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, 2003                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)

                381 Halton Road, Greenville, South Carolina 29606
                (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 $9,111,897.

         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, 2004,  was  approximately  $9,842,033.  (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,  2004,  there  were  2,165,779  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 2004 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 ..............................................      9
Item 4   Submission of Matters to a Vote of Security Holders ............      9
                                     Part II
Item 5   Market for Common Equity, Related Stockholder Matters
            and Small Business Issuer Purchases of Securities ...........      9
Item 6   Management's Discussion and Analysis or Plan of Operation ......      9
Item 7   Financial Statements ...........................................     24
Item 8   Changes In and Disagreements with Accountants
           on Accounting and Financial Disclosure .......................     49
Item 8A  Controls and Procedures ........................................     49
                                    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 ................................     50
Item 12  Certain Relationships and Related Transactions .................      *
                                     Part IV
Item 13  Exhibits and Reports on  Form 8-K ..............................     51
Item 14  Principal Accountant Fees and Services .........................      *

     * Incorporated  by reference to the  Registrant's  Proxy  Statement for the
     2004 Annual Meeting of Shareholders

<Page>

                           FORWARD-LOOKING STATEMENTS

         This Report of GrandSouth Bancorporation (the "Company") 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.  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. Therefore, actual results may differ materially from those expressed or
forecasted in such 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,  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;  adequacy  of the  allowance  for loan  losses;
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.

          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.

                                     PART I

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  and Fountain  Inn,  South  Carolina.  The main office is
located at 381 Halton Road, in Greenville, South Carolina, and the branch office
is located at 325 South Main Street, in Fountain Inn, South Carolina.

         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.


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         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
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 March 1, 2004, the Bank employed 32 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,  2003.  At that
time,  25 banks,  and  savings  banks  with 144  branch  locations  competed  in
Greenville County for aggregate deposits of approximately $6.6 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 also 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 gives 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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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.

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.

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. Legislation enacted in 1996 also
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").  The FICO  assessment is 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 regulation  and  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 laws 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

         The  Gramm-Leach-Bliley  Act,  which  makes it easier for  affiliations
between banks,  securities firms and insurance  companies to take place,  became
effective  in March  2000.  The Act  removes  Depression-era  barriers  that had
separated  banks and  securities  firms,  and seeks to  protect  the  privacy of
consumers' financial information.

         Under  provisions of the new  legislation  and  regulations  adopted by
appropriate regulators, 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.

                                       7
<PAGE>

         The Act and the  regulations  adopted  pursuant  to the Act  create new
opportunities  for the Company to offer  expanded  services to  customers in the
future,  though  the  Company  has not yet  determined  what the  nature  of the
expanded  services  might be or when the Company might find it feasible to offer
them. The Act has increased 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

         Proposed  legislation which could significantly  affect the business of
banking is  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.

Sarbanes-Oxley Act of 2002

         The  Sarbanes-Oxley  Act was  signed  into  law on July 30,  2002,  and
mandated  extensive reforms and requirements for public  companies.  The SEC has
adopted   extensive  new  regulations   pursuant  to  the  requirements  of  the
Sarbanes-Oxley  Act. The  Sarbanes-Oxley  Act and the SEC's new regulations have
increased  the  Company's  cost of  doing  business,  particularly  its fees for
internal  and  external  audit  services  and  legal  services,  and the law and
regulations  are  expected to continue to do so.  However,  the Company does not
believe that it will be affected by  Sarbanes-Oxley  and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.

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.

Further Information

         Further  information  about the business of the Company and the Bank is
set  forth in this  Form  10-KSB  under  Item 6  -"Management's  Discussion  and
Analysis or Plan of Operation."

Item 2.    Description of Property.

         The Bank leases  property at the  intersection of Halton Road and Rocky
Slope Road in  Greenville,  South  Carolina  where its main  office  facility is
located.  The  property is leased  until 2021 for $1,000 per month for years one
through  five,  $1,322 per month for years six through  fifteen,  and $1,521 per
month for years sixteen through the end of the lease term. 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  property  at the corner of South Main Street and East
Knight Street in Fountain Inn where a branch office is located.  The property is
leased until 2018 for $800 per month 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.

         From its opening until July 2003,  the Bank also operated in a building
in  Simpsonville,  South  Carolina.  That  office is also  leased  from Blake P.
Garrett,  Jr.,  as  Trustee,  for $3,000 per month for three years with two five
year renewal  options.  Mason Y. Garrett is a 10.3% partner in the  partnership.
This  office  was  closed in July  2003,  but the  Company's  lease  obligations
continue until February 2006.

                                       8
<PAGE>

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 2003.

                                     PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
        Issuer Purchases of Securities.

         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 2003, management is aware of a few transactions in which the
Company's  common  stock has been  transferred  in a range of $4.50 to $7.25 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.  In January  2004,  the Company  issued a 10%
stock dividend.  The trade prices above have been adjusted to reflect this stock
dividend.


         As of March 1, 2004, there were  approximately 624 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         The Company did not pay any cash dividends  prior to 2003. In 2003, the
Company paid cash dividends  totaling $.04 per share. 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.

Securities Authorized for Issuance under Equity Compensation Plans

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

Purchases of Equity Securities by the Company and Affiliated Purchasers

         Neither  the Company nor any  "affiliated  purchaser"  as defined in 17
C.F.R.  240.10b-18(a)(3)  purchased  any  shares  or units  of any  class of the
Company's  equity  securities  that is registered  pursuant to Section 12 of the
Exchange Act during the fourth  quarter of 2003.  Accordingly,  no disclosure is
required pursuant to 17 C.F.R. Section 228.703.




                                       9
<PAGE>

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

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS



Management's Discussion and Analysis or Plan of Operation

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.

Forward-Looking Statements

         This report contains  forward-looking  statements within the meaning of
the  Private  Securities  Litigation  Reform  Act of  1995,  such as  statements
relating  to  financial  results  and  plans  for  future  business  development
activities, and thus is prospective.  The words "may", "would", "could", "will",
"expect",  "anticipate",  "should", "believe", "intend", "plan", and "estimate",
as well as  similar  expressions  are  meant to  identify  such  forward-looking
statements.  Such forward-looking statements are subject to risks, uncertainties
and other factors,  which could cause actual results to differ  materially  from
future results expressed or implied by such forward-looking statements.

         These  statements  appear  in a number of  places  in this  report  and
include all statements that are not statements of historical fact and statements
regarding our intentions,  beliefs, or expectations.  These statements are based
on current  expectations,  estimates and projections about the banking industry,
the general  economy,  management's  beliefs and assumptions made by management.
These  forward-looking  statements are not guarantees of future  performance and
actual results may differ materially from those projected in the forward-looking
statements.  Potential risks and uncertainties  include, but are not limited to,
our ability to manage rapid growth,  general economic  conditions,  competition,
interest  rate  sensitivity,  adequacy  of the  allowance  for loan  losses  and
exposure to regulatory and legislative changes.

         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.

                                       10
<PAGE>

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   judgments  and
assumptions by management  which have a material impact on the carrying value of
certain assets and liabilities.  Management  considers these accounting policies
to be critical  accounting  policies.  The  judgments  and  assumptions  used by
management  are based on  historical  experience  and other  factors,  which are
believed to be reasonable under the circumstances.  Because of the nature of the
judgments and assumptions  made by management,  actual results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of the Company.

         The  Company  believes  the  allowance  for loan  losses 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, 2003 the  Company had total  assets of $172.5  million
composed  primarily of net loans of $148.1  million,  investment  securities and
Federal Funds sold of $16.0 million and cash and due from banks of $2.0 million.
Liabilities  were $162.8  million at December  31, 2003,  composed  primarily of
deposits of $145.6 million, Federal Home Loan Bank advances of $11.6 million and
subordinated  debentures of $3.5 million.  Shareholders' equity was $9.6 million
at December 31, 2003.

         The Company's loan  portfolio at December 31, 2003 consisted  primarily
of $30.5 million of  commercial  loans,  $94.4  million of real estate  mortgage
loans,  $15.8  million of real  estate  construction  loans and $9.7  million of
consumer  loans.  The allowance for loan losses totaled $2.3 million at December
31, 2003.  Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio as of December 31, 2003.

Earnings Performance

         The Company had net income from  operations for the year ended December
31, 2003 of  $650,112,  or $0.30  basic and $0.24  diluted  earnings  per share,
compared  to  $600,882  or $0.28  basic  earnings  per share  and $0.23  diluted
earnings per share for the year ended December 31, 2002. Earnings per share have
been  adjusted  for a 10% stock  dividend  issued on January 30,  2004.  Diluted
earnings per share  reflect the effect of the exercise of stock  options as well
as an assumed conversion of subordinated  debentures.  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 $5,354,528 in 2003 compared to $4,738,333 in 2002.  The Bank also had
other operating income (principally service charges,  fees and commissions,  and
gains on sales of  investment  securities)  of $508,123 in 2003 and  $440,809 in
2002. The Bank provided $1,339,000 and $805,000 to its allowance for loan losses
in 2003 and 2002  respectively,  and had other operating  expenses  (principally
salaries and  benefits,  occupancy and  equipment  expenses and data  processing
expenses) of $3,491,070 in 2003 and $3,312,790 in 2002.

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, 2003,  net interest  income was $5.4
million.  For the year ended  December  31, 2002,  net interest  income was $4.7
million.  This increase was primarily  attributable  to an increase in volume of
average  interest-earning assets, which increased to $151.0 million in 2003 from
$121.2 million in 2002. The average yield on  interest-earning  assets decreased
to 5.70% in 2003 from 6.84% in 2002, while the average cost of  interest-bearing
liabilities  decreased  to 2.35% in 2003  from  3.20% in 2002.  The net yield on
average  interest-earning  assets decreased to 3.55% in 2003 from 3.91% in 2002,
reducing the benefit of the increased volume of interest-earning assets.


                                       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, 2003 and 2002.

<TABLE>
<CAPTION>
                                                                               Average Balances, Yields and Rates
                                                                               ----------------------------------
                                                                                     (Dollars in Thousands)
                                                                Year Ended December 31, 2003        Year Ended December 31, 2002
                                                                ----------------------------        ----------------------------
                                                                           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 ........      $  4,291      $   55    1.28%      $  9,391        $  148       1.58%
Investment securities ...................................        16,246         557     3.43        12,031           609       5.06
Loans (2) ...............................................       130,448       7,992     6.13        99,820         7,540       7.55
                                                               --------      ------    -----      --------        ------       ----
  Total interest-earning assets .........................       150,985       8,604     5.70       121,242         8,297       6.84
Cash and due from banks .................................         2,149                              2,263
Allowance for loan losses ...............................        (1,642)                            (1,246)
Premises and equipment ..................................         3,958                              3,291
Other assets ............................................         2,014                              2,700
                                                               --------                           --------
  Total assets ..........................................      $157,464                           $128,250
                                                               ========                           ========
Liabilities and shareholders' equity
  Interest-bearing deposits .............................       125,449       2,793     2.23        99,160         3,092       3.12
  FHLB advances .........................................         9,588         382     3.98         8,500           371       4.36
  Subordinated debentures ...............................         3,500          74     2.11         3,500            96       2.75
                                                               --------      ------    -----      --------        ------       ----
    Total interest-bearing liabilities ..................       138,537       3,249     2.35       111,160         3,559       3.20
Noninterest-bearing demand deposits .....................         8,361                              7,090
Other liabilities .......................................         1,121                              1,363
                                                               --------                           --------
    Total liabilities ...................................       148,019                            119,613
Shareholders' equity ....................................         9,445                              8,637
                                                               --------                           --------
  Total liabilities and  shareholders' equity ...........      $157,464                           $128,250
                                                               ========                           ========
Interest rate spread (3) ................................                               3.35                                   3.64
                                                                                       -----                                   ----
Net interest income and net yield
  on earning assets  (4) ................................                    $5,355     3.55                      $4,738       3.91
                                                                             ======    -----                      ======       ----
Interest free funds supporting earning assets (5) .......       $12,448                            $10,082
                                                                =======                            =======
</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.  Income includes loan fees, which
     are immaterial to the calculation.
(3)  Total  interest-earning   assets  yield  less  the  total  interest-bearing
     liabilities rate.
(4)  Net interest income divided by total interest-earning assets.
(5)  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,  and  allocated to volume
and rate based on their proportions to the absolute value of each.

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31, 2003 compared to 2002
                                                                                              Increase (Decrease) Due to
                                                                                              --------------------------
                                                                                     Volume               Rate               Change
                                                                                     ------               ----               ------
                                                                                                  (Dollars in Thousands)
Interest earned on:
       Federal funds sold and interest-bearing
<S>                                                                                 <C>                 <C>                 <C>
         Deposits ......................................................            $   (69)            $   (24)            $   (93)
       Investment securities ...........................................                177                (229)                (52)
       Gross Loans .....................................................              2,037              (1,585)                452
                                                                                    -------             -------             -------

Total Interest Income ..................................................              2,145              (1,838)                307
Interest paid on:
       Deposits ........................................................                706              (1,005)               (299)
       FHLB advances ...................................................                 45                 (34)                 11
       Subordinated debentures .........................................                  -                 (22)                (22)
                                                                                    -------             -------             -------
Total Interest Expense .................................................                751              (1,061)               (310)

Change in Net Interest Income ..........................................            $ 1,394             $  (777)            $   617
                                                                                    =======             =======             =======
</TABLE>


         During  2004,  management  expects  that  interest  rates  will  remain
generally  flat  during the entire  year.  Therefore,  any  improvements  in net
interest  income for 2004 are  expected to be largely the result of increases in
the   volume   and   changes   in  the  mix  of   interest-earning   assets  and
interest-bearing  liabilities.  Management expects to continue to use aggressive
marketing  strategies  to increase the Bank's market share for both deposits and
quality loans within 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-sensitive liabilities, resulting in an asset-sensitive position at December
31, 2003 of $19.5 million for a cumulative gap ratio of 11.73%.


                                       13
<PAGE>

When  interest-sensitive  assets  exceed  interest-sensitive  liabilities  for a
specific repricing period, a positive interest sensitive 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.  However,  gap analysis,  such as
the table below,  does not take into account  actions by a bank or its customers
during periods of changing rates, which could  significantly  change the effects
of rate changes than would otherwise be expected.

         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, 2003
                                                                                              -----------------
                                                                        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 and interest-bearing deposits ..............    $  1,562     $     50      $      -      $      -     $  1,612
   Investments and FHLB stock ....................................       1,938        1,297         5,014         6,160       14,409
   Loans .........................................................     106,917       19,026        22,231         2,222      150,396
                                                                      --------     --------      --------      --------     --------

        Total interest-earning assets ............................    $110,417     $ 20,373      $ 27,245      $  8,382     $166,417
                                                                      ========     ========      ========      ========     ========
Interest-bearing liabilities
   Interest-bearing deposits
      Interest-bearing transaction accounts ......................         905            -         2,237             -        3,142
      Savings and money market accounts ..........................      31,887            -        16,423             -       48,310
      Time deposits over $100M ...................................       6,829       26,069         3,531             -       36,429
      Other time deposits ........................................      10,278       28,706         9,674             -       48,658
                                                                      --------     --------      --------      --------     --------
        Total interest-bearing deposits ..........................      49,899       54,775        31,865             -      136,539
                                                                      --------     --------      --------      --------     --------

   Other borrowings ..............................................       3,500        3,100         8,500             -       15,100
                                                                      --------     --------      --------      --------     --------
        Total interest-bearing liabilities .......................    $ 53,399     $ 57,875      $ 40,365      $      -     $151,639
                                                                      ========     ========      ========      ========     ========

Period interest-sensitive gap ....................................    $ 57,018     $(37,502)     $(13,120)     $  8,382
Cumulative interest-sensitive gap ................................      57,018       19,516         6,396        14,778

Gap ratio as a percentage of earning assets ......................       34.26%      (22.53)%       (7.89)%        5.04%
Cumulative gap ratio as a percentage of earning assets ...........       34.26        11.73          3.84          8.88
</TABLE>


                                       14
<PAGE>

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 estimated inherent losses. The Bank provided  $1,339,000
and $805,000 to the allowance during the years ended December 31, 2003 and 2002,
respectively.

Other Income

         In 2003, the Bank had other income of $508,123  compared to $440,809 in
2002.  The  increase  was  primarily  the result of gains of $89,575 on sales of
investment securities classified as available-for-sale.

Other Expenses

         Salaries and employee  benefits  totaled  $1,894,529 and $1,789,615 for
2003 and 2002,  respectively.  The  increase  was  primarily  due to  additional
lending  staff at the  Greenville  location.  Occupancy  and  equipment and data
processing  expenses  totaled  $867,300  for the year ended  December  31,  2003
compared to $731,336  for the year ended  December  31,  2002.  The  increase of
$135,964 was primarily due to one-time software conversion costs and a full-year
of expenses associated with the Greenville location,  which opened in late 2002.
In 2003, the Bank recorded write-downs of assets acquired in settlement of loans
of $25,549, compared to $89,031 in 2002.

Income Taxes

         During the years ended  December 31, 2003 and 2002,  the Bank  recorded
income tax expense of $382,469 and $460,470, 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, 2003,  the Bank's  investment  portfolio,  excluding
investments  required for  membership  in the Federal  Home Loan Bank  ("FHLB"),
comprised approximately 8.0% of total assets. The following table summarizes the
carrying  value amounts of securities  held by the Bank at December 31, 2003 and
at December 31, 2002. Available-for-sale securities are stated at estimated fair
value. The Bank had no held-to-maturity securities at December 31, 2003.

Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                December 31, 2003                       December 31, 2002
                                                                -----------------                       -----------------
                                                                       Net                                     Net
                                                                    Unrealized                              Unrealized
                                                       Book          Holding         Fair         Book         Holding       Fair
                                                      Value        Gain/(Loss)       Value        Value      Gain/(Loss)     Value
                                                      -----        -----------       -----        -----      -----------     -----
                                                                                   (Dollars in thousands)

<S>                                                 <C>            <C>            <C>           <C>           <C>           <C>
Federal  Agencies ............................      $  3,014       $    (38)      $  2,976      $  5,992      $     60      $  6,052
Mortgage-backed securities ...................        10,901            (48)        10,853        11,391           215        11,606
                                                    --------       --------       --------      --------      --------      --------
                                                    $ 13,915       $    (86)      $ 13,829      $ 17,383      $    275      $ 17,658
                                                    ========       ========       ========      ========      ========      ========
</TABLE>


                                       15
<PAGE>

         The Bank also holds  stock in the FHLB.  This stock was  recorded  at a
cost of $580,000 at December 31, 2003 and $425,000 at December 31, 2002, 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, 2003.  All of the
securities are stated at estimated fair value.

                   Securities Portfolio Maturities and Yields

                                                      December 31, 2003
                                                      -----------------
                                                 Fair value            Yield
                                                 ----------            -----
                                                    (Dollars in thousands)
Federal agencies

         Due from one to five years .....     $    2,975,625           2.09%
                                              -------------


Mortgage-backed securities
         Due from five to ten years .....         10,226,717           3.66
         Due after ten years ............            626,877           4.43
                                              --------------
                                                  10,853,594
                                              --------------
                                              $   13,829,219           3.35%
                                              ==============

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans to 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, 2003 and 2002, is shown
in the following table according to type of loan:

                           Loan Portfolio Composition

                                                            December 31,
                                                            ------------
                                                       2003               2002
                                                       ----               ----
                                                      (Dollars in thousands)
Commercial .................................        $  30,500         $  45,122
Real estate - Construction .................           15,814            13,627
Real estate - Mortgage .....................           94,391            44,840
Consumer ...................................            9,691             7,350
                                                    ---------         ---------
    Total loans ............................          150,396           110,939
Less allowance for loan losses .............           (2,345)           (1,395)
                                                    ---------         ---------
                                                    $ 148,051         $ 109,544
                                                    =========         =========



                                       16
<PAGE>

         A certain  degree  of risk 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
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 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  62.8% of the Bank's
loan  portfolio  at December  31, 2003  compared to 40.4% 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.

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, 2003, as well as the amount of fixed
and variable rate loans outstanding.

<TABLE>
<CAPTION>
                                                                             December 31, 2003
                                                                             -----------------
                                                         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 ...............      $ 25,325         $ 3,459         $1,716        $ 30,500
Real estate - construction .........................        13,770           2,044              -          15,814
Real estate - mortgage .............................        67,898          26,446             47          94,391
Consumer installment ...............................         4,879           3,691          1,121           9,691
                                                          --------         -------         ------        --------
         Total loans ...............................      $111,872         $35,640         $2,884        $150,396
                                                          ========         =======         ======        ========

Fixed rate .........................................                                                     $ 51,246
                                                                                                         ========

Variable rate ......................................                                                     $ 99,150
                                                                                                         ========
</TABLE>


                                       17
<PAGE>

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, 2003 and 2002,  the Bank had  $1,230,953  and $855,270,
respectively,  of nonaccrual  loans. The increase was primarily  attributable to
one large loan placed on nonaccrual in 2003.  Gross  interest  income that would
have been recorded  with respect to nonaccrual  loans in 2003 and 2002 under the
original  terms of the loans was  $93,543  and  $27,430,  respectively.  Accrued
interest on nonaccrual  loans  totaled  $10,294 and $17,907 at December 31, 2003
and 2002,  respectively.  At December  31,  2003 and 2002 loans of $388,760  and
$-0-,  respectively,  were 90 days or more past due and still accruing interest.
Management  believes,  at this time,  that principal and interest on these loans
will ultimately be collected.  There were no restructured  loans at December 31,
2003 and 2002.

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans. Problem loans can include loans in nonaccrual status, loans that are past
due 90 days or more and still  accruing,  and  impaired  loans.  A loan  becomes
impaired  when it is  probable  that a creditor  will be unable to  collect  all
amounts due in accordance  with the contractual  terms of the loan agreement.  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.  Loans totaling  approximately  $1.5 million were determined by
management  to be impaired  at December  31,  2003,  and a specific  reserve was
allocated in calculating the allowance for loan losses.

Assets Acquired in Foreclosure

         At  December  31,  2003  and  2002,  the Bank had  assets  acquired  in
settlements of loans of approximately $411,000 and $243,000,  respectively.  For
both years, those amounts  represented 100% of real estate owned. Six properties
were acquired in 2003.  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 that
the 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  considers 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, 2003.


                                       18
<PAGE>

         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 2003, the Bank  experienced  net  charge-offs  of  approximately
$389,000.  Management  believes  that  it has  adequately  provided  for  losses
considering  its  assessment  of collateral  values and other factors  affecting
collectibility.  In addition,  Management  believes  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.

                    Analysis of the Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                                                          Year Ended
                                                                                                          ----------
                                                                                           December 31, 2003      December 31, 2002
                                                                                           -----------------      -----------------
                                                                                                    (Dollars in thousands)

<S>                                                                                            <C>                       <C>
Total gross loans outstanding at end of period .................................               $ 150,396                 $ 110,939
Average amount of loans outstanding, gross .....................................                 130,448                    99,820
                                                                                               ---------                 ---------

Balance of allowance for loan losses - beginning ...............................                   1,395                     1,176
                                                                                               ---------                 ---------
Loans charged off:
     Real estate-construction ..................................................                     (82)                        -
     Real estate-mortgage ......................................................                    (120)                     (529)
     Consumer loans ............................................................                     (97)                      (54)
     Commercial and other loans ................................................                     (90)                      (25)
                                                                                               ---------                 ---------
        Total charge-offs ......................................................                    (389)                     (608)

Recoveries of loans previously charged-off .....................................                       -                        22
                                                                                               ---------                 ---------
Net charge-offs ................................................................                    (389)                     (586)

Additions to allowance charged to expense ......................................                   1,339                       805
                                                                                               ---------                 ---------

Balance of allowance for loan losses - ending ..................................               $   2,345                 $   1,395
                                                                                               =========                 =========

Ratios
     Net charge-offs during period to average
        loans outstanding during period ........................................                    0.30%                     0.59%
     Net charge-offs to loans at end of period .................................                    0.26                      0.53
     Allowance for loan losses to average loans ................................                    1.80                      1.40
     Allowance for loan losses
         to loans at end of period .............................................                    1.56                      1.26
     Net charge-offs to allowance for loan losses ..............................                    16.6                      42.0
     Net charge-offs to provision for loan losses ..............................                    29.1                      72.8
</TABLE>



                                       19
<PAGE>

Deposits

The amounts and  composition  of total deposits as of December 31, 2003 and 2002
were as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                              2003                                2002

                                                                Amount                Percent            Amount            Percent
                                                                ------                -------            ------            -------
<S>                                                            <C>                    <C>              <C>                    <C>
Noninterest-bearing ..............................             $  9,082                 6.2%           $  7,286                 6.1%
NOW accounts .....................................                3,142                 2.2               2,461                 2.1
Money market accounts ............................               47,549                32.7              38,037                32.1
Savings ..........................................                  760                 0.5                 447                 0.4
Time, less than $100,000 .........................               48,658                33.4              47,479                40.1
Time, $100,000 and over ..........................               36,430                25.0              22,763                19.2
                                                               --------               -----            --------               -----
                                                               $145,621               100.0%           $118,473               100.0%
                                                               ========               =====            ========               =====
</TABLE>

The average  amounts and average rates paid on deposits held by the Bank for the
years ended December 31, 2003 and 2002 are summarized below:

<TABLE>
<CAPTION>
                                                                                                      Deposits
                                                                                               (Dollars in Thousands)
                                                                                 December 31, 2003                December 31, 2002
                                                                                 -----------------                -----------------
                                                                              Amount         Average          Amount         Average
                                                                              ------         Rate (%)         ------        Rate (%)
                                                                                             --------                       --------

<S>                                                                            <C>               <C>        <C>               <C>
Noninterest-bearing demand ...........................................         $  8,361             -       $  7,090             -
Interest-bearing transaction accounts ................................            2,580          0.11          2,317          0.60
Savings ..............................................................              628          0.48            455          0.93
Money market accounts ................................................           41,686          1.95         25,274          2.08
Certificates of deposit and individual  retirement
accounts .............................................................           80,555          2.45         71,114          3.58
                                                                               --------          ----       --------          ----

         Total average deposits ......................................         $133,810          2.23%      $106,250          2.91%
                                                                               ========          ====       ========          ====
</TABLE>

         As of December 31, 2003,  the Bank held $36.4  million in time deposits
of $100,000 or more,  with  approximately  $6.8  million  maturing  within three
months,  $10.3  million with  maturities  over three  through six months,  $15.8
million with  maturities  over six through  twelve  months and $3.5 million with
maturities  over  twelve  months.  Brokered  deposits  as of  December  31, 2003
amounted to approximately $20,327,000.

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, 2003 and 2002.

                                                Years Ended December 31,
                                                ------------------------
                                                 2003            2002
                                                 ----            ----

             Return on average assets             0.41%           0.47%
             Return on average equity             6.88            6.96
             Dividend payout ratio               13.33               -
             Average equity to average
               asset ratio                        6.00            6.73



                                       20
<PAGE>

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 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
relatively  stable  funding  base,  and were  equal to 59.0% of total  assets at
December 31, 2003. 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 investment  portfolio and qualifying mortgage
loans.  At December  31,  2003,  the Bank had the ability to borrow up to 15% of
assets from the FHLB. $11.6 million of borrowings were outstanding from the FHLB
at  December  31,  2003,  secured  by  investment  securities  and 1 - 4  family
residential mortgage loans. These borrowings bear interest at rates ranging from
1.15% to 4.38%.  $3.1 million matures in 2004, $6.5 million matures in 2006, and
$2.0 million matures in 2011. The $2 million advance is callable and may reprice
prior to its final maturity date.


         The unused borrowing capacity currently available from the FHLB assumes
that the Bank's $580,000  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 2003
was $11.6 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  $3,500,000  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 Arrangements


         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These instruments  represent  unfunded  commitments,  not outstanding  balances,
therefore,  the risk associated with these financial  instruments is referred to
as "off-balance  sheet risk". The Bank's financial  instruments with off-balance
sheet risk consist of 1) commitments to extend credit and 2) standby  letters of
credit.  Both involve elements of credit and interest rate risk not reflected on
the  balance  sheet.  We use the same credit and  collateral  policies in making
these commitments as we do for on-balance sheet instruments.


         Commitments  to extend  credit 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, 2003, the Bank had issued  commitments to extend
credit  of $24.3  million  through  various  types of  lending.  Commitments  at
variable rates of interest  totaled $17.7 million and commitments at fixed rates
totaled $6.6  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 it has
adequate  sources of  liquidity to fund  commitments  that are drawn upon by the
borrower.


         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby  letters of credit which are  assurances to a third party that they 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  $730,105 at
December 31, 2003. 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.


                                       21
<PAGE>

         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 $ 479,000 at
December 31, 2003. These  obligations are payable over several years as shown in
Note 10 to the Company's consolidated financial statements.


Capital Resources

         Shareholders'  equity increased  $330,053 during 2003. Major components
of the change in shareholders' equity included net operating income of $650,112,
unrealized  losses, net of tax, in the investment  portfolio of $240,927,  and a
cash dividend of $.04 per share, or $78,764.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under these standards,  financial institutions and holding companies
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  institution  falls below certain  levels,  increasingly
stringent regulatory corrective actions are mandated.

              Company and Bank capital ratios at December 31, 2003 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
                                                                                   For capital           under prompt corrective
                                                                                adequacy purposes            Action provisions
                                                                                -----------------            -----------------
                                                               Actual                  Minimum                     Minimum
                                                         Amount      Ratio      Amount       Ratio           Amount        Ratio
                                                         ------      -----      ------       -----           ------        -----
                                                                                    (amounts in $000)
Company (consolidated):
As of December 31, 2003
<S>                                                     <C>             <C>       <C>             <C>      <C>             <C>
Total capital (to risk weighted assets) .........       $14,974          9.9%     $12,066         8.0%     $15,087         10.0%

Tier 1 capital (to risk weighted assets) ........         9,587          6.4        6,033         4.0        9,052          6.0

Tier 1 capital (to average assets) ..............         9,587          6.1        6,633         4.0        7,544          5.0

Bank:
As of December 31, 2003
Total capital (to risk weighted assets) .........       $14,812          9.8%     $12,074         8.0%     $15,093         10.0%

Tier 1 capital (to risk weighted assets) ........        12,925          8.6        6,037         4.0        9,056          6.0

Tier 1 capital (to average assets) ..............        12,925          7.8        6,631         4.0        8,289          5.0

</TABLE>


                                       22
<PAGE>

The Company and Bank total capital to risk-weighted assets of 9.9% and 9.8% fell
slightly below the  well-capitalized  requirement of 10%, as shown above.  Banks
that are not  well-capitalized  are not  allowed  to  accept  or renew  brokered
deposits  without  prior  approval  from  regulators.  The Company is  borrowing
approximately  $2.5 million in the first  quarter of 2004 with the  intention of
providing  additional capital to the Bank, which should enable the total capital
to risk-weighted assets ratio to be above the well-capitalized  level by the end
of the first quarter of 2004.

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.

Recently Issued Accounting Standards

         Recently issued accounting  standards and  pronouncements are discussed
in Note 1, Summary of Significant  Accounting  Policies and  Activities,  in our
Report on Consolidated  Financial  Statements included herein.  Other accounting
standards,  which  have been  issued or  proposed  by the  Financial  Accounting
Standards  Board  that do not  require  adoption  until a  future  date  are not
expected to have a material impact on the consolidated financial statements upon
adoption.


                                       23
<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, 2003 and 2002

          Consolidated Statements of Operations for the years ended December 31,
          2003, 2002 and 2001

          Consolidated  Statements of  Shareholders'  Equity for the years ended
          December 31, 2003, 2002 and 2001

          Consolidated Statements of Cash Flows for the years ended December 31,
          2003, 2002 and 2001

          Notes to Consolidated Financial Statements




                                       24
<PAGE>







                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                   REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001











                                       25
<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, 2003
and 2002 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, 2003. 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, 2003 and 2002 and
the  results  of their  operations  and cash  flows for each of the years in the
three year period  ended  December  31,  2003,  in  conformity  with  accounting
principles generally accepted in the United States of America.





Greenville, South Carolina
March 1, 2004





                                       26
<PAGE>



                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                              DECEMBER 31,
                                                                                                              ------------
                                                                                                       2003                 2002
                                                                                                       ----                 ----
                                                          ASSETS
<S>                                                                                               <C>                  <C>
Cash and due from banks ...................................................................       $   2,046,684        $   2,669,420
Federal funds sold ........................................................................           1,562,000            5,197,000
                                                                                                  -------------        -------------

           Total cash and cash equivalents ................................................           3,608,684            7,866,420

Investment securities available for sale ..................................................          13,829,219           17,658,190
Other investments, at cost ................................................................             580,000              425,000
Loans, net ................................................................................         148,051,270          109,544,338
Property and equipment, net ...............................................................           3,893,185            3,993,030
Bank owned life insurance .................................................................             827,487              785,649
Assets acquired in settlement of loans ....................................................             410,921              242,835
Other assets ..............................................................................           1,259,992              967,935
                                                                                                  -------------        -------------

           Total assets ...................................................................       $ 172,460,758        $ 141,483,397
                                                                                                  =============        =============

                                           LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits
     Noninterest bearing ..................................................................       $   9,082,231        $   7,285,699
     Interest bearing .....................................................................         136,538,717          111,186,823
                                                                                                  -------------        -------------

           Total deposits .................................................................         145,620,948          118,472,522

Federal Home Loan Bank advances ...........................................................          11,600,000            8,500,000
Subordinated debentures ...................................................................           3,500,000            3,500,000
Other liabilities .........................................................................           2,098,485            1,699,603
                                                                                                  -------------        -------------

           Total liabilities ..............................................................         162,819,433          132,172,125
                                                                                                  -------------        -------------

COMMITMENTS AND CONTINGENCIES - Notes 10 and 14

SHAREHOLDERS' EQUITY
     Common stock, no par value, 20,000,000 shares authorized,
        2,165,970 and 1,875,329 shares issued and  outstanding
        at December 31, 2003 and 2002, respectively .......................................           9,695,208            8,464,227
     Retained earnings ....................................................................                   -              660,001
     Accumulated other comprehensive income (loss) ........................................             (53,883)             187,044
                                                                                                  -------------        -------------

           Total shareholders' equity .....................................................           9,641,325            9,311,272
                                                                                                  -------------        -------------

           Total liabilities and shareholders' equity .....................................       $ 172,460,758        $ 141,483,397
                                                                                                  =============        =============
</TABLE>





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




                                       27
<PAGE>


                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                                             For the years ended December 31,
                                                                                             --------------------------------
                                                                                        2003               2002               2001
                                                                                        ----               ----               ----
INTEREST INCOME
<S>                                                                                 <C>               <C>               <C>
        Loans and fees on loans .............................................       $ 7,991,856       $ 7,540,240       $ 7,391,647
        Investment securities ...............................................           556,705           608,439           697,072
        Federal funds sold and due from banks ...............................            55,213           148,434           316,552
                                                                                    -----------       -----------       -----------

          Total interest income .............................................         8,603,774         8,297,113         8,405,271

INTEREST EXPENSE
        Deposits ............................................................         2,792,628         3,092,067         4,552,670
        Federal Home Loan Bank advances .....................................           382,279           370,463            68,409
        Subordinated notes ..................................................            74,339            96,250           193,555
                                                                                    -----------       -----------       -----------

          Total interest expense.............................................         3,249,246         3,558,780         4,814,634
                                                                                    -----------       -----------       -----------

          Net interest income ...............................................         5,354,528         4,738,333         3,590,637

PROVISION FOR POSSIBLE LOAN LOSSES ..........................................         1,339,000           805,000           722,500
                                                                                    -----------       -----------       -----------
          Net interest income after provision for
           possible loan losses .............................................         4,015,528         3,933,333         2,868,137
                                                                                    -----------       -----------       -----------

NONINTEREST INCOME
        Service fees on deposit accounts ....................................           289,434           293,119           209,453
        Gain on sale of investment securities available for sale ............            89,575                 -                 -
        Other ...............................................................           129,114           147,690            67,608
                                                                                    -----------       -----------       -----------
          Total noninterest income ..........................................           508,123           440,809           277,061
                                                                                    -----------       -----------       -----------

NONINTEREST EXPENSES
        Salaries and benefits ...............................................         1,894,529         1,789,615         1,676,062
        Printing and supplies ...............................................            71,246            97,586            86,665
        Data processing .....................................................           350,666           293,868           242,656
        Occupancy and equipment .............................................           516,634           437,468           299,659
        Professional services ...............................................           151,950           159,845           142,698
        Writedowns and expenses on assets acquired in settlement of loans ...            25,549            89,031           151,495
        Other operating .....................................................           480,496           445,377           379,205
                                                                                    -----------       -----------       -----------
          Total noninterest expenses ........................................         3,491,070         3,312,790         2,978,440
                                                                                    -----------       -----------       -----------
          Income before income taxes ........................................         1,032,581         1,061,352           166,758

INCOME TAX PROVISION (BENEFIT) ..............................................           382,469           460,470          (129,056)
                                                                                    -----------       -----------       -----------
          Net income ........................................................       $   650,112       $   600,882       $   295,814
                                                                                    ===========       ===========       ===========
NET INCOME PER COMMON SHARE
         Basic ..............................................................       $       .30       $       .28       $       .14
                                                                                    ===========       ===========       ===========
         Diluted ............................................................       $       .24       $       .23       $       .13
                                                                                    ===========       ===========       ===========
WEIGHTED AVERAGE NUMBER OF COMMON
        SHARES OUTSTANDING

         Basic ..............................................................         2,165,970         2,165,970         2,165,970
                                                                                    ===========       ===========       ===========
         Diluted ............................................................         2,874,818         2,860,326         2,213,945
                                                                                    ===========       ===========       ===========
</TABLE>

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


                                       28
<PAGE>


                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              For the years ended December 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                          Common stock                 Retained           other            Total
                                                    ---------------------------        earnings       comprehensive    shareholders'
                                                       Shares            Amount        (deficit)      income (loss)        equity
                                                       ------            ------        ---------      -------------        ------

<S>                                                    <C>           <C>              <C>              <C>              <C>
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 $81,230) .....................               -               -                -          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
                                                                                                                        -----------

    Net income .................................               -               -          650,112                -          650,112
    Other comprehensive income -
       Unrealized holding losses on
       investment securities (net of
       income tax benefit of $81,915) ..........               -               -                -         (240,927)        (240,927)
                                                                                                                        -----------

    Comprehensive income .......................               -               -                -                -          409,185
    Stock dividend (5%) ........................          93,731         625,186         (625,186)               -                -
    Cash in lieu of fractional shares ..........               -            (368)               -                -             (368)
    Cash dividend ($.04) per share .............               -               -          (78,764)               -          (78,764)

    Stock dividend (10%) .......................         196,910         606,163         (606,163)               -                -
                                                     -----------     -----------      -----------      -----------      -----------

Balance, December 31, 2003 .....................       2,165,970     $ 9,695,208      $         -      $   (53,883)     $ 9,641,325
                                                     ===========     ===========      ===========      ===========      ===========
</TABLE>




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


                                       29
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                           For the years ended December 31,
                                                                                           --------------------------------
                                                                                     2003                2002                2001
                                                                                     ----                ----                ----
OPERATING ACTIVITIES
<S>                                                                              <C>                <C>                <C>
      Net income ..........................................................      $    650,112       $    600,882       $    295,814
      Adjustments to reconcile net income to net cash
         provided by operating activities
         Deferred income tax expense (benefit) ............................          (193,385)           206,310           (303,656)
         Provision for possible loan losses ...............................         1,339,000            805,000            722,500
         Depreciation and amortization ....................................           334,168            203,149            144,159
         Gain on sale of securities available for sale ....................           (89,575)                 -                  -
         Gain on sale of property and equipment ...........................           (11,455)                 -                  -
         Loss on sale of assets acquired in settlement of loans ...........            (9,999)            35,619                  -
         Write-down of assets acquired in settlement of loans .............            24,359             44,000            151,495
         Decrease (increase) in other assets ..............................          (292,057)          (281,739)           128,966
         Increase (decrease) in other liabilities .........................           592,267           (944,477)            78,967
                                                                                 ------------       ------------       ------------

              Net cash provided by operating activities ...................         2,343,435            668,744          1,218,245
                                                                                 ------------       ------------       ------------

INVESTING ACTIVITIES
      Purchase of investment securities ...................................        (9,796,291)       (12,524,711)       (11,816,674)
      Purchase of Federal Home Loan Bank stock ............................          (155,000)                 -           (306,400)
      Proceeds from principal paydowns on investment securities ...........         5,286,482          3,023,004            661,226
      Proceeds from sales and calls of investment securities ..............         7,187,427                  -                  -
      Proceeds from maturity of investment securities .....................         1,000,000          3,000,000         11,100,000
      Increase in loans, net ..............................................       (40,295,128)       (19,108,231)       (22,628,222)
      Purchase of Bank owned life insurance ...............................                 -                  -           (749,968)
      Increase in cash surrender value of life insurance ..................           (41,838)           (35,681)                 -
      Proceeds from sale of assets acquired in settlement of loans ........           266,750            524,157            291,605
      Proceeds from sale of property and equipment ........................            23,000             10,237                  -
      Purchase of property and equipment ..................................          (245,868)        (2,089,225)        (1,039,788)
                                                                                 ------------       ------------       ------------

              Net cash used in investing activities .......................       (36,770,466)       (27,200,450)       (24,488,221)
                                                                                 ------------       ------------       ------------

FINANCING ACTIVITIES
      Proceeds from Federal Home Loan Bank advances .......................         3,100,000                  -          8,500,000
      Proceeds from issuance of subordinated debentures ...................                 -                  -          3,500,000
      Exercise of stock options ...........................................                 -                  -             10,010
      Net increase in deposits ............................................        27,148,427         24,052,833         16,828,971
      Dividends paid ......................................................           (78,764)                 -                  -
      Cash paid in lieu of fractional shares ..............................              (368)                 -                  -
                                                                                 ------------       ------------       ------------
               Net cash provided by financing activities ...................        30,169,295         24,052,833         28,838,981
                                                                                 ------------       ------------       ------------
              Net (decrease) increase in cash and cash
              equivalents .................................................        (4,257,736)        (2,478,873)         5,569,005

CASH AND CASH EQUIVALENTS, BEGINNING
      OF YEAR .............................................................         7,866,420         10,345,293          4,776,288
                                                                                 ------------       ------------       ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ....................................      $  3,608,684       $  7,866,420       $ 10,345,293
                                                                                 ============       ============       ============
SUPPLEMENTAL INFORMATION
     Cash paid for:
         Income taxes .....................................................      $    147,511       $    340,610       $    174,370
                                                                                 ============       ============       ============
         Interest .........................................................      $  3,382,683       $  4,038,239       $  4,257,929
                                                                                 ============       ============       ============
         Loans transferred to assets acquired in settlement of loans ......      $    449,196       $    273,085       $    109,000
                                                                                 ============       ============       ============
</TABLE>



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


                                       30
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL 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,  2001 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.

   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)


                                       31
<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 estimated loss  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)



                                       32
<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 and on January 22, 2004,  the Company  issued a ten percent  stock
     dividend.  Per share and share amounts have been retroactively  restated to
     reflect the stock dividends declared in 2003 and 2004.

   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)


                                       33
<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  times, or on different  bases,
     than its interest-earning assets. Credit risk is the risk of default on the
     Company's loan and  investment  securities  portfolios  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  SFAS  No.  123,  "Accounting  for
     Stock-Based Compensation",  to stock-based employee compensation. Per share
     and weighted  average shares  outstanding have been restated to reflect the
     five and ten percent stock dividends.

<TABLE>
<CAPTION>
                                                                                                Years ended December 31,
                                                                                                ------------------------
                                                                                      2003              2002                2001
                                                                                      ----              ----                ----

<S>                                                                                 <C>               <C>               <C>
Net income, as reported ..................................................          $650,112          $600,882          $   295,814
Deduct:  Total stock-based employee compensation
     expense determined under fair value based
     method for all awards, net of related tax effects ...................           (18,500)          (17,828)             (29,431)
                                                                                    --------          --------          -----------

Pro forma net income .....................................................          $631,612          $583,054          $   266,383
                                                                                    ========          ========          ===========

Net income per common share:
     Basic - as reported .................................................          $    .30          $   0.28          $      0.14
                                                                                    ========          ========          ===========
     Basic - pro forma ...................................................          $    .29          $   0.27          $      0.12
                                                                                    ========          ========          ===========


     Diluted - as reported ...............................................          $    .24          $   0.23          $      0.13
                                                                                    ========          ========          ===========
     Diluted - pro forma .................................................          $    .24          $   0.23          $      0.12
                                                                                    ========          ========          ===========
</TABLE>

                                                                     (Continued)

                                       34
<PAGE>

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

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 2003, 2002 and 2001: the risk free interest rate used
was 4.00,  4.50 and 5.89 percent,  respectively,  the expected  volatility was 5
percent,  the expected option life was 5 years and the assumed dividend rate was
zero.

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

     In December 2002, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No.  148,  "Accounting  for  Stock-based  Compensation-Transition  and
     Disclosure",  an  amendment  of 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.  SFAS No. 148 also amends the disclosure
     provisions  of SFAS No.  123 and APB  Opinion  No. 28,  "Interim  Financial
     Reporting",  to require disclosure in the summary of significant accounting
     policies of the effects of an entity's  accounting  policy with  respect to
     stock-based  employee  compensation on reported net income and earnings per
     share in annual and interim financial  statements.  While SFAS No. 148 does
     not amend SFAS No. 123 to require  companies to account for employee  stock
     options using the fair value method, the disclosure  provisions of SFAS No.
     148 are applicable to all companies with stock-based employee compensation,
     regardless  of whether  they account for that  compensation  using the fair
     value method of SFAS No. 123 or the  intrinsic  value method of APB Opinion
     No. 25. The provisions of SFAS No. 148 were effective for annual  financial
     statements  for fiscal  years  ending  after  December  15,  2002,  and for
     financial reports  containing  condensed  financial  statements for interim
     periods  beginning  after  December 15,  2002.  The Company has adopted the
     disclosure  provisions  of SFAS No. 148 and  continues  to account  for its
     stock-based  compensation  using the intrinsic  value method of APB Opinion
     No. 25.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative Instruments and Hedging Activities",  which amends and clarifies
     accounting  for  derivative   instruments,   including  certain  derivative
     instruments embedded in other contracts and loan commitments that relate to
     the origination of mortgage loans held for sale, and for hedging activities
     under SFAS No. 133.  SFAS No. 149 was  generally  effective  for  contracts
     entered into or modified  after June 30, 2003. The adoption of SFAS No. 149
     did not have any impact on the financial  condition or operating results of
     the Company.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of both Liabilities and Equity."
     SFAS  No.  150  establishes  standards  for how an  issuer  classifies  and
     measures  certain  financial   instruments  with  characteristics  of  both
     liabilities  and equity.  It requires  that an issuer  classify a financial
     instrument  that is within  its scope as a  liability  (or an asset in some
     circumstances).  Many of those  instruments  were previously  classified as
     equity.  SFAS No. 150 was generally  effective  for  financial  instruments
     entered into or modified after May 31, 2003, and otherwise was effective at
     the beginning of the first interim  period  beginning  after June 15, 2003.
     The  adoption  of SFAS No.  150 did not have any  impact  on the  financial
     condition or operating results of the Company.

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


                                       35
<PAGE>

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

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

     In  November  2003,  the  Emerging  Issues  Task Force  ("EITF")  reached a
     consensus that certain  quantitative and qualitative  disclosures should be
     required  for  debt  and  marketable   equity   securities   classified  as
     available-for-sale or held-to-maturity  under SFAS No. 115 and SFAS No. 124
     that  are   impaired   at  the   balance   sheet  date  but  for  which  an
     other-than-temporary  impairment has not been  recognized.  Accordingly the
     EITF issued EITF No. 03-1, "The Meaning of Other-Than-Temporary  Impairment
     and Its  Application  to Certain  Investments."  This issue  addresses  the
     meaning  of   other-than-temporary   impairment  and  its   application  to
     investments  classified  as either  available  for sale or held to maturity
     under SFAS No. 115 and provides  guidance on  quantitative  and qualitative
     disclosures.  EITF No. 03-1 was  effective  for fiscal  years  ending after
     December 15, 2003. Adopting the disclosure  provisions of EITF No. 03-1 did
     not have any  effect on the  Company's  financial  position  or  results of
     operations.

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


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, 2003 and
2002 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, 2003 and 2002,  federal funds sold amounted to  $1,562,000  and  $5,197,000,
respectively.



                                       36
<PAGE>

NOTE 4 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                                      December 31, 2003
                                                                                      -----------------
                                                                                       Gross unrealized
                                                                Amortized              ----------------                      Fair
                                                                 Cost               Gains              Losses                Value
                                                                 ----               -----              ------                -----
<S>                                                           <C>                  <C>              <C>                  <C>
Federal Agencies ...................................          $ 3,013,346          $     -          $    37,721          $ 2,975,625
Mortgage backed ....................................           10,901,449           62,121              109,976           10,853,594
                                                              -----------          -------          -----------          -----------

       Total investment securities .................          $13,914,795          $62,121          $   147,697          $13,829,219
                                                              ===========          =======          ===========          ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                                        December 31, 2002
                                                                                        -----------------

<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>


           The amortized costs and fair values of securities  available for sale
at December 31, 2003, 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
                                                    ----           ----------

One to five years ............................  $ 3,013,346        $ 2,975,625
Five to ten years ............................   10,290,000         10,226,717
After ten years ..............................      611,449            626,877
                                                -----------        -----------

       Total investment securities ...........  $13,914,795        $13,829,219
                                                ===========        ===========



           Investment  securities with an aggregate amortized cost of $4,052,849
(fair value of $4,055,629) at December 31, 2003 and  $12,870,926  (fair value of
$13,130,408) at December 31, 2002 were pledged to collateralize  public deposits
and borrowings.

            The following  table shows gross  unrealized  losses and fair value,
and  length  of time  that  individual  securities  have  been  in a  continuous
unrealized loss position at December 31, 2003.


<TABLE>
<CAPTION>
                                             Less than 12 Months             12 Months or More                  Total
                                             -------------------             -----------------                  -----
                                          Fair            Unrealized        Fair       Unrealized         Fair           Unrealized
                                          value             losses          value        losses           value           losses
                                          -----             ------          -----        ------           -----           ------

<S>                                    <C>               <C>                <C>           <C>          <C>               <C>
Federal agencies ...............       $ 2,975,625       $    37,721        $    -        $    -       $ 2,975,625       $    37,721
Mortgage backed ................         7,679,335           109,976             -             -         7,679,335           109,976
                                       -----------       -----------        ------        ------       -----------       -----------

Total ..........................       $10,654,960       $   147,697        $    -        $    -       $10,654,960       $   147,697
                                       ===========       ===========        ======        ======       ===========       ===========
</TABLE>

                                                                     (Continued)


                                       37
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         No individual  securities were in a continuous loss position for twelve
months or more. The Company has the ability and intent to hold these  securities
until such time as the value  recovers  or the  securities  mature.  The Company
believes,  based on  industry  analyst  reports  and  credit  ratings,  that the
deterioration  in value is  attributable to changes in market interest rates and
not in the credit  quality of the issuer  and  therefore,  these  losses are not
considered other-than-temporary.

         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 $580,000  and  $425,000 at December 31, 2003 and
2002, respectively, 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:

                                                             December 31,
                                                             ------------
                                                        2003             2002
                                                        ----             ----

Commercial ...................................     $ 30,500,112     $ 45,122,320
Real estate - construction ...................       15,814,092       13,626,756
Real estate - mortgage .......................       94,391,576       44,840,542
Consumer .....................................        9,690,934        7,349,790
                                                   ------------     ------------

Loans, gross .................................      150,396,714      110,939,408
Less allowance for possible loan losses ......        2,345,444        1,395,070
                                                   ------------     ------------

                                                   $148,051,270     $109,544,338
                                                   ============     ============

           At December 31, 2003 and 2002,  non-accrual loans totaled  $1,230,953
and  $855,270,  respectively.  The gross  interest  income which would have been
recorded under the original terms of the loans amounted to $93,543,  $27,430 and
$195,396 in 2003,  2002 and 2001,  respectively.  Loans with  payments  past due
ninety days or more and accruing interest were $388,760, with $10,293 in accrued
interest at December  31, 2003.  At December 31, 2002,  there were no loans with
payments past due ninety days or more and accruing  interest.  Impaired loans of
approximately  $1.5  million at December  31,  2003 were  included on the Bank's
classified  loans listing,  and a specific  reserve was allocated in calculating
the  allowance  for  possible  loan losses.  Variable  rate and fixed rate loans
totaled $99,150,269 and $51,246,445, respectively, at December 31, 2003.

           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,
                                                                                                   ------------
                                                                                   2003                2002                  2001
                                                                                   ----                ----                  ----

<S>                                                                           <C>                  <C>                  <C>
Balance, beginning of year ..........................................         $ 1,395,070          $ 1,175,570          $   957,899
Provision for possible loan losses ..................................           1,339,000              805,000              722,500
Loans charged against the allowance, net of recoveries ..............            (388,626)            (585,500)            (504,829)
                                                                              -----------          -----------          -----------

Balance, end of year ................................................         $ 2,345,444          $ 1,395,070          $ 1,175,570
                                                                              ===========          ===========          ===========
</TABLE>


                                       38
<PAGE>

NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                           December 31,
                                                           ------------
                                                     2003                2002
                                                     ----                ----

Land and land improvements ...................     $   566,596      $   566,596
Building and leasehold improvements ..........       2,891,464        2,891,464
Furniture and equipment ......................       1,246,746        1,064,101
Vehicles .....................................          67,375           69,022
                                                   -----------      -----------

                                                     4,772,181        4,591,183
Accumulated depreciation .....................        (878,996)        (598,153)
                                                   -----------      -----------

        Total property and equipment .........     $ 3,893,185      $ 3,993,030
                                                   ===========      ===========

           Depreciation  expense for the years ended December 31, 2003, 2002 and
2001 amounted to $334,168, $203,172 and $144,159, 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:

          Type of Asset                 Life of Years      Depreciation Method
          -------------                 -------------      -------------------

     Software                               3              Straight-line
     Furniture and equipment                5 to 7         Straight-line
     Buildings and improvements             5 to 40        Straight-line
     Vehicles                               3              Straight-line


NOTE 7 - DEPOSITS

           The following is a detail of deposit accounts:

                                                           December 31,
                                                           ------------
                                                     2003                 2002
                                                     ----                 ----

Noninterest bearing ......................       $  9,082,231       $  7,285,699
Interest bearing:
   NOW accounts ..........................          3,142,012          2,461,139
   Money market accounts .................         47,548,787         38,036,656
   Savings ...............................            760,644            447,073
                                                 ------------       ------------

                                                   60,533,674         48,230,567
                                                 ------------       ------------

     Time, less than $100,000 ............         48,657,509         47,479,227
     Time, $100,000 and over .............         36,429,765         22,762,728
                                                 ------------       ------------

                                                   85,087,274         70,241,955
                                                 ------------       ------------

       Total deposits ....................       $145,620,948       $118,472,522
                                                 ============       ============

           Interest expense on time deposits greater than $100,000 was $518,986,
$550,583 and $1,239,313, in 2003, 2002 and 2001, respectively.


                                                                     (Continued)


                                       39
<PAGE>

NOTE 7 - DEPOSITS, Continued

     At December 31, 2003 the scheduled  maturities of  certificates  of deposit
are as follows:

                   2004                                        $ 71,900,740
                   2005                                           9,813,288
                   2006                                             754,175
                   2007                                           2,387,986
                   2008 and thereafter                              231,085

                                                                -----------
                                                                $85,087,274
                                                                ===========


NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

           The Bank had advances  outstanding from the FHLB totaling $11,600,000
and  $8,500,000 at December 31, 2003 and 2002,  respectively.  The advances bear
interest at fixed rates ranging from 1.15 percent to 4.38 percent. An advance of
$3,100,000  matures in 2004,  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 $4,052,849 and fair value of $4,055,629 and by qualifying residential 1
- 4 family  first  mortgages.  During  2003,  the  maximum  amount  of  advances
outstanding was $11,600,000 and the average amount  outstanding  during 2003 was
$9,415,000.

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,  2003).  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  $74,339 and $96,250 in interest  expense on the debentures in 2003 and
2002, respectively.

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 an office,  which it used as a branch  until July
2003, under a non-cancelable operating lease which expires in February 2006 with
monthly lease  payments of $3,000.  This office was closed in July 2003, but the
lease  obligations   continue  until  February  2006.  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.

                                                                     (Continued)

                                       40
<PAGE>

NOTE 10 - COMMITMENTS AND CONTINGENCIES, Continued

         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 year
   ended ee ended
    December 31,
    ------------

         2004                                    $ 57,600
         2005                                      57,600
         2006                                      29,250
         2007                                      23,400
         2008                                      23,400
      Thereafter                                  288,153
                                                 --------

                                                 $479,403
                                                 ========

           Company and Bank total capital ratios fell below the well capitalized
requirement  at  December  31,  2003.  Refer  to Note 19  concerning  regulatory
matters.  Refer to Note 14  concerning  financial  instruments  with off balance
sheet risk.

NOTE 11 - UNUSED LINES OF CREDIT

           At  December  31,  2003,  the Bank had an  unused  line of  credit to
purchase federal funds totaling  $3,500,000 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.  At December 31, 2003, the Bank had
unused  available  credit  of  approximately  $14,326,000.  The  line of  credit
agreement requires the Bank to pledge investment  securities or qualifying loans
as collateral. (See Note 8).

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>
                                                                                      2003                 2002             2001
                                                                                      ----                 ----             ----

Income taxes currently payable
<S>                                                                                <C>                 <C>                <C>
   Federal ..............................................................          $ 551,994           $ 223,460          $ 153,300
   State ................................................................             23,860              30,700             21,300
                                                                                   ---------           ---------          ---------

                                                                                     575,854             254,160            174,600
Deferred tax provision (benefit) ........................................           (193,385)            206,310            (66,520)
Adjustment to valuation allowance .......................................                  -                   -           (204,881)
Adjustment of effective income tax rates in computing
   deferred taxes .......................................................                  -                   -            (32,255)
                                                                                   ---------           ---------          ---------

       Provision (benefit) ..............................................          $ 382,469           $ 460,470          $(129,056)
                                                                                   =========           =========          =========
</TABLE>

                                                                     (Continued)

                                       41
<PAGE>

NOTE 12 - INCOME TAXES, Continued

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

<TABLE>
<CAPTION>
                                                                                                      Deferred tax asset (liability)
                                                                                                      ------------------------------
                                                                                                          2003               2002
                                                                                                          ----               ----

<S>                                                                                                   <C>                 <C>
Allowance for possible loan losses .........................................................          $ 516,114           $ 289,589
Nonaccrual loan interest ...................................................................              3,500               9,326
Unrealized net (gains) losses on investment securities available for sale ..................             31,663             (88,007)
Depreciation ...............................................................................           (184,927)           (145,534)
Amortization ...............................................................................              1,105               1,422
Cash basis versus accrual basis of accounting ..............................................             (7,296)            (14,592)
Other ......................................................................................             12,580               7,480
                                                                                                      ---------           ---------

       Net deferred tax asset ..............................................................          $ 372,739           $  59,684
                                                                                                      =========           =========
</TABLE>


           The net  deferred  tax  asset  is  included  in other  assets  in the
consolidated  balance sheets. There is no valuation allowance because management
believes it is more likely than not that the full amount of deferred  tax assets
will be realized.

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>
                                                                 2003                      2002                     2001
                                                                 ----                      ----                     ----
                                                        Amount           %         Amount        %         Amount          %
                                                        ------           -----     ------        -------   ------          --------

<S>                                                     <C>          <C>          <C>          <C>          <C>           <C>
Tax expense at statutory rate ......................    $ 351,100           34    $ 360,900           34    $  56,700            34
Increase (decrease) in taxes resulting from:
   State bank tax (net of federal benefit) .........       23,860            2       20,300            2       14,100             8
Adjustment to valuation allowance and
   effective income tax rate .......................          809            -       63,680            5     (204,881)         (122)
Other tax preference items .........................        6,700            1       15,590            2        5,025             3
                                                        ---------    ---------    ---------    ---------    ---------     ---------
       Income tax provision (benefit) ..............    $ 382,469           37    $ 460,470           43    $(129,056)          (77)
                                                        =========    =========    =========    =========    =========     =========
</TABLE>


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,
                                                          ------------
                                                    2003                2002
                                                    ----                ----

Balance, beginning of year .............        $ 1,883,882         $ 1,982,723
New loans ..............................            224,969             493,499
Less loan payments .....................           (300,871)           (592,340)
                                                -----------         -----------

Balance, end of year ...................        $ 1,807,980         $ 1,883,882
                                                ===========         ===========

           Deposits by  directors  and their  related  interests at December 31,
2003 and 2002 approximated $2,375,925 and $2,392,000, respectively.
                                                                     (Continued)

                                       42
<PAGE>

NOTE 13 - RELATED PARTY TRANSACTIONS, Continued

           A director,  shareholder  and  executive  officer of the Company is a
partner in a partnership from which the Company leases operating  facilities and
land.  The Company  also leases land from a relative of a director,  shareholder
and executive  officer of the Company (see Note 10). Lease  expenses  charged to
operations under these agreements  approximated $46,000 in 2003, $46,000 in 2002
and $44,000 in 2001.


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,  2003  and  2002,  unfunded
commitments to extend credit were  $24,285,415  and  $17,004,334,  respectively.
Variable  rate and  fixed  rate  unfunded  commitments  to  extend  credit  were
$17,720,045  and  $6,565,370,  respectively,  at  December  31,  2003.  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, 2003 and
2002, there were outstanding  letters of credit totaling  $730,105 and $667,870,
respectively.

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 2003, 2002, and 2001
amounted to $34,609, $30,481 and $28,995, 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
owned by the Bank. The Company recorded net expense related to these benefits of
approximately $28,596 and $18,302 in 2003 and 2002, respectively.


                                       43
<PAGE>

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
269,998 options (after adjustment for a 10 percent stock dividend issued January
22,  2004) 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>
     $ 3.90                      165,165            4.9 years            $3.90            165,165              $3.90
       4.28                       43,493            7.1                   4.28             26,096               4.28
       6.21                       37,441            8.2                   6.21             12,777               6.21
                                 -------                                                  -------
                                 246,099                                                  204,038
                                 =======                                                  =======
</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,
                                                                      --------------------------------
                                                            2003                        2002                      2001
                                                            ----                        ----                      ----
                                                                  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 ............      240,599          $4.20      208,658         $3.94      167,706        $3.90
Granted .....................................        5,500           6.06       31,941          6.21       43,493         4.28
Exercised ...................................            -                           -                     (2,541)        3.90
Forfeited or expired ........................            -                           -                          -            -
                                                   -------                     -------                    -------

Outstanding at end of year ..................      246,099           4.24      240,599          4.20      208,658         3.97
                                                   =======                     =======                    =======

Options exercisable at December 31, .........      204,038                     128,976          3.96       99,099         3.94
Shares available for grant ..................       23,899                      56,861                     89,101
</TABLE>

         Granted  shares and per share  exercise  prices  have been  restated to
reflect the 2003 and 2004 stock dividends.


                                       44
<PAGE>

NOTE 17 - COMMON STOCK AND NET INCOME PER COMMON SHARE

           Following  is a  reconciliation  of basic  net  income  per  share to
diluted net income per share for the years ended  December  31,  2003,  2002 and
2001.

<TABLE>
<CAPTION>
                                                                                     Income               Shares          Per-share
                                                                                   (numerator)        (denominator)         amount
                                                                                   -----------        -------------         ------
For the year ended December 31, 2003
      Basic net income per common share
<S>                                                                                <C>                  <C>                  <C>
         Income available to common stockholders .........................         $ 650,112            2,165,970            $   .30
         Effect of dilutive instruments:
             Stock options ...............................................                 -               87,178                  -
         Effect of convertible instruments:
             Interest savings/incremental shares
                assumed on conversion of subordinated
                Debentures ...............................................            46,834              621,670                  -
                                                                                   ---------            ---------            -------
      Diluted net income per common share
         Income available to common stockholders
             plus assumed exercises of stock options .....................         $ 696,946            2,874,818            $   .24
                                                                                   =========            =========            =======

For the year ended December 31, 2002
      Basic net income per common share
         Income available to common stockholders .........................         $ 600,882            2,165,970            $   .28
         Effect of dilutive instruments:
             Stock options ...............................................                 -               72,686                  -
         Effect of convertible instruments:
             Interest savings/incremental shares
                assumed on conversion of subordinated
                Debentures ...............................................            60,638              621,670                 -
                                                                                   ---------            ---------            -------
      Diluted net income per common share
         Income available to common stockholders
             plus assumed exercises of stock options .....................         $ 661,519            2,860,326            $   .23
                                                                                   =========            =========            =======

For the year ended December 31, 2001
      Basic net income per common share
         Income available to common stockholders .........................         $ 295,814            2,165,970            $   .14
         Effect of dilutive instruments:
             Stock options ...............................................                 -               47,975                  -
                                                                                   ---------            ---------            -------
      Diluted net income per common share
         Income available to common stockholders
             plus assumed exercises of stock options .....................         $ 295,814            2,213,945            $   .13
                                                                                   =========            =========            =======
</TABLE>

           The Bank issued a five percent  common stock  dividend on January 21,
2003 and a ten percent  stock  dividend on January 30,  2004.  Weighted  average
common shares outstanding have been adjusted to reflect the stock dividends.

           The subordinated debentures were anti-dilutive at December 31, 2001.

NOTE 18 - RESTRICTIONS ON DIVIDENDS

           The ability of the Company to pay cash  dividends is  dependent  upon
receiving cash in the form of dividends from the Bank. State banking regulations
require prior written approval from state banking  regulators for the payment of
cash dividends.


                                       45
<PAGE>

NOTE 19 - REGULATORY MATTERS

         The  Company  and the Bank are  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 Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
specific capital  guidelines must be met that involve  quantitative  measures of
the Company and Bank assets, liabilities, and certain off balance sheet items as
calculated under regulatory accounting practices.  The Company'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 Company and 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.  The  Company met the capital
adequacy reporting exemption in 2002, as consolidated assets were less than $150
million.  The  Company and Bank  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)
Company (consolidated):
As of December 31, 2003
<S>                                                           <C>            <C>       <C>            <C>      <C>            <C>
Total capital (to risk weighted assets) ...............       $14,974         9.9%     $12,066        8.0%     $15,087        10.0%

Tier 1 capital (to risk weighted assets) ..............         9,587         6.4        6,033        4.0        9,052         6.0

Tier 1 capital (to average assets) ....................         9,587         6.1        6,633        4.0        7,544         5.0

Bank:
As of December 31, 2003
Total capital (to risk  weighted assets) ..............       $14,812         9.8%     $12,074        8.0%     $15,093        10.0%

Tier 1  capital (to risk weighted assets) .............        12,925         8.6        6,037        4.0        9,056         6.0

Tier 1 capital (to average assets) ....................        12,925         7.8        6,631        4.0        8,289         5.0

As of December 31, 2002
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
</TABLE>


         The  Company's  and the Bank's total  capital to risk  weighted  assets
ratios were 9.9% and 9.8%,  respectively,  which were below the well capitalized
requirement  of 10%.  Banks  that are not  well-capitalized  are not  allowed to
accept or renew brokered deposits without prior approval from regulators.


                                       46
<PAGE>

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.

           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.

           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,
                                                                                             ------------
                                                                               2003                                 2002
                                                                               ----                                 ----
                                                                   Carrying             Fair             Carrying            Fair
                                                                    Amount             value              Amount             value
                                                                    ------             -----              ------             -----
Financial Assets:
<S>                                                             <C>                <C>                <C>               <C>
   Cash and due from banks ..................................   $  2,046,684       $  2,046,684       $  2,669,420      $  2,669,420
   Federal funds sold .......................................      1,562,000          1,562,000          5,197,000         5,197,000
   Investment securities available for sale .................     13,829,219         13,829,219         17,658,190        17,658,190
   Other investments, at cost ...............................        580,000            580,000            425,000           425,000
   Loans ....................................................    150,396,714        150,850,189        110,939,408       112,658,951
Financial Liabilities:
   Deposits .................................................    145,620,948        146,272,528        118,472,522       120,205,734
   Federal Home Loan Bank advances ..........................     11,600,000         11,663,196          8,500,000         8,755,000

   Subordinated debentures ..................................      3,500,000          3,500,000          3,500,000         3,500,000
</TABLE>
<TABLE>
<CAPTION>

Financial Instruments with Off-Balance                               Notional         Notional
    Sheet Risk:                                                       Amount           Amount
                                                                      ------           ------
<S>                                                                  <C>                <C>
Standby letters of credit ...................................        730,105            667,870
Commitments to extend credit ................................     24,285,415         17,004,334
</TABLE>

                                       47
<PAGE>

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION

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

                            CONDENSED BALANCE SHEETS

                                                             December 31,
                                                             ------------
                                                        2003              2002
                                                        ----              ----
ASSETS
     Cash ....................................      $    60,951      $   182,636
     Investment in bank subsidiary ...........       12,939,357       12,534,923
     Deferred tax asset ......................          158,661          117,973
                                                    -----------      -----------

                                                    $13,158,969      $12,835,532
                                                    ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ........................      $    17,644      $    24,260
     Subordinated debentures .................        3,500,000        3,500,000
     Shareholders' equity ....................        9,641,325        9,311,272
                                                    -----------      -----------

                                                    $13,158,969      $12,835,532
                                                    ===========      ===========



                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                 For the years ended
                                                                                                     December 31,
                                                                                                     ------------
                                                                                     2003                 2002              2001
                                                                                     ----                 ----              ----

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

EXPENSES
      Interest .........................................................             74,339              96,250             193,555
      Sundry ...........................................................             36,172              30,694              30,039
                                                                                  ---------           ---------           ---------

            Loss before equity in undistributed net
                income of bank subsidiary ..............................           (110,511)           (126,944)           (223,594)

EQUITY IN UNDISTRIBUTED NET INCOME
      OF BANK SUBSIDIARY ...............................................            719,864             681,883             448,476
                                                                                  ---------           ---------           ---------

            Income before income taxes .................................            609,353             554,939             224,882

      Income tax benefit (expense) .....................................             40,759              45,943             (70,932)
                                                                                  ---------           ---------           ---------

            Net income .................................................          $ 650,112           $ 600,882           $ 295,814
                                                                                  =========           =========           =========
</TABLE>









                                                                     (Continued)


                                       48
<PAGE>

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION, Continued

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                  For the years ended
                                                                                                       December 31,
                                                                                                       ------------
                                                                                       2003               2002               2001
                                                                                       ----               ----               ----

OPERATING ACTIVITIES
<S>                                                                               <C>                <C>                <C>
      Net income ..........................................................       $   650,112        $   600,882        $   295,814
      Adjustments to reconcile net income to net cash
         used in operating activities
         Deferred income taxes ............................................           (40,688)            24,989            (70,932)
         Accrued expenses and other .......................................             6,616            (83,721)            35,953
         Equity in undistributed net income of bank subsidiary ............          (719,864)          (681,883)          (448,476)
                                                                                  -----------        -----------        -----------

                Net cash used in operating activities .....................          (103,824)          (139,733)          (187,641)
                                                                                  -----------        -----------        -----------

INVESTING ACTIVITY
      Additional investment in bank subsidiary ............................           (17,861)        (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 ...........................          (121,685)        (1,139,733)         1,322,369

CASH, BEGINNING OF YEAR ...................................................           182,636          1,322,369                  -
                                                                                  -----------        -----------        -----------

CASH, END OF YEAR .........................................................       $    60,951        $   182,636        $ 1,322,369
                                                                                  ===========        ===========        ===========
</TABLE>

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

         Not Applicable.

Item 8A.  Controls and Procedures.

         Based on the evaluation required by 17 C.F.R. Section  240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17  C.F.R.  Sections  240.13a-15(e)  or  240.15d-15(e)),   the  Company's  chief
executive  officer and chief financial  officer concluded that the effectiveness
of such  controls and  procedures,  as of the end of the period  covered by this
annual report, was adequate.

         No disclosure is required under 17 C.F.R. Section 228.308.




                                       49
<PAGE>

                                    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" -- Directors" and "-- Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in registrant's definitive proxy statement filed
with the  Commission  for the 2004 Annual  Meeting of  Shareholders  (the "Proxy
Statement") is incorporated herein by reference.

         Audit Committee Financial Expert

         The Company's  board of directors has determined  that the Company does
not have an "audit committee  financial expert," as that term is defined by Item
401(e) of Regulation S-B promulgated by the Securities and Exchange  Commission,
serving on its audit committee.  The Company's audit committee is a committee of
directors who are elected by the  shareholders  and who are  independent  of the
Company and its  management.  After reviewing the experience and training of all
of the  Company's  independent  directors,  the board of directors has concluded
that  no  independent  director  meets  the  SEC's  very  demanding  definition.
Therefore, it would be necessary to find a qualified individual willing to serve
as both a  director  and  member of the  audit  committee  and have that  person
elected  by the  shareholders  in order to have an  "audit  committee  financial
expert" serving on the Company's audit committee.  The Company's audit committee
is,  however,  authorized to use  consultants  to provide  financial  accounting
expertise in any instance where members of the committee believe such assistance
would be useful. Accordingly, the Company does not believe that it needs to have
an "audit committee financial expert" on its audit committee.

         Code of Ethics

         The  Company  has  adopted a code of ethics  (as  defined  by 17 C.F.R.
228.406) that applies to its principal executive officer and principal financial
officer.  The Company will provide a copy of the code of ethics, free of charge,
to any person  upon  written  request  to J. B.  Garrett,  Corporate  Secretary,
GrandSouth  Bancorporation,  Inc., 381 Halton Road,  Greenville,  South Carolina
29606.

Item 10. Executive Compensation.

         The information set forth under the caption "Management  Compensation"
in the Proxy Statement 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 the Proxy Statement is incorporated
herein by reference.


                      Equity Compensation Plan Information

         The following  table sets forth  aggregated  information as of December
31, 2003 about all of the Company's  compensation  plans  (including  individual
compensation  arrangements)  under which  equity  securities  of the Company are
authorized for issuance:


                                       50
<PAGE>

<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                246,099                     $4.46                         23,899

Equity compensation
plans not approved
by security holders                   -                         -                              -
                                -------                     -----                         ------
Total                           246,099                     $4.46                         23,899
</TABLE>

The number of shares subject to outstanding options,  exercise prices and number
of shares remaining  available for future issuance of options have been restated
to reflect the stock dividend issued in 2004.

Item 12. Certain Relationships and Related Transactions.

         The information set forth under the caption "Certain  Relationships and
Related   Transactions"  in  the  Proxy  Statement  is  incorporated  herein  by
reference.


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)
31.1                      Rule 13a-14(a)/15d-14(a) Certifications
31.2                      Rule 13a-14(a)/15d-14(a) Certifications
32                        18 U.S.C. Section 1350 Certifications

-------------
(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.

     Form 8-K filed October 22, 2003 pursuant to Item 12 of that form.

Item 14.  Principal Accountant Fees and Services

         The  information  set  forth  under  the  caption  "Independent  Public
Accountants  -  Fees  Paid  to  Independent  Auditors"  and  "--Audit  Committee
Pre-Approval  of  Audit  and  Permissible   Non-Audit  Services  of  Independent
Auditors" in the Proxy Statement is incorporated herein by reference.



                                       51
<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 30, 2004             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 __, 2004
Blanton S. Phillips

s/Ronald K. Earnest                      President, Chief Operating Officer, Director       March 30, 2004
--------------------------------
Ronald K. Earnest

s/Harold E. Garrett                      Director                                           March 30, 2004
--------------------------------
Harold E. Garrett

s/Mason Y. Garrett                       Chairman, Director                                 March 30, 2004
--------------------------------
Mason Y. Garrett

s/Michael L. Gault                       Director                                           March 30, 2004
--------------------------------
Michael L. Gault

                                         Director                                           March __, 2004
--------------------------------
Baety O. Gross

--------------------------------         Director                                           March __, 2004
S. Hunter Howard, Jr.
</Table>



                                       52
<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)
31.1                      Rule 13a-14(a)/15d-14(a) Certifications
31.2                      Rule 13a-14(a)/15d-14(a) Certifications
32                        18 U.S.C. Section 1350 Certifications
-------------
(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.



                                       53