns and expenses on assets acquired in settlement
   of loans ..............................................................             89,031            151,495              80,000
   Other operating .......................................................            445,377            379,205             295,946
                                                                                  -----------        -----------         -----------

        Total noninterest expenses .......................................          3,312,790          2,978,440           2,155,152
                                                                                  -----------        -----------         -----------

        Income before income taxes .......................................          1,061,352            166,758             473,523

INCOME TAX PROVISION (BENEFIT) ...........................................            460,470           (129,056)            176,253
                                                                                  -----------        -----------         -----------

        Net income .......................................................        $   600,882        $   295,814         $   297,270
                                                                                  ===========        ===========         ===========

NET INCOME PER COMMON SHARE
     Basic ...............................................................        $      0.31        $      0.15         $      0.15
                                                                                  ===========        ===========         ===========

     Diluted .............................................................        $      0.26        $      0.15         $      0.15
                                                                                  ===========        ===========         ===========

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING
     Basic ...............................................................          1,969,095          1,969,095           1,966,785
                                                                                  ===========        ===========         ===========

     Diluted .............................................................          2,560,416          2,011,995           2,022,303
                                                                                  ===========        ===========         ===========
</TABLE>

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

                                       26
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              For the years ended December 31, 2002, 2001 and 2000


<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                       Common stock         Additional     Retained         other         Total
                                                       ------------           paid-in      Earnings     comprehensive  shareholders'
                                                    Shares       Amount       capital      (deficit)    income (loss)     equity
                                                    ------       ------       -------      ---------    -------------     ------
<S>                                               <C>         <C>           <C>            <C>            <C>            <C>
Balance, December 31, 1999 ..................     1,873,129   $ 4,682,823   $ 3,771,394    $  (533,965)   $  (168,159)   $ 7,752,093
                                                                                                                         -----------

    Net income ..............................             -             -             -        297,270              -        297,270
    Other comprehensive income -
       Unrealized gain on investment
       securities (net of income tax
       expense of $64,692) ..................             -             -             -              -        132,220        132,220
                                                                                                                         -----------

    Comprehensive income ....................             -             -             -              -              -        429,490
    Par value conversion upon
       exchange of stock ....................             -     3,771,394    (3,771,394)             -              -              -
                                                -----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 2000 ..................     1,873,129     8,454,217             -       (236,695)       (35,939)     8,181,583
                                                                                                                         -----------

    Net income ..............................             -             -             -        295,814              -        295,814
    Other comprehensive income -
       Unrealized gain on investment
       securities (net of income tax
       expense of $33,339) ..................             -             -             -              -         67,689         67,689
                                                                                                                         -----------

    Comprehensive income ....................             -             -             -              -              -        363,503
    Exercise of stock options ...............         2,200        10,010             -              -              -         10,010
                                                -----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 2001 ..................     1,875,329     8,464,227             -         59,119         31,750      8,555,096
                                                                                                                         -----------

    Net income ..............................                                                  600,882                       600,882
    Other comprehensive income -
       Unrealized gain on investment
       securities (net of income tax
       expense of $ 119,727) ................                                                                 155,294        155,294
                                                                                                                         -----------

    Comprehensive income ....................                                                                                756,176
                                                -----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 2002 ..................     1,875,329   $ 8,464,227   $         -    $   660,001    $   187,044    $ 9,311,272
                                                ===========   ===========   ===========    ===========    ===========    ===========
</TABLE>















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


                                       27
<PAGE>


                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                  For the years ended
                                                                                                      December 31,
                                                                                                      ------------
                                                                                       2002               2001              2000
                                                                                       ----               ----              ----
OPERATING ACTIVITIES
<S>                                                                              <C>                <C>                <C>
      Net income ..........................................................      $    600,882       $    295,814       $    297,270
      Adjustments to reconcile net income to net cash
         provided by operating activities
         Deferred income tax expense (benefit) ............................           227,770           (271,143)            (1,033)
         Provision for possible loan losses ...............................           805,000            722,500            865,000
         Depreciation and amortization ....................................           203,149            144,159            123,481
         Gain on sale of property and equipment ...........................                 -                  -             (7,264)
         Loss on sale of assets acquired in settlement of loans ...........            35,619                  -                  -
         Write-down of assets acquired in settlement of loans .............            44,000            151,495             80,000
         Decrease (increase) in other assets ..............................          (281,739)           128,966             95,226
         Increase (decrease) in other liabilities .........................          (965,937)            46,454          1,568,877
                                                                                 ------------       ------------       ------------

              Net cash provided by operating activities ...................           668,754          1,218,245          3,021,557
                                                                                 ------------       ------------       ------------

INVESTING ACTIVITIES
      Purchase of investment securities ...................................       (12,524,711)       (11,816,674)        (3,725,941)
      Purchase of Federal Home Loan Bank stock ............................                 -           (306,400)                 -
      Proceeds from principal paydowns on investment securities ...........         3,023,004            661,226            758,180
      Proceeds from maturity of investment securities .....................         3,000,000         11,100,000                  -
      Increase in loans, net ..............................................       (19,108,231)       (22,628,222)        (9,833,051)
      Purchase of Bank owned life insurance ...............................                 -           (749,968)                 -
      Increase in cash surrender value of life insurance ..................           (35,681)                 -                  -
      Proceeds from sale of assets acquired in settlement of loans ........           524,157            291,605                  -
      Proceeds from sale of property and equipment ........................            10,237                  -            523,094
      Purchase of property and equipment ..................................        (2,089,225)        (1,039,788)          (913,108)
                                                                                 ------------       ------------       ------------

              Net cash used in investing activities .......................       (27,200,450)       (24,488,221)       (13,190,826)
                                                                                 ------------       ------------       ------------

FINANCING ACTIVITIES
      Proceeds from Federal Home Loan Bank advances .......................                 -          8,500,000                  -
      Proceeds from issuance of subordinated debentures ...................                 -          3,500,000                  -
      Exercise of stock options ...........................................                 -             10,010                  -
      Net increase in deposits ............................................        24,052,833         16,828,971          5,414,562
                                                                                 ------------       ------------       ------------

              Net cash provided by financing activities ...................        24,052,833         28,838,981          5,414,562
                                                                                 ------------       ------------       ------------

              Net (decrease) increase in cash and cash
              equivalents .................................................        (2,478,873)         5,569,005         (4,754,707)

CASH AND CASH EQUIVALENTS, BEGINNING
      OF YEAR .............................................................        10,345,293          4,776,288          9,530,995
                                                                                 ------------       ------------       ------------

CASH AND CASH EQUIVALENTS, END OF YEAR ....................................      $  7,866,420       $ 10,345,293       $  4,776,288
                                                                                 ============       ============       ============

SUPPLEMENTAL INFORMATION Cash paid for:
         Income taxes .....................................................      $    340,610       $    174,370       $          -
                                                                                 ============       ============       ============

         Interest .........................................................      $  4,038,239       $  4,257,929       $  2,440,385
                                                                                 ============       ============       ============

         Loans transferred to assets acquired
              in settlement of loans ......................................      $    273,085       $    109,000       $    819,726
                                                                                 ============       ============       ============
</TABLE>



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


                                       28
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                    NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

           GrandSouth   Bancorporation  (the  "Company")  is  a  South  Carolina
corporation  organized  in 2000 for the  purpose of being a holding  company for
GrandSouth Bank (the "Bank"). On October 2, 2000, pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding  shares of $2.50 par value
common stock of the Bank were  exchanged for shares of no par value common stock
of the Company.  Common stock and additional  paid-in  capital amounts have been
adjusted  as of  December  31,  2000 to reflect  the par value  conversion.  The
Company presently engages in no business other than that of owning the Bank, has
no employees,  and operates as one business segment. The Company is regulated by
the Federal Reserve Board. The  consolidated  financial  statements  include the
accounts of the Company and the Bank. All significant  intercompany accounts and
transactions  have been eliminated in  consolidation.  For ease of presentation,
the  formation of the holding  company has been treated as if it occurred at the
earliest  date  presented  in  these  consolidated  financial  statements.  This
presentation has no effect on net income or shareholders' equity.

           The Bank was  incorporated  in 1998 and operates as a South  Carolina
chartered  bank providing  full banking  services to its customers.  The Bank is
subject  to  regulation  by  the  South   Carolina   State  Board  of  Financial
Institutions and the Federal Deposit Insurance Corporation.

   Basis of presentation
     The  accounting  and reporting  policies  conform to accounting  principles
     generally accepted in the United States of America and to general practices
     in the banking industry.  The Company uses the accrual basis of accounting.
     All  transactions  of the  organizing  association  are  included  in these
     consolidated financial statements.

   Estimates
     The  preparation of  consolidated  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and  disclosure of contingent
     assets  and  liabilities  as of  the  date  of the  consolidated  financial
     statements  and the  reported  amount of income  and  expenses  during  the
     reporting periods. Actual results could differ from those estimates.

   Concentrations of credit risk
     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various  personal and commercial  purposes.  The Company
     has a diversified loan portfolio and the borrowers'  ability to repay their
     loans is not dependent upon any specific economic sector.

   Investment securities
     The Bank accounts for investment securities in accordance with Statement of
     Financial  Accounting  Standards  (SFAS) No. 115,  "Accounting  for Certain
     Investments  in  Debt  and  Equity  Securities".   The  statement  requires
     investments  in equity  and debt  securities  to be  classified  into three
     categories:

1.   Available for sale: These are securities which are not classified as either
     held to maturity or as trading securities. These securities are reported at
     fair  market  value  which  is  determined   using  quoted  market  prices.
     Unrealized gains and losses are reported,  net of income taxes, as separate
     components  of  shareholders'   equity   (accumulated  other  comprehensive
     income).  Gains or losses on  dispositions  of securities  are based on the
     difference  between the net proceeds and the adjusted  carrying  amounts of
     the securities sold using the specific  identification method. Premiums and
     discounts are amortized into interest income by a method that  approximates
     a level yield.

                                                                     (Continued)



                                       29
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

2.   Held to maturity: These are investment securities which the Company has the
     ability and intent to hold until maturity.  These  securities are stated at
     cost, adjusted for amortization of premiums and the accretion of discounts.
     Premiums and discounts are amortized into interest  income by a method that
     approximates a level yield. The Company has no held to maturity securities.

3.   Trading: These are securities which are bought and held principally for the
     purpose of selling in the near future.  Trading  securities are reported at
     fair market value,  and related  unrealized gains and losses are recognized
     in the income statement. The Company has no trading securities.

   Loans, interest and fee income on loans
     Loans are stated at the principal balance  outstanding.  Unearned discount,
     unamortized  loan fees,  and the  allowance  for  possible  loan losses are
     deducted  from total  loans in the  consolidated  balance  sheet.  Interest
     income is recognized on an accrual basis over the term of the loan based on
     the principal amount outstanding.

     Loans are generally placed on non-accrual status when principal or interest
     becomes  ninety days past due, or when payment in full is not  anticipated.
     When a loan is placed  on  non-accrual  status,  interest  accrued  but not
     received is generally  reversed against interest income.  If collectibility
     is in  doubt,  cash  receipts  on  non-accrual  loans are not  recorded  as
     interest income,  but are used to reduce principal.  Loans are not returned
     to  accrual  status  until the  borrower  demonstrates  the  ability to pay
     principal and interest.  Loans on non-accrual status as well as real estate
     acquired  through  foreclosure  or deed  taken in lieu of  foreclosure  are
     included in non-performing assets.

   Allowance for possible loan losses
     The  provision  for  possible  loan losses  charged to  operating  expenses
     reflects  the amount  deemed  appropriate  by  management  to  establish an
     adequate reserve to meet the present and foreseeable  risk  characteristics
     of the current loan portfolio.  Management's  estimate is based on periodic
     and  regular   evaluation   of   individual   loans,   the   overall   risk
     characteristics  of the various  portfolio  segments,  past experience with
     losses, and prevailing and anticipated economic conditions. Loans which are
     determined to be uncollectible are charged against the allowance. Provision
     for possible loan losses and recoveries on loans previously charged off are
     added to the allowance.

     The Company  accounts for impaired  loans in accordance  with SFAS No. 114,
     "Accounting by Creditors for Impairment of a Loan".  This standard requires
     that all  lenders  value  loans at the loan's  fair value if it is probable
     that the lender will be unable to collect all amounts due  according to the
     terms of the loan  agreement.  Fair value may be determined  based upon the
     present  value  of  expected  cash  flows,  market  price of the  loan,  if
     available,  or value of the underlying collateral.  Expected cash flows are
     required to be discounted at the loan's effective interest rate.

     Under  SFAS No.  114,  as  amended  by SFAS  No.  118,  when  the  ultimate
     collectibility  of an  impaired  loan's  principal  is in doubt,  wholly or
     partially,  all cash receipts are applied to  principal.  Once the reported
     principal  balance  has been  reduced to zero,  future  cash  receipts  are
     applied to  interest  income,  to the  extent  that any  interest  has been
     foregone.  Further cash  receipts are recorded as recoveries of any amounts
     previously charged off.

     A loan is also considered  impaired if its terms are modified in a troubled
     debt  restructuring.  For these accruing  impaired loans, cash receipts are
     typically  applied to principal and interest  receivable in accordance with
     the terms of the restructured loan agreement. Interest income is recognized
     on these loans using the accrual method of accounting.

                                                                     (Continued)




                                       30
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

   Property and equipment
     Property and equipment are stated at cost, net of accumulated depreciation.
     Depreciation is computed using the straight-line  method over the estimated
     useful lives of the related assets.  Maintenance and repairs are charged to
     operations, while major improvements are capitalized. Upon retirement, sale
     or other  disposition of property and equipment,  the cost and  accumulated
     depreciation are eliminated from the accounts, and gain or loss is included
     in income from operations.

   Assets acquired in settlement of loans
     Assets acquired in settlement of loans include real estate acquired through
     foreclosure or deed taken in lieu of foreclosure,  and repossessed  assets.
     These assets are  recorded at the lower of the carrying  value of the loans
     or the estimated fair value of the related asset, net of estimated  selling
     costs.  The excess  carrying value, if any, is charged to the allowance for
     possible loan losses upon transfers.  If further reduction in value occurs,
     charges are included in income from operations.

   Income taxes
     The  financial  statements  have been prepared on the accrual  basis.  When
     income and  expenses are  recognized  in  different  periods for  financial
     reporting  purposes versus for purposes of computing income taxes currently
     payable,  deferred  taxes are provided on such temporary  differences.  The
     Company  accounts  for  income  taxes in  accordance  with  SFAS  No.  109,
     "Accounting for Income Taxes".  Under SFAS No. 109, deferred tax assets and
     liabilities  are recognized  for the expected  future tax  consequences  of
     events that have been recognized in the financial statements or tax return.
     Deferred  tax assets and  liabilities  are  measured  using the enacted tax
     rates  expected  to apply to  taxable  income in the  years in which  those
     temporary differences are expected to be realized or settled.

   Advertising and public relations expense
     Advertising,   promotional,   and  other  business  development  costs  are
     generally expensed as incurred.  External costs incurred in producing media
     advertising  are  expensed  the first  time the  advertising  takes  place.
     External  costs  relating to direct  mailings are expensed in the period in
     which the direct mailings are sent.

   Net income per common share
     Net  income  per  common  share is  computed  on the basis of the  weighted
     average  number of common shares  outstanding  in accordance  with SFAS No.
     128, `Earnings per Share". The treasury stock method is used to compute the
     effect of stock  options and  convertible  subordinated  debentures  on the
     weighted  average number of common shares  outstanding for diluted earnings
     per share.  On January 21, 2003,  the Company  issued a five percent  stock
     dividend.  Per share and share amounts have been retroactively  restated to
     reflect the stock dividend.

   Statement of cash flows
     For purposes of reporting cash flows, cash and cash equivalents are defined
     as those  amounts  included in the  balance  sheet  caption  "Cash and cash
     equivalents".  Cash and cash equivalents have an original maturity of three
     months or less.

   Fair values of financial instruments
     SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments," as
     amended by SFAS No. 119, requires  disclosure of fair value information for
     financial  instruments,  whether  or not  recognized  in  the  consolidated
     balance sheet,  when it is practicable to estimate the fair value. SFAS No.
     107  defines a  financial  instrument  as cash,  evidence  of an  ownership
     interest in an entity or contractual obligations which require the exchange
     of cash or other  financial  instruments.  Certain  items are  specifically
     excluded from the disclosure  requirements,  including the Company's common
     stock. In addition,  other  nonfinancial  instruments  such as property and
     equipment  and  other  assets  and  liabilities  are  not  subject  to  the
     disclosure requirements.


                                                                     (Continued)


                                       31
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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

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

   Reclassifications
     Certain  prior year  amounts  have been  reclassified  to conform  with the
     current presentation.  These reclassifications have no effect on previously
     reported shareholders' equity or net income.

   Stock based compensation
     The Company has a stock-based  employee  compensation plan which is further
     described  in Note  16.  The  Company  accounts  for  the  plan  under  the
     recognition  and  measurement  principles  of Accounting  Principles  Board
     ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees",  and
     related  Interpretations.  No  stock-based  employee  compensation  cost is
     reflected in net income, as all stock options granted under these plans had
     an exercise price equal to the market value of the underlying  common stock
     on the date of grant.  The following  table  illustrates  the effect on net
     income and net income per common  share as if the  Company  had applied the
     fair value recognition  provisions of Financial  Accounting Standards Board
     ("FASB")  SFAS No.  123,  "Accounting  for  Stock-Based  Compensation",  to
     stock-based employee compensation.

<TABLE>
<CAPTION>
                                                                                             Years ended December 31,
                                                                                             ------------------------
                                                                                      2002             2001               2000
                                                                                      ----             ----               ----

<S>                                                                                <C>               <C>                <C>
Net income, as reported .................................................          $600,882          $ 295,814          $   297,270
Deduct:  Total stock-based employee compensation
     expense determined under fair value based method
     for all awards, net of related tax effects .........................           (17,828)           (29,431)             (35,431)
                                                                                   --------          ---------          -----------

Pro forma net income ....................................................          $583,054          $ 266,383          $   261,839
                                                                                   ========          =========          ===========

Net income per common share:
     Basic - as reported ................................................          $   0.31          $    0.15          $       0.15
                                                                                   ========          =========          ===========
     Basic - pro forma ..................................................          $   0.30          $    0.14          $       0.13
                                                                                   ========          =========          ===========


     Diluted - as reported ..............................................          $   0.26          $    0.15          $       0.15
                                                                                   ========          =========          ===========
     Diluted - pro forma ................................................          $   0.25          $    0.13          $       0.15
                                                                                   ========          =========          ===========
</TABLE>

The fair value of the option  grant is  estimated on the date of grant using the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions  for grants in 2002, 2001 and 2000: the risk free interest rate used
was 4.50,  5.89 and 5.90 percent,  respectively,  the expected  volatility was 5
percent,  the expected option life was 5 years and the assumed dividend rate was
zero.

                                                                     (Continued)


                                       32
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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 June  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
     Retirement  Obligations".  This statement  requires companies to record the
     fair value of an asset  retirement  obligation as a liability in the period
     in which it incurs a legal  obligation  associated  with the  retirement of
     tangible long-lived assets that result from the acquisition,  construction,
     development  and/or normal use of assets.  A corresponding  asset (which is
     depreciated  over  the  life  of the  asset)  must  also be  recorded.  The
     provisions  of SFAS No. 143 were  adopted by the Company on January 1, 2003
     with no impact on financial position and results of operations.

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
     Impairment  or Disposal  of  Long-Lived  Assets",  which  supersedes  prior
     pronouncements associated with impairment or disposal of long-lived assets.
     The  statement  establishes   methodologies  for  assessing  impairment  of
     long-lived  assets,  including assets to be disposed of by sale or by other
     means.  The  adoption  of this  standard  had no  impact  on the  financial
     position of the Company.

     In April 2002, The FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections".  This  statement  rescinds SFAS No. 4,  "Reporting  Gains and
     Losses from Extinguishments of Debt", and SFAS No. 64,  "Extinguishments of
     Debt  Made to  Satisfy  Sinking-Fund  Requirements".  This  statement  also
     rescinds SFAS No. 44,  "Accounting for Intangible Assets of Motor Carriers"
     and  amends  SFAS No.  13,  "Accounting  for  Leases".  This new  statement
     requires gains and losses from  extinguishment  of debt to be classified as
     an extraordinary item only if they meet the criteria of APB Opinion No. 30,
     "Reporting the Results of Operations-Reporting the Effects of Disposal of a
     Segment of Business, and Extraordinary,  Unusual and Infrequently Occurring
     Events and Transactions", which will distinguish transactions that are part
     of an  entity's  recurring  operations  from  those  that  are  unusual  or
     infrequent or that meet the criteria for classification as an extraordinary
     item.  The adoption of the  provisions of SFAS No. 145 had no impact on the
     Company's financial position or results of operations.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities",  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities and nullifies  Emerging Issues Task Force (EITF) Issue No. 94-3,
     "Liability  Recognition for Certain Employee Termination Benefits and Other
     Costs  to  Exit  an  Activity   (including  Certain  Costs  Incurred  in  a
     Restructuring)".  This Statement  applies to costs associated with specific
     exit activities and requires a liability for a cost associated with an exit
     or disposal  activity to be recognized  and measured  initially at its fair
     value in the period in which the  liability is incurred.  A liability for a
     cost  associated  with an exit or disposal  activity  is incurred  when the
     definition  of a liability is met. The  provisions  of this  statement  are
     effective for exit or disposal activities that are initiated after December
     31, 2002.  The  provisions of this statement were adopted by the Company on
     January  1, 2003  with no  impact  on  financial  position  or  results  of
     operations.

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

                                                                     (Continued)


                                       33
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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

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


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

           The Bank is required to maintain average reserve  balances,  computed
by applying prescribed  percentages to its various types of deposits,  either at
the bank or on deposit with the Federal  Reserve  Bank. At December 31, 2002 and
2001 these required reserves were met by vault cash.


NOTE 3 - FEDERAL FUNDS SOLD

           When the Bank's cash reserves  (Note 2) are in excess of the required
amount,  it may lend the excess to other banks on a daily basis.  As of December
31, 2002 and 2001,  federal funds sold  amounted to $ 5,197,000 and  $8,138,000,
respectively.


NOTE 4 - INVESTMENT SECURITIES

           The amortized cost and fair value of investment  securities available
for sale are as follows:

<TABLE>
<CAPTION>
                                                                                       December 31, 2002
                                                                                       -----------------
                                                                                        Gross unrealized
                                                               Amortized                ----------------                  Fair
                                                                 Cost                Gains              Losses            Value
                                                                 ----                -----              ------            -----
<S>                                                          <C>                 <C>                  <C>                <C>
Federal Agencies ...................................         $ 5,992,484         $    60,211          $        -         $ 6,052,695
Mortgage backed ....................................          11,390,685             214,810                   -          11,605,495
                                                             -----------         -----------         -----------         -----------

       Total investment securities .................         $17,383,169         $   275,021          $        -         $17,658,190
                                                             ===========         ===========         ===========         ===========
</TABLE>

<TABLE>

<CAPTION>
                                                                               December 31, 2001
                                                                               -----------------
<S>                                                          <C>                 <C>                 <C>                 <C>
Federal Agencies ...................................         $ 3,483,068         $    80,526         $         -         $ 3,563,594
Mortgage backed ....................................           7,390,711              20,957              54,096           7,357,572
                                                             -----------         -----------         -----------         -----------

       Total investment securities .................         $10,873,779         $   101,483         $    54,096         $10,921,166
                                                             ===========         ===========         ===========         ===========
</TABLE>





                                       34
<PAGE>


NOTE 4 - INVESTMENT SECURITIES, Continued

           The amortized costs and fair values of securities  available for sale
at December 31, 2002, by contractual maturity, are shown in the following chart.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.


                                                     Amortized
                                                        Cost          Fair value
                                                        ----          ----------

Within one year ............................       $   992,484       $ 1,034,375
One to five years ..........................         5,000,000         5,018,320
Five to ten years ..........................         7,304,626         7,382,362
After ten years ............................         4,086,058         4,223,133
                                                   -----------       -----------

       Total investment securities .........       $17,383,169       $17,658,190
                                                   ===========       ===========

           Investment securities with an aggregate amortized cost of $12,870,926
(fair value of $13,130,408)  at December 31, 2002 and $9,987,868  (fair value of
$10,028,425) at December 31, 2001 were pledged to collateralize  public deposits
and borrowings.

           The Bank,  as a member  institution  of the Federal Home Loan Bank of
Atlanta  (FHLB),  is required to own capital  stock in the FHLB based  generally
upon the balance of  investment  securities  pledged and FHLB  borrowings.  FHLB
capital stock with a cost of $425,000 at December 31, 2002 and 2001, is included
in other investments in the consolidated  balance sheets. No ready market exists
for the stock,  and it has no quoted  market value.  However,  redemption of the
stock has historically been at par value.


NOTE 5 - LOANS

           The  composition  of net loans by major loan  category  is  presented
below:

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                          ------------
                                                                                                2002                       2001
                                                                                                ----                       ----
<S>                                                                                        <C>                          <C>
Commercial ...............................................................                 $ 45,122,320                 $ 36,799,837
Real estate - construction ...............................................                   13,626,756                    6,846,288
Real estate - mortgage ...................................................                   44,840,542                   41,924,033
Consumer .................................................................                    7,349,790                    7,119,604
                                                                                           ------------                 ------------

Loans, gross .............................................................                  110,939,408                   92,689,762
Less allowance for possible loan losses ..................................                    1,395,070                    1,175,570
                                                                                           ------------                 ------------

                                                                                           $109,544,338                 $ 91,514,192
                                                                                           ============                 ============
</TABLE>

           At December 31, 2002 and 2001, non-accrual loans totaled $855,270 and
$1,362,265,  respectively.  The gross  interest  income  which  would  have been
recorded under the original  terms of the loans  amounted to $27,430,  $195,396,
and $158,028 in 2002, 2001 and 2000,  respectively.  At December 31, 2002, there
were no loans with payments past due ninety days or more and accruing  interest.
Loans with  payments  past due ninety days or more and  accruing  interest  were
$626,000  at  December  31,  2001.  Variable  rate and fixed rate loans  totaled
$54,133,098 and $56,806,310, respectively, at December 31, 2002.



                                                                     (Continued)

                                       35
<PAGE>

NOTE 5 - LOANS, Continued

           The  following is a summary of the activity  within the allowance for
possible loan losses for the periods presented:

<TABLE>
<CAPTION>
                                                                                                For the years ended
                                                                                                     December 31,
                                                                                                     ------------
                                                                                    2002                  2001                2000
                                                                                    ----                  ----                ----
<S>                                                                           <C>                  <C>                  <C>
Balance, beginning of year ..........................................         $ 1,175,570          $   957,899          $ 1,173,000
Provision for possible loan losses ..................................             805,000              722,500              865,000
Loans charged against the allowance, net of recoveries ..............            (585,500)            (504,829)          (1,080,101)
                                                                              -----------          -----------          -----------

Balance, end of year ................................................         $ 1,395,070          $ 1,175,570          $   957,899
                                                                              ===========          ===========          ===========
</TABLE>

NOTE 6 - PROPERTY AND EQUIPMENT

           Components  of property and  equipment  included in the balance sheet
are as follows:

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                          ------------
                                                                                                2002                         2001
                                                                                                ----                         ----
<S>                                                                                        <C>                          <C>
Land and land improvements ...............................................                 $   566,596                  $   331,322
Building and leasehold improvements ......................................                   2,891,464                      655,505
Furniture and equipment ..................................................                   1,064,101                      543,530
Vehicles .................................................................                      69,022                       69,432
Construction in progress .................................................                           -                      925,222
                                                                                           -----------                  -----------

                                                                                             4,591,183                    2,525,011
Accumulated depreciation .................................................                    (598,153)                    (407,797)
                                                                                           -----------                  -----------

        Total property and equipment .....................................                 $ 3,993,030                  $ 2,117,214
                                                                                           ===========                  ===========
</TABLE>

           During  2001,  the  Company  constructed  its  main  office  which is
included in construction in progress at December 31, 2001. The building,  with a
total cost of $2,235,959, was completed in 2002.

           Depreciation  expense for the years ended December 31, 2002, 2001 and
2000 amounted to $203,172, $144,159, and $123,481, respectively. Depreciation is
charged  to  operations  over the  estimated  useful  lives of the  assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:

<TABLE>
<CAPTION>
                  Type of Asset                           Life of Years                   Depreciation Method
     ----------------------------------------       --------------------------      ---------------------------------

<S>                                                         <C>                              <C>
     Software                                               3                                Straight-line
     Furniture and equipment                                5 to 7                           Straight-line
     Buildings and improvements                             5 to 40                          Straight-line
     Vehicles                                               3                                Straight-line
</TABLE>




                                       36
<PAGE>

NOTE 7 - DEPOSITS

           The following is a detail of deposit accounts:

                                                           December 31,
                                                           ------------
                                                     2002                 2001
                                                     ----                 ----

Noninterest bearing ......................       $  7,285,699       $  4,762,844
Interest bearing:
   NOW accounts ..........................          2,461,139          2,197,697
   Money market accounts .................         38,036,656         21,770,636
   Savings ...............................            447,073            494,466
                                                 ------------       ------------

                                                   48,230,567         29,225,643
                                                 ------------       ------------

     Time, less than $100,000 ............         47,479,227         44,772,190
     Time, $100,000 and over .............         22,762,728         21,040,227
                                                 ------------       ------------

                                                   70,241,955         65,812,417
                                                 ------------       ------------

       Total deposits ....................       $118,472,522       $ 95,038,060
                                                 ============       ============

           Interest expense on time deposits greater than $100,000 was $550,583,
$1,239,313, and $1,077,154, in 2002, 2001 and 2000, respectively.

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

                   2003 ...............................      $32,797,049
                   2004 ...............................       30,249,818
                   2005 ...............................        3,481,083
                   2006 ...............................          326,438
                   2007 ...............................        2,948,712
                   2008 ...............................          438,855
                                                             -----------
                                                             $70,241,955
                                                             ===========

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

           The Bank had advances  outstanding from the FHLB totaling  $8,500,000
at December 31, 2002 and 2001. The advances bear interest at fixed rates ranging
from 4.33 percent to 4.38 percent. An advance of $6,500,000 matures in 2006, and
an advance  of  $2,000,000  matures in 2011.  The  advance  maturing  in 2011 is
callable, and may reprice prior to its final maturity date.

           Advances are  collateralized  by  investment  securities  with a book
value of  $12,215,706  and fair value of  $12,466,249.  During 2002, the maximum
amount of advances outstanding was $8,500,000 and the average amount outstanding
during 2001 was $1,594,000.


NOTE 9 - SUBORDINATED DEBENTURES

           In 2001,  the  Company  issued  ten-year  variable  rate  convertible
subordinated debentures.  The debentures pay interest quarterly at prime minus 2
percent  (2.25  percent at December 31,  2002).  The holders of  debentures  may
convert the principal  amount of the debenture  into common stock of the Company
at the  conversion  ratio of $6.50  (approximate  fair  value  at  issuance)  of
debenture  principal for one share of the Company's  stock.  The Company has the
option of  redeeming  the  debentures  at any time after  December 31, 2005 as a
whole or in part and from  time to time at  predetermined  prices.  The  Company
incurred  $96,250 and $193,255 in interest expense on the debentures in 2002 and
2001, respectively.



                                       37
<PAGE>

NOTE 10 - COMMITMENTS AND CONTINGENCIES

           The Company is party to litigation  and claims  arising in the normal
course of business.  Management, after consultation with legal counsel, believes
that the  liabilities,  if any, arising from such litigation and claims will not
be material to the Bank's financial position.

           The Company has a ground  lease on its main  office  location,  which
expires in 2021. The monthly lease payment is $1,000 for years one through five,
and increases to $1,322 per month in year eleven and to $1,521 per month in year
sixteen.

           The Company leases a branch office under a  non-cancelable  operating
lease which expires in February 2006 with monthly lease payments of $3,000.  The
lease  contains two additional  five-year  renewal  options with  provisions for
adjustments  to the monthly lease  payments.  The lease  agreement  requires the
Company to pay all taxes, insurance and maintenance costs.

           The  Company  also  leases  land upon which it  constructed  a branch
office under a  non-cancelable  operating  lease which expires in March of 2018.
The lease  requires  monthly  lease  payments of $800.  The lease  contains four
renewal  options of five  years  each with  provisions  for  adjustments  to the
monthly  lease  payments.  The lease  agreement  requires the Company to pay all
property taxes.

           Future  minimum  lease  payments  under  these  operating  leases are
summarized as follows:

     For the years ended
         December 31,
         ------------

             2003 .........................................      $57,600
             2004 .........................................       57,600
             2005 .........................................       57,600
             2006 .........................................       29,250
             2007 .........................................       23,400
          Thereafter ......................................      311,553
                                                                ---------
                                                                 $537,003
                                                                =========

           Refer to Note 14 concerning  financial  instruments  with off balance
sheet risk.

NOTE 11 - UNUSED LINES OF CREDIT

           At  December  31,  2002,  the Bank had an  unused  line of  credit to
purchase federal funds totaling  $1,000,000 from an unrelated bank. This line of
credit is available on a one to seven day basis for general  corporate  purposes
of the Bank.  The  lender has  reserved  the right to  withdraw  the line at its
option.  The Bank had a second  line of  credit  with the FHLB to  borrow  up to
fifteen  percent  of the  Bank's  total  assets.  The line of  credit  agreement
requires the Bank to pledge investment securities as collateral. (See Note 8).



                                       38
<PAGE>

NOTE 12 - INCOME TAXES

           The following  summary of the provision for income taxes includes tax
deferrals  which arise from temporary  differences in the recognition of certain
items of revenue and expense for tax and  financial  reporting  purposes for the
years ended December 31:

<TABLE>
<CAPTION>
                                                                                      2002               2001                2000
                                                                                      ----               ----                ----
Income taxes currently payable
<S>                                                                                <C>                <C>                 <C>
   Federal ..............................................................          $ 223,460          $ 153,300           $ 164,286
   State ................................................................             30,700             21,300              13,000
                                                                                   ---------          ---------           ---------

                                                                                     254,160            174,600             177,286
Deferred tax provision (benefit) ........................................            206,310            (66,520)             (1,033)
Adjustment to valuation allowance .......................................                  -           (204,881)                  -
Adjustment of effective income tax rates in computing
   deferred taxes .......................................................                  -            (32,255)                  -
                                                                                   ---------          ---------           ---------

       Provision (benefit) ..............................................          $ 460,470          $(129,056)          $ 176,253
                                                                                   =========          =========           =========
</TABLE>

The income tax effect of cumulative temporary differences at December 31, are as
follows:

<TABLE>
<CAPTION>
                                                                                                      Deferred tax asset (liability)
                                                                                                      ------------------------------
                                                                                                       2002                  2001
                                                                                                       ----                  ----
<S>                                                                                                 <C>                   <C>
Allowance for possible loan losses .....................................................            $ 289,589             $ 272,379
Nonaccrual loan interest ...............................................................                9,326                66,435
Unrealized net gains on investment securities available for sale .......................              (88,007)              (16,112)
Depreciation ...........................................................................             (145,534)              (15,978)
Amortization ...........................................................................                1,422                (8,064)
Cash basis versus accrual basis of accounting ..........................................              (14,592)              (21,889)
Other ..................................................................................                7,480                61,118
                                                                                                    ---------             ---------

       Net deferred tax asset ..........................................................            $  59,684             $ 337,889
                                                                                                    =========             =========
</TABLE>

           The net  deferred  tax  asset  is  included  in other  assets  in the
consolidated balance sheets.

The  provision  for  income  taxes is  reconciled  to the  amount of income  tax
computed at the federal  statutory  rate on income  before  income taxes for the
years ended December 31, as follows:

<TABLE>
<CAPTION>
                                                                     2002                     2001                      2000
                                                                     ----                     ----                      ----
                                                            Amount            %        Amount           %       Amount            %
                                                            ------           ---       ------          ---      ------           ---

<S>                                                       <C>                <C>   <C>               <C>      <C>                <C>
Tax expense  (benefit) at statutory rate ..............   $ 360,900          34%   $  56,700           34%    $ 160,998          34%
Increase (decrease) in taxes resulting
from:
   State bank tax (net of federal benefit) ............      20,300           2       14,100            8         8,829           2
Adjustment to valuation allowance and
   effective income tax rate ..........................      63,680           5     (204,881)        (122)            -           -
Other tax preference items ............................      15,590           2        5,025            3         6,426           1
                                                          ---------   ---------    ---------    ---------     ---------   ---------

       Income tax provision (benefit) .................   $ 460,470          43%   $(129,056)         (77%)   $ 176,253          37%
                                                          =========   =========    =========    =========     =========   =========
</TABLE>



                                       39
<PAGE>

NOTE 13 - RELATED PARTY TRANSACTIONS

           Certain  directors,  executive officers and companies with which they
are affiliated,  are customers of and have banking transactions with the Bank in
the ordinary course of business. These loans were made on substantially the same
terms, including interest rates and collateral,  as those prevailing at the time
for comparable arms-length transactions.

           A  summary  of loan  transactions  with  directors,  including  their
affiliates and executive officers are as follows:

                                                        For the years ended
                                                           December 31,
                                                           ------------
                                                     2002                2001
                                                     ----                ----

Balance, beginning of year .............        $ 1,982,723         $ 1,076,071
New loans ..............................            493,499           1,599,516
Less loan payments .....................           (592,340)           (692,864)
                                                -----------         -----------

Balance, end of year ...................        $ 1,883,882         $ 1,982,723
                                                ===========         ===========

           Deposits by  directors  and their  related  interests at December 31,
2002 and 2001 approximated $2,392,000 and $2,385,000, respectively.

           A director,  shareholder  and  executive  officer of the Company is a
partner in a partnership from which the Company leases operating  facilities and
land (see Note 10). Lease expenses  charged to operations under these agreements
approximated $36,000 in 2002, $34,000 in 2001 and $33,600 in 2000.

NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

           In the ordinary  course of business,  and to meet the financing needs
of its customers,  the Bank is a party to various financial instruments with off
balance sheet risk. These financial  instruments,  which include  commitments to
extend  credit  and  standby  letters of credit,  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amount of those instruments  reflects the extent
of involvement the Bank has in particular classes of financial instruments.

       The Bank's exposure to credit loss in the event of  nonperformance by the
other party to the financial  instrument  for  commitments  to extend credit and
standby  letters of credit is  represented by the  contractual  amounts of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on balance sheet instruments. Commitments
to extend  credit are  agreements  to lend to a customer  as long as there is no
violation of any material  condition  established  in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  the  payment  of a  fee.  At  December  31,  2002  and  2001,  unfunded
commitments to extend credit were  $17,004,334  and  $14,578,121,  respectively.
Variable  rate and  fixed  rate  unfunded  commitments  to  extend  credit  were
$10,282,781  and  $6,721,553,  respectively,  at  December  31,  2002.  The Bank
evaluates each customer's credit worthiness on a case-by-case  basis. The amount
of  collateral  obtained,  if deemed  necessary  by the Bank upon  extension  of
credit, is based on management's  credit evaluation of the borrower.  Collateral
varies but may  include  accounts  receivable,  inventory,  property,  plant and
equipment,  commercial  and  residential  real estate.  At December 31, 2002 and
2001, there were outstanding  letters of credit totaling  $667,870 and $417,700,
respectively.



                                       40
<PAGE>

NOTE 15 - EMPLOYEE BENEFIT PLAN

           The Bank sponsors the GrandSouth  Bank Profit Sharing  Section 401(k)
Plan  for  the  benefit  of  all  eligible   employees.   The  Bank  contributes
seventy-five  percent of the first four percent of the  employee's  compensation
contributed to the Plan.  Contributions made to the Plan in 2002, 2001, and 2000
amounted to $30,481, $28,995, and $20,107, respectively.

           In  2001,  supplemental  benefits  were  approved  by  the  Board  of
Directors for certain  executive  officers of the Bank.  These  benefits are not
qualified  under the  Internal  Revenue  Code and they are not funded.  However,
certain  funding  is  provided  informally  and  indirectly  by  life  insurance
policies.  The  company  recorded  net  expense  related  to these  benefits  of
approximately $18,302 and $8,000 in 2002 and 2001, respectively.

NOTE 16 - STOCK OPTION PLAN

           During 1998, the Board of Directors  approved a stock option plan for
the benefit of the directors,  officers and employees. The Board may grant up to
273,000  options (after  adjustment for 5 percent stock dividend  issued January
21,  2003) at an option  price per share not less than the fair market  value on
the date of grant. All options granted to officers and employees vest 20 percent
each year for five years and expire 10 years from the grant date.

<TABLE>
<CAPTION>
                                                 Options outstanding                           Options exercisable
                                                 -------------------                           -------------------
                                                       Weighted
                                                        average           Weighted                            Weighted
      Range of                                         remaining           average                             average
      exercise                       Number           contractual         exercise           Number           exercise
       prices                      outstanding            life              price          Exercisable          price
       ------                      -----------            ----              -----          -----------          -----
<S>   <C>                            <C>              <C>                   <C>              <C>                <C>
      $4.33                          150,150          5.9 years             $4.33            109,720            $4.33
       4.76                           39,539          8.1                    4.76              7,531             4.76
       6.90                           29,039          9.1                    6.90                  -             6.90
                                     -------                                                 -------

                                     218,728                                                 117,251
                                     =======                                                 =======
</TABLE>

           A summary  of the status of the plan and  changes  during the year is
presented below:

<TABLE>
<CAPTION>
                                                                      For the years ended December 31,
                                                                      --------------------------------
                                                      2002                          2001                          2000
                                                      ----                          ----                          ----
                                                             Weighted                     Weighted                      Weighted
                                                             average                      average                        average
                                                             exercise                     exercise                      exercise
                                              Shares          price         Shares         price          Shares          price
                                              ------          -----         ------         -----          ------          -----

<S>                                          <C>             <C>           <C>            <C>            <C>             <C>
Outstanding at beginning of year             189,689         $4.38         152,460        $4.33          161,700         $4.33
Granted                                       29,039          6.90          39,539         4.76                -             -
Exercised                                          -                       (2,310)         4.33                -             -
Forfeited or expired                               -                             -            -            9,240          4.33
                                             -------                       -------                       -------

Outstanding at end of year                   218,728          4.67         189,689         4.38          152,460          4.33
                                             =======                       =======                       =======

Options exercisable at December 31,          117,251          4.36          90,090         4.33           62,370          4.33
Shares available for grant                    51,692                        81,001                       120,540
</TABLE>


         Granted  shares and per share  exercise  prices  have been  restated to
reflect the 2003 five percent stock dividend.



                                       41
<PAGE>

NOTE 17 - COMMON STOCK AND NET INCOME PER COMMON SHARE

           SFAS No. 128,  "Earnings  per Share",  requires that the Bank present
basic and diluted net income per common share.  The assumed  conversion of stock
options  creates the difference  between basic and diluted net income per common
share.  Net income per share is calculated  by dividing net income  adjusted for
interest  recognized on the convertible  debt, by the weighted average number of
common shares outstanding for each period presented. The weighted average number
of common shares outstanding for basic net income per common share was 1,969,095
in 2002 and 2001, and 1,966,785 in 2000.  The weighted  average number of common
shares  outstanding  for diluted net income per common  share was  2,560,416  in
2002,  2,011,995 in 2001,  and 2,022,303 in 2000. The difference in the weighted
average number of shares  outstanding  for basic net income per common share and
the weighted  average  number of shares  outstanding  for diluted net income per
common  share  was the  effect of the  assumed  exercise  of the  stock  options
outstanding and conversion of subordinated  notes.  The treasury stock method is
used to compute the effect of stock  options on the weighted  average  number of
common shares outstanding for the diluted method.

           The Bank issued a five percent  common stock  dividend on January 21,
2003.  Weighted average common shares  outstanding have been adjusted to reflect
the stock dividend.


NOTE 18 - DIVIDENDS

           There are no current plans to initiate  payment of cash dividends and
future  dividend  policy  will  depend  on  the  Company's   earnings,   capital
requirements,  financial  condition and other factors considered relevant by the
Board of Directors. The Bank is restricted by banking regulations in its ability
to pay  dividends to the Company and must obtain the approval of the State Board
of Financial Institutions prior to payment.


NOTE 19 - REGULATORY MATTERS

           The  Bank is  subject  to  various  regulatory  capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  possible   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

           Quantitative  measures  established  by regulation to ensure  capital
adequacy  require the Bank to maintain  minimum amounts and ratios (set forth in
the table  below) of total and Tier 1 capital to  risk-weighted  assets,  and of
Tier 1 capital to average assets.  Management believes, as of December 31, 2002,
that the Bank meets all capital adequacy requirements to which it is subject.








                                                                     (Continued)


                                       42
<PAGE>

NOTE 19 - REGULATORY MATTERS, Continued

           As of December 31, 2002 the most recent  notification  of the banking
regulators  categorized  the  Bank  as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  have  changed the  institution's
category.  The Bank's actual capital  amounts and ratios and minimum  regulatory
amounts and ratios are presented as follows:

<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                         For capital         under prompt corrective
                                                                                       adequacy purposes         action provisions
                                                                                       -----------------         -----------------
                                                                      Actual                 Minimum                  Minimum
                                                                      ------                 -------                  -------
                                                               Amount        Ratio      Amount      Ratio       Amount       Ratio
                                                               ------        -----      ------      -----       ------       -----
                                                                                        (amounts in $000)
As of December 31, 2002
<S>                                                           <C>            <C>       <C>            <C>      <C>             <C>
Total  capital (to risk  weighted assets) .............       $13,743        11.6%     $ 9,463        8.0%     $11,829         10.0%

Tier 1 capital (to risk  weighted assets) .............        12,348        10.4        4,732        4.0        7,097          6.0

Tier 1 capital (to average assets) ....................        12,348         8.8        5,606        4.0        7,008          5.0

As of December 31, 2001
Total capital (to risk weighted assets) ...............       $11,867        12.2%     $ 7,751        8.0%     $ 9,688         10.0%

Tier 1  capital (to risk weighted assets) .............        10,691        11.0        3,875        4.0        5,813          6.0

Tier 1 capital (to average assets) ....................        10,691         9.7        4,418        4.0        5,523          5.0
</TABLE>

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

           SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information,  whether or not recognized in the
balance  sheets,  when it is practical to estimate the fair value.  SFAS No. 107
defines a financial  instrument as cash, evidence of an ownership interest in an
entity or  contractual  obligations  which require the exchange of cash or other
instruments.  Certain  items  are  specifically  excluded  from  the  disclosure
requirements,  including  the Bank's  common  stock,  property and equipment and
other assets and liabilities.

           Fair value  approximates  carrying  value for cash and due from banks
and federal funds sold due to the short-term nature of the instrument.

           Investment securities available for sale are valued using quoted fair
market  prices.  Other  investments  at cost are considered to be an appropriate
estimate of fair value due to historical redemption of the stock at cost.

           Fair  value  for  loans  maturing  after  one  year is  based  on the
discounted present value of the estimated future cash flows. Discount rates used
in these computations  approximate the rates currently offered for similar loans
of comparable terms and credit quality.









                                                                     (Continued)

                                       43
<PAGE>

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued

           Fair  value for  demand  deposit  accounts  is equal to the  carrying
value. Interest-bearing accounts with no fixed maturity date are valued based on
rates offered  within the Bank's market using current  interest rates on similar
instruments. Certificate of deposit accounts maturing within one year are valued
at their  carrying  value.  The fair value of  certificate  of deposit  accounts
maturing  after one year are estimated by  discounting  cash flows from expected
maturities using current interest rates on similar instruments.

           The fair values of fixed rate  advances  from the FHLB are  estimated
using the discounted cash flow calculation that applies to the Company's current
borrowing rate  available  from the FHLB.  The carrying  amounts of the variable
rate subordinated debentures are reasonable estimates of fair value because they
can be repriced frequently.

           Fair value for the Bank's off-balance sheet financial  instruments is
based on the discounted present value of the estimated future cash flows.

           The Bank has used  management's  best estimate of fair value based on
the above  assumptions.  Thus, the fair values  presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument. In
addition,  any income  taxes or other  expenses  which  would be  incurred in an
actual sale or  settlement  are not taken into  consideration  in the fair value
presented.

            The estimated fair values of the Bank's financial instruments are as
follows:

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                              2002                                 2001
                                                                              ----                                 ----
                                                                  Carrying             Fair             Carrying             Fair
                                                                   Amount              value             Amount             value
                                                                   ------              -----             ------             -----
Financial Assets:
<S>                                                            <C>                <C>                <C>                <C>
   Cash and due from banks .............................       $  2,669,420       $  2,669,420       $  2,207,293       $  2,207,293
   Federal funds sold ..................................          5,197,000          5,197,000          8,138,000          8,138,000
   Investment securities available for sale ............         17,658,190         17,658,190         10,921,166         10,921,166
   Other investments, at cost ..........................            425,000            425,000            425,000            425,000
   Loans ...............................................        110,939,408        112,658,951         92,689,762         92,807,806


Financial Liabilities:
   Deposits ............................................        118,472,522        120,205,734         95,038,060         95,520,501
   Federal Home Loan Bank advances .....................          8,500,000          8,755,000          8,500,000          8,500,000
   Subordinated debentures .............................          3,500,000          3,500,000          3,500,000          3,500,000


Financial Instruments with Off-Balance
    Sheet Risk:
   Standby letters of credit ...........................            667,870            667,870            417,700            417,700
   Commitments to extend credit ........................         17,004,334         17,004,334         14,578,121         14,578,121
</TABLE>






                                       44
<PAGE>

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION

            Following  is  condensed   financial   information   of   GrandSouth
Bancorporation (parent company only):


                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                  2002                     2001
                                                                                                  ----                     ----
ASSETS
<S>                                                                                          <C>                         <C>
     Cash ..................................................................                 $   182,636                 $ 1,322,369
     Investment in bank subsidiary .........................................                  12,534,923                  10,697,082
     Deferred tax asset ....................................................                     117,973                      70,932
                                                                                             -----------                 -----------

                                                                                             $12,835,532                 $12,090,383
                                                                                             ===========                 ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ......................................................                 $    24,260                 $    35,287
     Subordinated debentures ...............................................                   3,500,000                   3,500,000
     Shareholders' equity ..................................................                   9,311,272                   8,555,096
                                                                                             -----------                 -----------

                                                                                             $12,835,532                 $12,090,383
                                                                                             ===========                 ===========
</TABLE>


                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                  For the years ended
                                                                                                      December 31,
                                                                                                      ------------
                                                                                       2002              2001                2000
                                                                                       ----              ----                ----

<S>                                                                                <C>                 <C>                 <C>
REVENUES ................................................................          $       -           $       -           $       -

EXPENSES
      Interest ..........................................................             96,250             193,555                   -
      Sundry ............................................................             30,694              30,039                   -
                                                                                   ---------           ---------           ---------

            Loss before equity in undistributed net
                income of bank subsidiary ...............................           (126,944)           (223,594)                  -

EQUITY IN UNDISTRIBUTED NET INCOME
      OF BANK SUBSIDIARY ................................................            681,883             448,476             297,270
                                                                                   ---------           ---------           ---------

            Income before income taxes ..................................            554,939             224,882             297,270

      Income tax benefit ................................................             45,943             (70,932)                  -
                                                                                   ---------           ---------           ---------

                                                                                   $ 600,882           $ 295,814           $ 297,270
                                                                                   =========           =========           =========
</TABLE>








                                                                     (Continued)


                                       45
<PAGE>

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION, Continued


                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                   For the years ended
                                                                                                      December 31,
                                                                                                      ------------
                                                                                      2002                2001                2000
                                                                                      ----                ----                ----

<S>                                                                               <C>                <C>                <C>
OPERATING ACTIVITIES ......................................................       $   600,882        $   295,814        $   297,270
      Net income
      Adjustments to reconcile net income to net cash
         used in operating activities
         Deferred income taxes ............................................            24,989            (70,932)                 -
         Accrued expenses and other .......................................           (83,721)            35,953                  -
         Equity in undistributed net income of bank subsidiary ............          (681,883)          (448,476)          (297,270)
                                                                                  -----------        -----------        -----------

                Net cash used in operating activities .....................          (139,733)          (187,641)                 -
                                                                                  -----------        -----------        -----------

INVESTING ACTIVITY
      Additional investment in bank subsidiary ............................        (1,000,000)        (2,000,000)                 -
                                                                                  -----------        -----------        -----------

FINANCING ACTIVITIES
      Proceeds from issuance of subordinated debentures ...................                 -          3,500,000                  -
      Exercise of stock options ...........................................                 -             10,010                  -
                                                                                  -----------        -----------        -----------

                Net cash provided by financing activities .................                 -          3,510,010                  -

                Net increase (decrease) in cash ...........................        (1,139,733)         1,322,369                  -

CASH, BEGINNING OF YEAR ...................................................         1,322,369                  -                  -
                                                                                  -----------        -----------        -----------

CASH, END OF YEAR .........................................................       $   182,636        $ 1,322,369        $         -
                                                                                  ===========        ===========        ===========
</TABLE>






















                                       46
<PAGE>


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

         Not Applicable.

                                    PART III

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

         The  information  set  forth  under  the  captions  "Management  of the
Company"  and "Section  16(a)  Beneficial  Ownership  Reporting  Compliance"  in
registrant's  definitive  proxy statement filed with the Commission for the 2003
Annual Meeting of Shareholders is incorporated herein by reference.

Item 10. Executive Compensation.

         The information set forth under the captions "Management  Compensation"
and "Stock Option Plan" in  registrant's  definitive  proxy statement filed with
the  Commission  for the 2003 Annual  Meeting of  Shareholders  is  incorporated
herein by reference.

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

         The  information  set forth under the caption  "Security  Ownership  of
Certain  Beneficial  Owners and  Management" in  registrant's  definitive  proxy
statement  filed with the Commission for the 2003 Annual Meeting of Shareholders
is incorporated herein by reference.


                      Equity Compensation Plan Information

         The following  table sets forth  aggregated  information as of December
31, 2002 about all of the Company's  compensation  plans  (including  individual
compensation  arrangements)  under which  equity  securities  of the Company are
authorized for issuance:

<TABLE>
<CAPTION>
Plan category                   Number of securities         Weighted-average             Number of securities
                                to be issued upon            exercise price of            remaining available
                                exercise of                  outstanding options,         for future issuance
                                outstanding options,         warrants and rights          under equity
                                warrants and rights                                       compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column(a))
                                (a)                          (b)                          (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S>                             <C>                          <C>                          <C>
Equity compensation
plans approved by
security holders                236,278                      4.88                         260,000

Equity compensation
plans not approved
by security holders                   0                         0                               0
                                -------                      ----                         -------
Total                           236,278                      4.88                         260,000
</TABLE>

Item 12. Certain Relationships and Related Transactions.

         The information set forth under the caption "Certain  Relationships and
Related Transactions" in registrant's  definitive proxy statement filed with the
Commission for the 2003 Annual Meeting of Shareholders is incorporated herein by
reference.



                                       47
<PAGE>

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

(a)      Description of Exhibits.

Exhibit No.                Description
-----------                -----------

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
4.1                       Form of Common Stock Certificate (2)
10.1                      Stock Option Plan (2)
10.2                      Form of Stock Option Agreement (2)
10.3                      Form of 10-Year Variable Rate Convertible Subordinated
                          Debenture (3)
10.4                      Executive Supplemental Retirement Plan Executive
                           Agreement with Ronald K. Earnest (4)
21                        Subsidiaries of Registrant (2)
-------------
(1)  Incorporated by reference to exhibits to Form 8-A filed November 13, 2000.
(2)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2000.
(3)  Incorporated  by reference to exhibits to Form 10-QSB for the quarter ended
     March 31, 2001.
(4)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2001.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed during the fourth quarter of 2002.

Item 14.  Controls and Procedures

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


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



                                       48
<PAGE>

                                   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.

                           GrandSouth Bancorporation


March 27, 2003             By: s/Mason Y. Garrett
                              --------------------------------------------------
                                 Mason Y. Garrett
                                 Chief Executive Officer


                           By: s/J. B. Garrett
                              --------------------------------------------------
                                 J. B. Garrett
                                 Vice President
                                 (Principal Financial and Principal Accounting
                                    Officer)


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

Signature                                Title                                              Date
---------                                -----                                              ----
<S>                                      <C>                                                          <C>

---------------------------------------  Director                                           March __, 2003
Blanton S. Phillips

                                         President, Chief Operating Officer, Director       March __, 2003
--------------------------------
Ronald K. Earnest

s/Harold E. Garrett                      Director                                           March 27, 2003
--------------------------------
Harold E. Garrett

s/Mason Y. Garrett                       Chairman, Director                                 March 27, 2003
--------------------------------
Mason Y. Garrett

s/Michael L. Gault                       Director                                           March 27, 2003
--------------------------------
Michael L. Gault

s/Baety O. Gross                         Director                                           March 27, 2003
--------------------------------
Baety O. Gross

--------------------------------         Director                                           March __, 2003
S. Hunter Howard, Jr.
</Table>





                                       49
<PAGE>

I, Mason Y. Garrett, certify that:

1.   I  have   reviewed   this  annual  report  on  Form  10-KSB  of  GrandSouth
     Bancorporation;

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

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

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

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

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

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

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

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

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

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

Date: March 27, 2003



                                    s/ Mason Y. Garrett
                                    --------------------------------------------
                                     Chief Executive Officer



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<PAGE>

I, J. B. Garrett, certify that:

1.   I  have   reviewed   this  annual  report  on  Form  10-KSB  of  GrandSouth
     Bancorporation;

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

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

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

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

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

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

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

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

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

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

Date: March 27, 2003



                                    s/ J. B. Garrett
                                    --------------------------------------------
                                     Chief Financial Officer




                                       51
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.               Description

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
4.1                       Form of Common Stock Certificate (2)
10.1                      Stock Option Plan (2)
10.2                      Form of Stock Option Agreement (2)
10.3                      Form of 10-Year Variable Rate Convertible Subordinated
                          Debenture (3)
10.4                      Executive Supplemental Retirement Plan Executive
                           Agreement with Ronald K. Earnest (4)
21                        Subsidiaries of Registrant (2)
-------------
(1)  Incorporated by reference to exhibits to Form 8-A filed November 13, 2000.
(2)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2000.
(3)  Incorporated  by reference to exhibits to Form 10-QSB for the quarter ended
     March 31, 2001.
(4)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2001.



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