<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)

   [X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended June 30, 2002
                                                 -------------

   [_]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT of 1934
                        For the transition period from           to

                        Commission file number: 0-25465



                          CORNERSTONE BANCORP, INC./CT
       (Exact name of small business issuer as specified in its charter)

            CONNECTICUT                                  06-1524044
------------------------------------       ------------------------------------
 (State or other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)

                   550 Summer St., Stamford, Connecticut 06901
                   -------------------------------------------
                    (Address of principal executive offices)

                                 (203) 356-0111
                                 --------------
                          (Issuer's telephone number)

   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
    ---


The number of shares outstanding of the issuer's common stock as of July 31,
2002 was 1,204,394.

Transitional Small Business Disclosure Format (check one): Yes____   No  X
                                                                        ---

<PAGE>

                                TABLE OF CONTENTS

                         PART I - Financial Information

Item 1. Financial Statements (Unaudited)
----------------------------

<TABLE>
<CAPTION>
                                                                                                                        PAGE
                                                                                                                        ----
<S>                                                                                                                     <C>
         Consolidated Statements of Condition
         June 30, 2002 and December 31, 2001 ....................................................................           1

         Consolidated Statements of Income
         Three Months Ended June 30, 2002 and June 30, 2001 .....................................................           2

         Consolidated Statements of Income
         Six Months Ended June 30, 2002 and June 30, 2001 .......................................................           3

         Consolidated Statements of Changes in Stockholders' Equity
         Six Months Ended June 30, 2002 and June 30, 2001 .......................................................           4

         Consolidated Statements of Cash Flows
         Six Months Ended June 30, 2002 and June 30, 2001 .......................................................           5

         Notes to Consolidated Financial Statements .............................................................           6

Item 2.  Management's Discussion and Analysis
---------------------------------------------
         of Financial Condition and Results of Operations .......................................................       7- 17
         ------------------------------------------------

                                                PART II - Other Information

Item 1. Legal Proceedings .......................................................................................        None
-------------------------

Item 2. Changes in Securities and Use of Proceeds ...............................................................        None
-------------------------------------------------

Item 3. Defaults upon Senior Securities .........................................................................        None
---------------------------------------

Item 4. Submission of Matters to a Vote of Security Holders .....................................................          17
-----------------------------------------------------------

Item 5. Other Information .......................................................................................        None
-------------------------

Item 6. Exhibits and Reports on Form 8-K ........................................................................          18
----------------------------------------

Signatures ......................................................................................................          19
</TABLE>

<PAGE>

                         PART I - Financial Information

Item 1. Financial Statements

                    CORNERSTONE BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CONDITION
                 (In thousands, except share and per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                 June 30,   December 31,
Assets                                                                             2002         2001
                                                                                  -----        ----
<S>                                                                             <C>          <C>
Cash and cash equivalents:
  Cash and due from banks                                                       $  12,459    $   8,700
   Federal funds sold                                                              16,700       15,599
                                                                                ---------    ---------
            Total cash and cash equivalents                                        29,159       24,299
                                                                                ---------    ---------
Securities, including collateral of $5,977 at June 30, 2002
  and $8,101 at December 31, 2001 for borrowings under
  securities repurchase agreements:
  Available for sale, at fair value                                                 7,724        9,779
  Held to maturity, at amortized cost (fair value of $30,732
    at June 30, 2002 and $35,957 at December 31, 2001)                             29,946       35,349
                                                                                ---------    ---------
            Total securities                                                       37,670       45,128
                                                                                ---------    ---------

Loans, net of allowance for loan losses of $1,949
  at June 30, 2002 and $1,848 at December 31, 2001                                118,982      105,539
Accrued interest receivable                                                         1,072        1,075
Federal Home Loan Bank stock, at cost                                                 521          466
Premises and equipment, net                                                         2,904        2,915
Bank-owned life insurance                                                           5,003          979
Other assets                                                                        1,419        1,116
                                                                                ---------    ---------
              Total assets                                                      $ 196,730    $ 181,517
                                                                                =========    =========
Liabilities and Stockholders' Equity

Liabilities:
Deposits:
  Demand (non-interest bearing)                                                 $  49,757    $  33,673
  Money market demand and NOW                                                      31,747       35,493
  Regular, club and money market savings                                           33,074       29,824
  Time                                                                             56,253       55,483
                                                                                ---------    ---------
            Total deposits                                                        170,831      154,473

Borrowings under securities repurchase agreements                                   5,928        8,041
Accrued interest payable                                                              116          164
Other liabilities                                                                   1,201          898
                                                                                ---------    ---------
            Total liabilities                                                     178,076      163,576
                                                                                ---------    ---------

Stockholders' equity:
Common stock, par value $0.01 per share; authorized
   5,000,000 shares; issued 1,275,855 shares at June 30, 2002
   and 1,153,135 shares at December 31, 2001                                           13           12
Additional paid-in capital                                                         13,898       11,816
Retained earnings                                                                   5,560        6,848
Treasury stock, at cost (71,461 shares at June 30, 2002
   and 76,415 shares at December 31, 2001)                                           (749)        (880)
Restricted stock                                                                     (183)           -
Accumulated other comprehensive income, net of taxes                                  115          145
                                                                                ---------    ---------
    Total stockholders' equity                                                     18,654       17,941
                                                                                ---------    ---------

Total liabilities and stockholders' equity                                      $ 196,730    $ 181,517
                                                                                =========    =========
</TABLE>


See accompanying notes to unaudited consolidated financial statements.

                                      -1-

<PAGE>

                    CORNERSTONE BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
                 (In thousands, except share and per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                            June 30,
                                                                            --------
                                                                      2002            2001
                                                                      ----            ----
<S>                                                             <C>                <C>
Interest income:
  Loans                                                         $     2,244        $    2,379
  Securities                                                            496               297
  Federal funds sold                                                     49               375
                                                                -----------        ----------
Total interest income                                                 2,789             3,051
                                                                -----------        ----------
Interest expense:
  Deposits                                                              731               974
  Borrowngs under securities repurchase agreements                       17                31
                                                                -----------        ----------
            Total interest expense                                      748             1,005
                                                                -----------        ----------

Net interest income                                                   2,041             2,046
Provision for loan losses                                                64                39
                                                                -----------        ----------

Net interest income after provision for loan losses                   1,977             2,007
                                                                -----------        ----------

Non-interest income:
 Deposit service charges                                                123               123
 Gain on sales of loans                                                 136                 -
 Bank-owned life insurance                                               42                 -
 Other                                                                  223               108
                                                                -----------        ----------
            Total non-interest income                                   524               231
                                                                -----------        ----------

Non-interest expense:
   Salaries and employee benefits                                       967               812
   Occupancy                                                            194               133
   Furniture and equipment                                               96                96
   Data processing                                                      140               191
   Professional fees                                                     99                68
   Other                                                                285               300
                                                                -----------        ----------
            Total non-interest expense                                1,781             1,600
                                                                -----------        ----------

Income before income tax expense                                        720               638
Income tax expense                                                      288               245
                                                                -----------        ----------

Net income                                                      $       432        $      393
                                                                ===========        ==========

Earnings per common share (Note B):
   Basic                                                        $      0.36        $     0.33
   Diluted                                                             0.35              0.32

Weighted average common shares (Note B):
   Basic                                                          1,189,057         1,177,652
   Diluted                                                        1,228,268         1,218,140
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -2-

<PAGE>

                    CORNERSTONE BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                 (In thousands, except share and per share data)
                                   (unaudited)

                                                           Six Months Ended
                                                               June 30,
                                                               --------
                                                          2002          2001
                                                          ----          ----
Interest income:
  Loans                                                $    4,560    $    4,679
  Securities                                                1,050           709
  Federal funds sold                                           99           530
                                                       ----------    ----------
       Total interest income                                5,709         5,918
                                                       ----------    ----------

Interest expense:
  Deposits                                                  1,536         1,831
  Borrowings under securities repurchase agreements
   and Federal Home Loan Bank advances                         35            73
                                                       ----------    ----------
       Total interest expense                               1,571         1,904
                                                       ----------    ----------

Net interest income                                         4,138         4,014
Provision for loan losses                                     112           109
                                                       ----------    ----------

Net interest income after provision  for loan losses        4,026         3,905
                                                       ----------    ----------

Non-interest income:
  Deposit service charges                                     246           249
  Gain on sales of loans                                      211             -
  Bank-owned life insurance                                    42             -
  Other                                                       364           210
                                                       ----------    ----------
   Total non-interest income                                  863           459
                                                       ----------    ----------

Non-interest expense:
   Salaries and employee benefits                           1,866         1,554
   Occupancy                                                  378           285
   Furniture and equipment                                    186           195
   Data processing                                            278           326
   Professional fees                                          171           137
   Other                                                      520           495
                                                       ----------    ----------
       Total non-interest expense                           3,399         2,992
                                                       ----------    ----------

Income before income tax expense                            1,490         1,372
Income tax expense                                            596           535
                                                       ----------    ----------

Net income                                             $      894    $      837
                                                       ==========    ==========

Earnings per common share (Note B):
   Basic                                               $     0.75    $     0.71
   Diluted                                                   0.73          0.69

Weighted average common shares (Note B):
   Basic                                                1,187,774     1,176,114
   Diluted                                              1,219,999     1,214,301


See accompanying notes to consolidated financial statements.

                                      -3-

<PAGE>

                    CORNERSTONE BANCORP, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                      Additional                                        Other         Total
                                              Common   Paid-in    Retained    Treasury     Restricted   Comprehensive Stockholders[]
                                              Stock    Capital    Earnings    Stock        Stock        Income(Loss   Equity
                                              ------  ----------  --------    --------     ----------   ------------- --------------
<S>                                           <C>     <C>         <C>        <C>           <C>          <C>            <C>
BALANCE, JANUARY 1, 2001                      $   11  $ 11,657    $ 5,818    $   (880)     $     -      $     (22)    $  16,584

Net income                                                            837                                                   837
Change in net unrealized gain (loss)
  on available for sale securities,
    net of taxes                                                                                              109           109
                                                                                                                      ---------
        Total comprehensive income                                                                                          946

Cash dividends ($0.19 per share)                                     (228)                                                 (228)
Shares issued in connection with:
  Directors Compensation Plan                               10                                                               10
  Dividend Reinvestment Plan                                71                                                               71
                                              ------  --------    --------   ---------     ----------   -----------   ---------

BALANCE, JUNE 30, 2001                        $   11  $ 11,738    $ 6,427    $   (880)     $     -      $      87     $  17,383
                                              ======  ========    ========   =========     ==========   ===========   =========


BALANCE, JANUARY 1, 2002                      $   12  $ 11,816    $ 6,848    $   (880)     $     -      $     145     $  17,941

Net income                                                            894                                                   894
Change in net unrealized gain (loss)
  on available for sale securities,
    net of taxes                                                                                              (30)          (30)
                                                                                                                      ----------
        Total comprehensive income                                                                                          864

Cash dividends ($0.225 per share)                                    (249)                                                 (249)
Shares issued in connection with:
  Stock dividend                                   1     1,932     (1,933)                                                    -
  Restricted stock grants                                   52                    131         (183)                           -
  Stock option exercises                                    27                                                               27
  Directors Compensation Plan                               10                                                               10
  Dividend Reinvestment Plan                                61                                                               61
                                              ------  --------    --------   ---------     ----------   -----------   ----------

BALANCE, JUNE 30, 2002                        $   13  $ 13,898    $ 5,560    $   (749)     $  (183)     $     115     $  18,654
                                              ======  ========    ========   =========     ==========   ===========   ==========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      -4-

<PAGE>

                    CORNERSTONE BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                June 30,
                                                                                --------
                                                                            2002         2001
                                                                            ----         ----
<S>                                                                      <C>         <C>
Operating activities:
Net income                                                               $    894    $    837
Adjustments to reconcile net income
to net cash provided by operating activities:
   Depreciation and amortization                                              289         181
   Provision for loan losses                                                  112         109
   Decrease in accrued interest receivable                                      3         188
   Increase in other assets                                                  (303)       (241)
   Increase (decrease) in accrued interest payable                            (48)          7
   Decrease (increase) in other liabilities                                   303         (43)
   Gain on sales of loans                                                    (211)          -
   Income on bank-owned life insurance                                        (42)          -
   Other adjustments, net                                                      55           6
                                                                         --------    --------
   Net cash provided by operating activities                                1,052       1,044
                                                                         --------    --------

Investing activities:
   Proceeds from maturities and calls of securities available for sale      2,000      11,510
   Proceeds from maturities and calls of securities held to maturity        5,309       5,079
   Purchases of securities held to maturity                                     -      (8,610)
   Purchases of bank-owned life insurance                                  (3,982)          -
   Disbursements for loan originations less principal repayments          (15,876)     (4,200)
   Proceeds from sales of loans                                             2,498           -
   Purchases of Federal Home Loan Bank stock                                  (55)        (47)
   Purchases of premises and equipment                                       (175)       (261)
                                                                         --------    --------
        Net cash provided by (used in) investing activities               (10,281)      3,471
                                                                         --------    --------

Financing activities:
   Net increase in deposits                                                16,358      34,911
   Net decrease in borrowings under securities repurchase
     agreements and Federal Home Loan Bank advances                        (2,113)     (1,783)
    Dividends paid on common stock                                           (244)       (213)
    Proceeds from issuance of common stock                                     88          71
                                                                         --------    --------
        Net cash provided by financing activities                          14,089      32,986
                                                                         --------    --------

Net increase in cash and cash equivalents                                   4,860      37,501

Cash and cash equivalents at beginning of period                           24,299      11,670
                                                                         --------    --------

Cash and cash equivalents at end of period                               $ 29,159    $ 49,171
                                                                         ========    ========

Supplemental information:
      Interest payments                                                  $  1,619    $  1,897
      Income tax payments                                                     594         569
                                                                         ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -5-

<PAGE>

CORNERSTONE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(dollars in thousands)

NOTE A - BASIS OF PRESENTATION

         The accompanying unaudited interim consolidated financial statements
include the accounts of Cornerstone Bancorp, Inc., its subsidiary Cornerstone
Bank (the "Bank") and the Bank's subsidiary Cornerstone Business Credit, Inc.
("CBC"), collectively the "Company". The interim consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America for interim financial statements and
the instructions to Form 10-QSB, and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all adjustments
necessary, consisting only of normal recurring accruals, to present fairly the
financial position, results of operations, changes in stockholders' equity and
cash flows at the dates and for the periods presented. In preparing the interim
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates, as a result of
changing conditions and future events. An estimate that is particularly critical
and susceptible to significant near-term change is the allowance for loan
losses. The interim results of operations for the periods ended June 30, 2002
are not necessarily indicative of the results to be expected for the year ending
December 31, 2002 or for any other interim period.

     While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these interim
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes included in the Form 10-KSB for the
year ended December 31, 2001.

Prior period amounts are reclassified, whenever necessary, to conform to the
current period presentation. All per share data has been adjusted for the effect
of the stock dividend described in Note B.

NOTE B - EARNINGS PER SHARE

     Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders (net income less dividends on
preferred stock, if any) by the weighted average number of common shares
outstanding during the period. Shares of restricted stock are considered
outstanding common shares and included in the computation of basic EPS when they
become vested. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as stock options or
unvested restricted stock) were exercised or otherwise resulted in the issuance
of common stock. Diluted EPS is computed by dividing net income by the weighted
average number of common shares outstanding during the period, plus
common-equivalent shares computed using the treasury stock method. For the three
and six month periods ended June 30, 2002 and 2001, the number of shares for
diluted EPS exceeded the number of shares for basic EPS due to the dilutive
effect of outstanding stock options and unvested restricted stock. For purposes
of computing basic EPS, net income applicable to common stock equaled net income
for these periods.

     On March 20, 2002, the Board of Directors declared, at its regularly
scheduled meeting, a 10% common stock dividend. The stock dividend was
distributed on June 14, 2002 to stockholders of record as

                                      -6-

<PAGE>

of the close of business on May 31, 2002. An amount equal to the fair value of
these shares was charged to retained earnings, with a corresponding combined
increase in common stock and additional paid-in capital. As a result of the
stock dividend, earnings per share data presented herein for all periods has
been adjusted to reflect the increase in average shares outstanding.

NOTE C - SEGMENT INFORMATION

     Public companies are required to report certain financial information about
significant revenue-producing segments of the business for which sufficient
information is available and utilized by the chief operating decision maker.
Specific information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total assets.
As a community-oriented financial institution, substantially all of the Bank's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these banking operations, which constitute the Company's only
operating segment for financial reporting purposes.

NOTE D - RECENT ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections updates, clarifies and simplifies several existing
accounting pronouncements. SFAS No. 4 required all gains and losses from early
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. The Company has not
engaged in any debt extinguishments, and the other provisions of SFAS No. 145
are not pertinent to its operations.

     SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires that a liability be recognized for these costs only when
incurred, while existing practice calls for recognition of a liability when an
entity commits to an exit plan. This statement is effective for exit or disposal
activities initiated after December 31, 2002 and is not expected to have a
material impact on the Company's consolidated financial statements.

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

FORWARD-LOOKING STATEMENTS

     The statements contained in this report that are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Company regarding expectations for earnings,
credit quality and other financial and business matters. When used in this
report, the words "anticipate," "plan," "believe," "estimate," "expect" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements. All forward-looking statements involve
risks and uncertainties. Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements as a result of
certain factors, including but not limited to, competitive pressures on loan and
deposit product pricing; other actions of competitors; changes in economic
conditions; technological changes; the extent and timing of actions of the
Federal Reserve Board, including changes in monetary policies and interest
rates; customer deposit disintermediation; changes in customers'

                                      -7-

<PAGE>

acceptance of the Company's products and services; and the extent and timing of
legislative and regulatory actions and reforms.

     The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.

FINANCIAL CONDITION

General

     Total assets increased to $196,730 at June 30, 2002 from $181,517 at
December 31, 2001, an increase of $15,213 (or 8%). Increases in cash and cash
equivalents of $4,860, net loans of $13,443 and bank-owned life insurance of
$4,024 were funded by a decrease in total securities of $7,458 and increased
deposits of $16,358.

Loans

     The net loan portfolio increased to $118,982 at June 30, 2002 from $105,539
at December 31, 2001, an increase of $13,443. The 13% increase in the loan
portfolio in the first six months of 2002 reflected increases in all loan types.
Increased residential loans is primarily attributable to the origination of
three loans for more than $500 each in the first quarter of 2002 plus one new
multi-family residential loan for $2,500 in the second quarter of 2002.
Increases in non-residential loans reflect new loan growth and originations of
$1,200 in Small Business Administration ("SBA") loans, of which $713 is held for
sale at June 30, 2002. The increase in construction loans is primarily
attributable to a combination of new loan growth and advances funded on the
existing portfolio. Increases in commercial loans primarily represent new loan
growth during the first six months of 2002.

     Major classifications of loans at June 30, 2002 and December 31, 2001 were
as follows:

<TABLE>
<CAPTION>
                                                                                     Dollar          Percent
                                      June 30, 2002         December 31, 2001        Change          Change
                                      -------------         -----------------        ------          ------
<S>                                   <C>                   <C>                      <C>             <C>
Loans secured by real estate:
     Residential                           $  48,492           $   42,740            $ 5,752           13%
     Non-residential                          46,862               44,593              2,269            5
     Construction                              9,226                5,479              3,747           68
Commercial loans                              13,930               12,157              1,773           15
Consumer and other loans                       2,416                2,368                 48            2
                                           ---------           ----------            -------

Total loans                                  120,926              107,337             13,589           13
Allowance for loan losses                     (1,949)              (1,848)               101            5
Deferred loan costs, net                           5                   50                (45)         (90)
                                           ---------           ----------            -------          ---
Total loans, net                           $ 118,982           $  105,539            $13,443           13%
                                           =========           ==========            =======
</TABLE>

Non-performing Loans and the Allowance for Loan Losses

   It is the Bank's policy to manage its loan portfolio to facilitate early
recognition of problem loans. The Bank commences internal collection efforts
once a loan payment is more than 15 days past due. The Bank's data processing
system generates delinquency reports on all of the Bank's loans weekly, and
management reviews the loan portfolio to determine if past due loans should be
placed on non-accrual

                                      -8-

<PAGE>

status. Unless the customer is working with the Bank toward repayment, once a
loan payment is 90 days past due, the Bank generally initiates appropriate
collection or legal action.

     The following table sets forth information with respect to non-performing
loans at the dates indicated.

                                              June 30, 2002    December 31, 2001
                                              --------------   -----------------

Loans on non-accrual status:
  Loans secured by real estate                      $   447          $  202
                                                    --------         -------
Loans on accrual status:
  Loans secured by real estate                            -             737
  Commercial loans                                      146             133
  Consumer and other loans                               15              34
                                                    --------         -------
                                                        161             904
                                                    --------         -------

Total loans past due 90 days or more                    608           1,106

Loans current or past due less than 90 days
for which interest payments are being applied
to reduce principal balances:
       Loans secured by real estate                      12             308
                                                    --------         -------

Total non-performing loans                          $   620          $1,414
                                                    ========         =======

Ratio of total non-performing loans to
total loans outstanding                                0.52%           1.32%
                                                    ========         =======


     During the six months ended June 30, 2002, the Bank collected all principal
and other amounts due on four non-accrual loans to one borrower, resulting in
additional loan interest income of $175 (a recovery of interest previously
applied to reduce principal on the aforementioned loans) and an additional $8 in
late charge income. During the first six months of 2002, all of the $737 of
accruing loans secured by real estate past due greater than 90 days at December
31, 2001 were paid-off.

   The following table sets forth changes in the allowance for loan losses for
the periods indicated.

                                          Three Months Ended  Six Months Ended
                                               June 30,           June 30,
                                               --------           --------
                                            2002       2001     2002     2001
                                            ----       ----     ----     ----

Balance at beginning of period            $ 1,883    $  1,752 $  1,848  $  1,589
Provision for loan losses                      64          39      112       109
Charge-offs                                     -           -      (14)        -
Recoveries                                      2          95        3       188
                                          -------    -------- --------  --------
Balance at end of period                  $ 1,949    $  1,886 $  1,949  $  1,886
                                          =======    ======== ========  ========


     The ratios of the allowance for loan losses to total loans and to
non-performing loans were 1.61% and 314.4% respectively, at June 30, 2002,
compared to 1.72% and 130.7%, respectively, at December 31, 2001.

                                      -9-

<PAGE>

     Recoveries credited to the allowance for loan losses during the six months
ended June 30, 2001 included $90 with respect to a consumer loan that had been
charged off in 1990 and $81 on a loan that had been charged off in 1997.

Securities

     Total securities decreased to $37,670 at June 30, 2002 from $45,128 at
December 31, 2001, a decrease of $7,458 (or 17%). The decrease in the securities
portfolio was primarily due to cash flows from security maturities and
securities called prior to maturity in the available for sale and the held to
maturity portfolios, the proceeds of which were ultimately reinvested in the
loan portfolio. It is expected that near-term cash flows from the securities
portfolio and a portion of overnight federal funds will be used to fund future
loan originations.

     The following table sets forth the amortized cost and estimated fair value
of the securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                            June 30, 2002          December 31, 2001
                                            -------------          -----------------
                                                   Estimated                 Estimated
                                      Amortized      Fair       Amortized      Fair
                                        Cost         Value        Cost         Value
                                      ---------    ---------    ---------    ---------
<S>                                   <C>          <C>          <C>          <C>
Available for sale
------------------
U.S. Government Agency securities     $   7,532    $   7,724    $   9,541    $   9,779
                                      =========    =========    =========    =========

Held to maturity
----------------
U.S. Government Agency securities     $  29,871    $  30,653    $  35,274    $  35,882
Other                                        75           79           75           75
                                      ---------    ---------    ---------    ---------
                                      $  29,946    $  30,732    $  35,349    $  35,957
                                      =========    =========    =========    =========

Total debt securities                 $  37,478    $  38,456    $  44,890    $  45,736
                                      =========    =========    =========    =========
</TABLE>


Deposits

     Deposits are the primary source of funds for the Company. Deposits consist
of checking accounts, preferred savings accounts, regular savings deposits, NOW
accounts, money market accounts and certificates of deposit (time deposits).
Deposits are obtained from individuals, partnerships, small and medium size
businesses and professionals in the Company's market area. The Company does not
accept brokered deposits.

     The following table indicates the composition of deposits at the dates
indicated.

<TABLE>
<CAPTION>
                                                                                              Dollar     Percent
                                                    June 30, 2002      December 31, 2001      Change      Change
                                                    -------------      -----------------     --------     -------
<S>                                                    <C>                    <C>            <C>              <C>
Demand deposits (non-interest bearing)                 $   49,757             $ 33,673       $16,084          48%
Money market demand and NOW accounts                       31,747               35,493        (3,746)        (11)
Regular, club and money market savings                     33,074               29,824         3,250          11
Time deposits                                              56,253               55,483           770           1
                                                       ----------             --------       --------        ----

Total                                                  $  170,831             $154,473       $16,358          11%
                                                       ==========             ========       ========        ====
</TABLE>


     Increases in demand, regular, club, money market savings and time deposits
were partially offset by declines in money market demand and NOW accounts. The
increase in demand deposits was primarily

                                      -10-

<PAGE>

related to activity associated with one demand deposit account with a balance of
$8,959 at June 30, 2002 (which was closed out as a money market demand account
and reopened as a demand deposit in the first quarter of 2002) and an increase
in the balances funding cashiers check activity. The Bank expects the deposit
balances maintained in these accounts to be temporary in nature. The remaining
fluctuation in money market demand and NOW accounts was due to deposits
resulting from attorney-related trust activity. Increases in regular, club and
money market savings were due to general deposit activity. During the first
quarter of 2002, competitive rates offered by the Bank resulted in an influx of
approximately $5,100 in 91-180 day time deposits. This increase was partially
offset by withdrawal activity resulting from maturities in 12-17 month time
deposits during the first six months of 2002. Certificates of deposit in
denominations of $100 or more were $14,381 at June 30, 2002 compared to $12,122
at December 31, 2001, an increase of $2,259 (or 19%).

Liquidity and Capital Resources

     At June 30, 2002, total short-term investments, which are made up of
federal funds sold, available for sale securities and held to maturity
securities maturing in three months or less, totaled $24,424. The primary
liquidity of the Company is measured by the ratio of net cash, short-term
investments, and other marketable securities (non-U.S. agency securities) to
deposits and short-term liabilities. The primary liquidity ratio at June 30,
2002 was 15.35%. The Bank also calculates a secondary liquidity ratio which
contemplates the maturity of held to maturity securities beyond three months.
The Bank's secondary liquidity ratio at June 30, 2002 was 35.55%. The Company's
internal guideline is to maintain a primary liquidity ration of 10 to 15% and a
secondary liquidity ratio of 20% or more.

     Net cash provided by operating activities was $1,052 for the six months
ended June 30, 2002 as compared to $1,044 for the six months ended June 30,
2001. Compared to the first six months of 2001, cash used in investing
activities increased $13,752, primarily due to cash used to fund increased loan
disbursements, a decrease in cash provided by the proceeds from maturities and
calls of securities available for sale, and cash used for purchases of
bank-owned life insurance. These factors were partially offset by the effect of
securities purchased ($8,610 in 2001 but none in 2002). The decrease in net cash
provided by financing activities of $18,897 for the six months ended June 30,
2002, primarily resulted from a decrease in cash provided by deposits. Cash and
cash equivalents increased $4,860 for the six months ended June 30, 2002.

     At June 30, 2002, the Company had outstanding loan commitments under unused
lines of credit approximating $17,963 and outstanding letters of credit
approximating $1,660.

     At June 30, 2002 and December 31, 2001, the Company's consolidated
leverage capital ratio was 9.9% and 9.6%, respectively. At June 30, 2002 and
December 31, 2001, the Company's consolidated Tier 1 risk-based capital ratio
was 13.6% and 14.8%, respectively. The Company's consolidated total risk-based
capital ratio at June 30, 2002 and December 31, 2001 was 14.8% and 16.0%,
respectively. The Bank's regulatory capital ratios at these dates were
substantially the same as the consolidated ratios, and the Bank was classified
as a well-capitalized institution for regulatory purposes.

                                      -11-

<PAGE>

RESULTS OF OPERATIONS

General

     The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest income on earning assets,
such as loans and securities, and the interest expense paid on deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income includes banking service fees and charges, income on bank-owned life
insurance, and gains and losses on sales of securities available for sale and
loans held for sale. The Company's non-interest expense consists primarily of
salaries and employee benefits, occupancy and equipment expenses, data
processing expenses, and professional fees. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.

Critical Accounting Policies

     The Company's significant accounting policies are summarized in Note 1 to
the Consolidated Financial Statements, included in the 2001 Annual Report on
Form 10-KSB. These policies include the allowance for loan losses which
management deems to be an accounting policy that is critical to the Company's
financial results. This policy is critical due to the high degree of judgement
involved, the subjectivity of the assumptions utilized, and the potential for
changes in the necessary allowance as a result of changing conditions and future
events. While management uses the best available information to determine the
allowance for loan losses, future adjustments to the allowance may be necessary
based on a variety of factors, including changes in economic and real estate
market conditions, particularly in Southwestern Fairfield County, Connecticut.

Comparative Analysis of Operating Results for the Three Months Ended June 30,
2002 and June 30, 2001

     Net Income. Net income was $432 for the three months ended June 30, 2002
compared to $393 for the three months ended June 30, 2001, an increase of $39
(or 10%). Diluted earnings per common share were $0.35 for the three months
ended June 30, 2002 and $0.32 for the three months ended June 30, 2001 based on
weighted average shares outstanding of 1,228,268 and 1,218,140, respectively.
The annualized return on average common stockholders' equity (R.O.E) was 9.37%
and 9.18% for the three months ended June 30, 2002 and June 30, 2001,
respectively. The annualized return on average assets was 0.93% for the three
months ended June 30, 2002 and 0.92% for the three months ended June 30, 2001.

     Higher net income for the three months ended June 30, 2002 was principally
due to an increase in non- interest income, partially offset by increases in
non-interest expense and income tax expense.

     Net Interest Income. Net interest income is the difference between the
interest income the Company earns on its loans, securities, and other earning
assets, and the interest cost of deposits and other interest-bearing liabilities
necessary to fund these earning assets. It is the primary component of the
Company's earnings.

     Net interest income was $2,041 for the three months ended June 30, 2002,
comparable to the $2,046 reported for the three months ended June 30, 2001.
Lower interest rates contributed to declines in both interest income and
interest expense, which were partially offset by increases in earning assets and

                                      -12-

<PAGE>

interest-bearing liabilities.

     The average yield on interest-earning assets decreased 103 basis points for
the quarter ended June 30, 2002 compared to June 30, 2001, while the average
rate paid on interest-bearing liabilities decreased 107 basis points. During the
last three quarters of 2001 and the first quarter of 2002, the prime rate
decreased 325 basis points. This decrease directly impacted the yields on the
Company's variable rate loans tied to the prime rate and on federal funds sold,
and indirectly impacted the yields on other interest-earning assets which
declined as a result of the general decline in the level of market interest
rates. This general decline in market interest rates also contributed to the
decline in the average rate paid on interest-bearing liabilities. These changes
resulted in a 25 basis point decrease in the net interest margin for the quarter
ended June 30, 2002 compared to June 30, 2001.

     Interest Income. Average earning assets for the three months ended June 30,
2002 were $171,690 compared to $159,229 for the three months ended June 30,
2001, an increase of $12,461 (or 8%). Total interest income, which is a function
of the volume of interest-earning assets and their related rates, was $2,789 for
the three months ended June 30, 2002 compared to $3,051 for the three months
ended June 30, 2001, representing a decrease of $262 (or 9%).

     Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended June 30, 2002 were $116,865 compared
to $104,693 during the three months ended June 30, 2001, an increase of $12,172
(or 12%). Interest income on loans was $2,244 for the three months ended June
30, 2002 compared to $2,379 for the three months ended June 30, 2001, a decrease
of $135 (or 6%). The decrease in loan income primarily reflects the general
decline in interest rates occurring during the last three quarters of 2001 and
the first quarter of 2002 resulting from a decrease of 325 basis points in the
prime rate. This decrease in loan income offset increased income resulting from
the growth in loans during the period.

     Average investments in securities and federal funds sold were $51,958 for
the three months ended June 30, 2002 compared to $54,536 for the three months
ended June 30, 2001, a decrease of $2,578 (or 5%). Related income decreased to
$545 for the three months ended June 30, 2002 from $672 for the three months
ended June 30, 2001, a decrease of $127 (or 19%). Average investments in
securities, not including federal funds sold, increased by $19,923 (or 98%)
during the three months ended June 30, 2002. Average federal funds sold
decreased by $22,501 (or 66%). The decrease in income from securities and
federal funds was due to the general decline in market interest rates during the
last three quarters of 2001 and the first quarter of 2002. This decline in the
yield on the Company's investment securities and federal funds sold, as well as
the decline in the average volume of federal funds, was partially offset by the
increased volume of securities as federal funds sold were redeployed into
investment securities.

     Interest Expense. Interest expense was $748 for the three months ended June
30, 2002 compared to $1,005 for the three months ended June 30, 2001, a 26%
decrease. Interest expense is a function of the volume of interest-bearing
liabilities and their related rates. Average interest-bearing liabilities during
the three months ended June 30, 2002 were $124,977 compared to $116,084 during
the three months ended June 30, 2001, an increase of $8,893 (or 8%). During the
last three quarters of 2001 and the first quarter of 2002, the prime rate
decreased 325 basis points. The decrease in prime resulted in a decline in the
average rate paid on interest-bearing liabilities of 107 basis points for the
three months ended June 30, 2002 compared to June 30, 2001. This decrease was
partially offset by additional interest expense due to the increase in the
volume of deposits.

                                      -13-

<PAGE>

   Provision for Loan Losses. The periodic provision for loan losses represents
the amount necessary to adjust the allowance for loan losses to management's
estimate of probable credit losses inherent in the existing loan portfolio at
the reporting date. Management's determination of the allowance for loan losses
is based on the results of continuing reviews of individual loans and borrower
relationships, particularly in the commercial and commercial real estate loan
portfolios. A review of the quality of the loan portfolio is conducted
internally by management on a quarterly basis, using a consistently-applied
methodology, and the results are presented to the Board of Directors for
approval. The evaluation covers individual borrowers whose aggregate loans are
greater than $100, as well as all adversely-classified loans. Management also
considers factors such as the borrower's financial condition, historical and
expected ability to make loan payments, and underlying collateral values. The
determination of the allowance for loan losses also considers the level of past
due loans, the Bank's historical loan loss experience, changes in loan portfolio
mix, geographic and borrower concentrations, and current economic conditions.
The allowance for loan losses is also reduced by charge-offs and increased by
recoveries. The provision for loan losses was $64 for the three months ended
June 30, 2002 and $39 for the three months ended June 30, 2001. Loan recoveries
were $2 in the quarter ended June 30, 2002 compared to $95 in the second quarter
last year (no charge-offs in either period).

   At June 30, 2002, the Company had $620 of non-performing loans, including
$447 of non-accrual loans and $161 of accruing loans greater than 90 days past
due. Loans less than 90 days past due for which interest payments are being
applied to reduce principal balances were $12 at June 30, 2002. At December 31,
2001, the Company had $1,414 of non-performing loans, including $202 of
non-accrual loans and $904 of accruing loans greater than 90 days past due.
Loans less than 90 days past due for which interest payments are being applied
to reduce principal balances were $308 at December 31, 2001.

   Non-interest Income. Non-interest income was $524 for the three months ended
June 30, 2002 compared to $231 for the three months ended June 30, 2001, an
increase of $293 (or 127%). The increase in other non-interest income is
primarily attributed to the increase in loan service charges of $83. During the
first six months of 2002, approximately $4,000 in bank-owned life insurance was
purchased.

   Non-interest Expense. Total non-interest expense was $1,781 for the three
months ended June 30, 2002 and $1,600 for the three months ended June 30, 2001,
an increase of $181 (or 11%).

   The following table summarizes the dollar amounts for each category of
non-interest expense, and the dollar and percent changes:

<TABLE>
<CAPTION>
                                          Three Months Ended              Increase (Decrease)
                                               June 30,                      2002 vs 2001
                                               --------                      ------------
Category                              2002                  2001        $ Change       % Change
                                      ----                  ----        --------       --------
<S>                                  <C>                  <C>           <C>            <C>
Salaries and employee benefits        $   967              $  812        $ 155            19%
Occupancy                                 194                 133           61            46
Furniture and equipment                    96                  96            -             -
Data processing                           140                 191          (51)          (27)
Other categories                          384                 368           16             4
                                      -------              ------        -----
Total non-interest expense            $ 1,781              $1,600        $ 181            11%
                                      =======              ======        =====
</TABLE>

   The increase in salaries and employee benefits includes the addition of four
employees and associated benefits since the second quarter of last year, and
current-year expense of $48 for the recently-adopted salary continuation plan.
The increase in occupancy expense primarily relates to increased rent resulting
from the opening of the Bank's business development office on East Avenue in
Norwalk in June 2001 and the Bank's Westport branch in November 2001. The lower
data processing expense primarily reflects

                                      -14-

<PAGE>

costs incurred during the second quarter of 2001 to complete the conversion of
the Bank's core data processing system.

   The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $31 (or 1%) in the second quarter of 2002 compared to the
same period in 2001:

                                                   Three Months Ended
                                                        June 30,
                                                        --------
Category                                       2002                 2001
                                               ----                 ----

Salaries and employee benefits                 29.20%               24.74%
Occupancy                                       5.86                 4.05
Furniture and equipment                         2.90                 2.93
Data processing                                 4.23                 5.82
Other categories                               11.60                11.21
                                              ------               ------
Total non-interest expense                     53.79%               48.75%
                                              ======               ======

   Income Taxes. The provision for income taxes increased to $288 for the three
months ended June 30, 2002 from $245 for the three months ended June 30, 2001,
an increase of $43 (or 18%). The increase in income taxes was primarily due to
the 13% increase in pre-tax income.

Comparative Analysis of Operating Results for the Six Months Ended June 30, 2002
and June 30, 2001

   Net Income. Net income was $894 for the six months ended June 30, 2002
compared to $837 for the six months ended June 30, 2001, an increase of $57 (or
7%). Diluted earnings per common share were $0.73 for the six months ended June
30, 2002 and $0.69 for the six months ended June 30, 2001 based on weighted
average shares of 1,219,999 and 1,214,301, respectively. The annualized return
on average common stockholders' equity (R.O.E) was 9.80% and 9.82% for the six
months ended June 30, 2002 and June 30, 2001, respectively. The annualized
return on average assets was 0.98% for the six months ended June 30, 2002 and
1.04% for the six months ended June 30, 2001.

   Higher net income for the six months ended June 30, 2002 was principally due
to increased net interest income and non-interest income, partially offset by
increases in non-interest expense and income tax expense.

   Net Interest Income. Net interest income was $4,138 for the six months ended
June 30, 2002 compared to $4,014 for the six months ended June 30, 2001, an
increase of $124 (or 3%). Decreases in the prime rate during the last three
quarters of 2001 and the first quarter of 2002 directly impacted yields on the
Company's variable rate loans tied to the prime rate, investment securities and
federal funds leading to a decline in the yield on these earning assets. The
yield on total earning assets decreased 109 basis points for the six months
ended June 30, 2002 compared to June 30, 2001. The decline in market interest
rates also affected the interest rate paid on interest bearing-liabilities
during the six-month period ended June 30, 2002 compared to June 30, 2001, which
decreased 100 basis points. These changes resulted in a 39 basis point decrease
in the net interest margin for the six months ended June 30, 2002 compared to
June 30, 2001.

   Interest Income. Average earning assets for the six months ended June 30,
2002 were $169,004 compared to $149,607 for the six months ended June 30, 2001,
an increase of $19,397 (or 13%). Total

                                      -15-

<PAGE>

interest income, which is a function of the volume of interest-earning assets
and their related rates, was $5,709 for the six months ended June 30, 2002
compared to $5,918 for the six months ended June 30, 2001, representing a
decrease of $209 (or 4%).

   Loans represent the largest component of interest-earning assets. Average
loans outstanding in the six months ended June 30, 2002 were $113,341 compared
to $102,370 during the six months ended June 30, 2001, an increase of $10,971
(or 11%). Interest income on loans was $4,560 for the six months ended June 30,
2002 compared to $4,679 for the six months ended June 30, 2001, a decrease of
$119 (or 3%). The 325 basis point decline in prime rate during the last three
quarters of 2001 and the first quarter of 2002 contributed to the 111 basis
point decline in the yield on loans, but was partially offset by an increase in
average loans outstanding during the six months ended June 30, 2002 compared to
June 30, 2001.

   Average investments in securities and federal funds sold were $54,156 for the
six months ended June 30, 2002 compared to $47,237 for the six months ended June
30, 2001, an increase of $6,919 (or 15%). Related income decreased to $1,149 for
the six months ended June 30, 2002 from $1,239 for the six months ended June 30,
2001, a decrease of $90 (or 7%). Average investments in securities, not
including federal funds sold, increased by $17,675 (or 72%) during the six
months ended June 30, 2002, while average federal funds sold decreased by
$10,756 (or 47%). The decrease in income from securities and federal funds was
primarily due to the general decline in market interest rates during the last
three quarters of 2001 and the first quarter of 2002. While redeployment of
federal funds into securities resulted in an increase in income from the
securities portfolio for the period ended June 30, 2002 compared to June 30,
2001, this redeployment only partially offset the effect of the general decline
in market interest rates and the reduction in the volume of federal funds.

   Interest Expense. Interest expense was $1,571 for the six months ended June
30, 2002 compared to $1,904 for the six months ended June 30, 2001, a decrease
of $333 (or 17%). Interest expense is a function of the volume of
interest-bearing liabilities and their related rates. Average interest-bearing
liabilities during the six months ended June 30, 2002 were $125,528 compared to
$108,945 during the six months ended June 30, 2001, an increase of $16,583 (or
15%). Decreased interest expense resulted from a general decline in market
interest rates overshadowed the additional expense resulting from the increased
time deposits.

   Provision for Loan Losses. The periodic provision for loan losses represents
the amount necessary to adjust the allowance for loan losses to management's
estimate of probable credit losses inherent in the existing loan portfolio at
the reporting date. The allowance for loan losses is also reduced by charge-offs
and increased by recoveries. The provision for loan losses was $112 for the six
months ended June 30, 2002 and $109 for the six months ended June 30, 2001. Net
loan charge-offs were $11 in the six months ended June 30, 2002 and recoveries
were $188 in the first half of last year.

   Non-interest Income. Non-interest income was $863 for the six months ended
June 30, 2002 compared to $459 for the six months ended June 30, 2001, an
increase of $404 (or 88%). The increase in other non-interest income is
primarily attributed to the increase in loan service charges of $96. During the
first six months of 2002, approximately $4,000 in bank-owned life insurance was
purchased.

   Non-interest Expense. Total non-interest expense was $3,399 for the six
months ended June 30, 2002 and $2,992 for the six months ended June 30, 2001, an
increase of $407 (or 14%).

                                      -16-

<PAGE>

     The following table summarizes the dollar amounts for each category of
non-interest expense, and the dollar and percent changes:


                                      Six Months Ended     Increase (Decrease)
                                          June 30,            2002 vs 2001
                                          --------            ------------
Category                              2002        2001     $Change  %Change
                                      ----        ----     -------  -------

Salaries and employee benefits      $ 1,866     $ 1,554    $   312      20%
Occupancy                               378         285         93      33
Furniture and equipment                 186         195         (9)     (5)
Data processing                         278         326        (48)    (15)
Other categories                        691         632         59       9
                                    -------     -------    -------
Total non-interest expense          $ 3,399     $ 2,992    $   407      14%
                                    =======     =======    =======

     The increase in salaries and employee benefits includes the addition of
four employees and associated benefits since the first half of last year, and
salary continuation plan expense of $48. The increase in occupancy expense
primarily relates to increased rent resulting from the opening of the Bank's
business development office on East Avenue in Norwalk in June 2001 and the
Bank's Westport branch in November 2001. The lower data processing expense
primarily reflects costs incurred during the first half of 2001 to complete the
conversion of the Bank's core data processing system.

     The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $407 (or 14%) in the first six months of 2002 compared to the
same period in 2001:

                                            Six Months Ended
                                                June 30,
                                                --------
Category                                    2002         2001
                                            ----         ----

Salaries and employee benefits             28.39%       24.37%
Occupancy                                   5.75         4.47
Furniture and equipment                     2.83         3.06
Data processing                             4.23         5.11
Other categories                           10.52         9.91
                                           -----        -----
Total non-interest expense                 51.72%       46.92%
                                           =====        =====


     Income Taxes. The provision for income taxes increased to $596 for the six
months ended June 30, 2002 from $535 for the six months ended June 30, 2001, an
increase of $61 (or 11%). The increase in income taxes was primarily due to the
9% increase in pre-tax income.

PART II - Other Information

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

     The Annual Meeting of Shareholders of the Bancorp was held on May 15, 2002.
At the annual meeting, the shareholders elected Joseph S. Field, Merrill J.
Forgotson, J. James Gordon, Courtney A. Nelthropp and Donald Sappern to the
Board of Directors of the Bancorp. There were 748,987 votes for and 62,777 votes
withheld for Mr. Field, 748,987 votes for and 62,777 votes withheld for Mr.
Forgotson, 748,987 votes for and 62,777 votes withheld for Mr. Gordon, 748,987
votes for and 62,777 votes withheld for Mr. Nelthropp and 748,987 votes for and
62,777 votes withheld for Mr. Sappern. All five were elected for terms which
expire at the 2005 Annual Meeting of Shareholders. In addition Stanley A.

                                      -17-

<PAGE>

Levine, Ronald C. Miller, Martin Prince, Patrick Tisano and Dr. Joseph D.
Waxberg are currently serving terms which expire at the 2003 Annual Meeting of
Shareholders and James P. Jakubek, Joseph A. Maida, Melvin L. Maisel, Norman H.
Reader and Paul H. Reader are currently serving terms on the Board of Directors
which expire at the 2004 Annual Meeting of Shareholders.

     The shareholders also ratified the appointment by the Board of Directors of
KPMG LLP as the Bancorp's independent auditors for the fiscal year ending
December 31, 2002. There were 809,383 votes for, 1,172 votes against and 1,209
abstentions with respect to such ratification.

Item 6. Exhibits and Reports on Form 8-K

 (a) Exhibits: Exhibit 99.1 Certification - Pursuant to 18 U.S.C. Section 1350
     as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2002.

                                      -18-

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized

                            CORNERSTONE BANCORP, INC.
                                  (Registrant)

DATE: August 14, 2002                 /s/ Merrill J. Forgotson
     ------------------               ------------------------
                                     Merrill J. Forgotson
                                     President and Chief Executive Officer

DATE: August 14, 2002                 /s/ Ernest J. Verrico
      -----------------               ---------------------
                                     Ernest J. Verrico
                                     Vice President and Chief Financial Officer

                                       19