# U.S.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-QSB

(Mark One)

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------

| | For the Quarterly Period Ended June 30, 2007
| | --------------------------------------------

| | 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
000-51896

COMMUNITYSOUTH FINANCIAL CORPORATION(Exact name of small business issuer as specified in its charter)

|South Carolina               |  | 20-0934786         
|---------------------------- |  | -------------------
|(State or other jurisdiction |  | (I.R.S. Employer   
|of incorporation)            |  | Identification No.)

6602 Calhoun Memorial HighwayEasley, South Carolina 29640
(Address of principal executive offices, including zip code)

(864) 306-2540(Issuers telephone number, including area code)

______________________________

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       No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
   Yes         No

State
the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date: 4,698,697 shares of common stock, par value $.01 per
share, outstanding as of July 28, 2007.

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

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# CommunitySouth
Financial Corporation

# Part I  Financial
Information

# Item 1. Financial
Statements.

# CONSOLIDATED BALANCE
SHEETS

|                                                             | June 30, 2007 | December 31, 2006
|------------------------------------------------------------ | ------------- | -----------------
|
|Assets                                                       |               |                  
|Cash and cash equivalents                                    |               |                  
|Cash and due from bank                                       |               |                  
|Federal funds sold                                           |               |                  
|                                                             |               |                  
|Total cash and cash equivalents                              |               |                  
|Other investments, at cost                                   |               |                  
|Loans, net                                                   |               |                  
|Accrued interest receivable                                  |               |                  
|Property and equipment, net                                  |               |                  
|Bank owned life insurance                                    |               |                  
|Other assets                                                 |               |                  
|                                                             |               |                  
|Total assets                                                 |               |                  
|                                                             |               |                  
|Liabilities and Shareholders' Equity                         |               |                  
|Liabilities                                                  |               |                  
|Deposits                                                     |               |                  
|Noninterest bearing                                          |               |                  
|Interest bearing                                             |               |                  
|                                                             |               |                  
|Total deposits                                               |               |                  
|Accrued expense                                              |               |                  
|Accrued interest payable                                     |               |                  
|Other liabilities                                            |               |                  
|                                                             |               |                  
|Total liabilities                                            |               |                  
|                                                             |               |                  
|Shareholders' Equity                                         |               |                  
|Preferred stock, par value $.01 per share                    |               |                  
|10,000,000 shares authorized, no shares issued               |               |                  
|Common stock, par value $.01 per share                       |               |                  
|10,000,000 shares authorized, 4,698,697 and 4,697,697 issued |               |                  
|and outstanding at June 30, 2007 and                         |               |                  
|December 31, 2006, respectively                              |               |                  
|Additional paid-in capital                                   |               |                  
|Retained earnings                                            |               |                  
|                                                             |               |                  
|Total shareholders' equity                                   |               |                  
|                                                             |               |                  
|Total liabilities and shareholders' equity                   |               |                  
|                                                             |               |                  

# See notes to
consolidated financial statements.

2

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# CommunitySouth
Financial Corporation

# CONSOLIDATED STATEMENTS
OF INCOME (UNAUDITED)

|                                                    | Three months ended | Three months ended
|--------------------------------------------------- | ------------------ | ------------------
|
|Interest income                                     |                    |                   
|Interest and dividends on investments               |                    |                   
|Interest and fees on loans                          |                    |                   
|                                                    |                    |                   
|Total interest income                               |                    |                   
|Interest expense - deposits                         |                    |                   
|                                                    |                    |                   
|Net interest income                                 |                    |                   
|Provision for loan losses                           |                    |                   
|                                                    |                    |                   
|Net interest income after provision for loan losses |                    |                   
|                                                    |                    |                   
|Noninterest income                                  |                    |                   
|Mortgage origination fees                           |                    |                   
|Other                                               |                    |                   
|                                                    |                    |                   
|                                                    |                    |                   
|Total noninterest income                            |                    |                   
|                                                    |                    |                   
|Noninterest expense                                 |                    |                   
|Salaries and benefits                               |                    |                   
|Professional fees                                   |                    |                   
|Advertising                                         |                    |                   
|Supplies                                            |                    |                   
|Data processing                                     |                    |                   
|Occupancy                                           |                    |                   
|Depreciation                                        |                    |                   
|Equipment maintenance and rental                    |                    |                   
|Telephone                                           |                    |                   
|Other                                               |                    |                   
|                                                    |                    |                   
|Total noninterest expense                           |                    |                   
|                                                    |                    |                   
|Income before income taxes                          |                    |                   
|Income tax expense (benefit)                        |                    |                   
|                                                    |                    |                   
|Net income                                          |                    |                   
|                                                    |                    |                   
|Earnings per share (1)                              |                    |                   
|Basic                                               |                    |                   
|Diluted                                             |                    |                   
|                                                    |                    |                   
|Weighted average shares outstanding (1)             |                    |                   
|Basic                                               |                    |                   
|Diluted                                             |                    |                   

(1)  Adjusted for 5-for-4 stock splits effective January 16, 2006 and January 16, 2007.

# See notes to consolidated financial
statements.

3

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# CommunitySouth
Financial Corporation

# CONSOLIDATED STATEMENTS
OF INCOME (UNAUDITED)

|                                                    | Six months ended | Six months ended
|--------------------------------------------------- | ---------------- | ----------------
|
|Interest income                                     |                  |                 
|Interest and dividends on investments               |                  |                 
|Interest and fees on loans                          |                  |                 
|                                                    |                  |                 
|Total interest income                               |                  |                 
|Interest expense - deposits                         |                  |                 
|                                                    |                  |                 
|Net interest income                                 |                  |                 
|Provision for loan losses                           |                  |                 
|                                                    |                  |                 
|Net interest income after provision for loan losses |                  |                 
|                                                    |                  |                 
|Noninterest income                                  |                  |                 
|Mortgage origination fees                           |                  |                 
|Other                                               |                  |                 
|                                                    |                  |                 
|Total noninterest income                            |                  |                 
|                                                    |                  |                 
|Noninterest expense                                 |                  |                 
|Salaries and benefits                               |                  |                 
|Professional fees                                   |                  |                 
|Advertising                                         |                  |                 
|Supplies                                            |                  |                 
|Data processing                                     |                  |                 
|Occupancy                                           |                  |                 
|Depreciation                                        |                  |                 
|Equipment maintenance and rental                    |                  |                 
|Telephone                                           |                  |                 
|Other                                               |                  |                 
|                                                    |                  |                 
|Total noninterest expense                           |                  |                 
|                                                    |                  |                 
|Income before income taxes                          |                  |                 
|Income tax expense                                  |                  |                 
|                                                    |                  |                 
|Net income                                          |                  |                 
|                                                    |                  |                 
|Earnings per share (1)                              |                  |                 
|Basic                                               |                  |                 
|Diluted                                             |                  |                 
|                                                    |                  |                 
|Weighted average shares outstanding (1)             |                  |                 
|Basic                                               |                  |                 
|Diluted                                             |                  |                 

(1)  Adjusted for 5-for-4 stock splits
effective January 16, 2006 and January 16, 2007.

# See notes to consolidated financial
statements.

4

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# CommunitySouth
Financial CorporationCONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the six month
periods ended June 30, 2007 and June 30, 2006(UNAUDITED)

|                                |  |  |  |           | Total
|------------------------------- |  |  |  | --------- | -----
|
|
|Balance at December 31, 2006    |  |  |  | 4,697,697 |      
|Net income                      |  |  |  | -         |      
|Stock option compensation       |  |  |  | -         |      
|Cash paid for fractional shares |  |  |  | -         |      
|Stock options exercised         |  |  |  | 1,000     |      
|                                |  |  |  |           |      
|Balance at June 30, 2007        |  |  |  | 4,698,697 |      
|                                |  |  |  |           |      

|                                |  |  |  |           | Total
|------------------------------- |  |  |  | --------- | -----
|
|
|Balance at December 31, 2005    |  |  |  | 4,681,068 |      
|Net income                      |  |  |  | -         |      
|Stock option compensation       |  |  |  | -         |      
|Cash paid for fractional shares |  |  |  | -         |      
|                                |  |  |  |           |      
|Balance at June 30, 2006        |  |  |  | 4,681,068 |      
|                                |  |  |  |           |      

(1)
          Adjusted for 5-for-4 stock splits effective January 16, 2006 and January 16,
          2007.

# See notes to
consolidated financial statements.

5

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# CommunitySouth Financial
CorporationCONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)

|                                                            | Six Months ended | Six Months ended
|----------------------------------------------------------- | ---------------- | ----------------
|
|Operating activities                                        |                  |                 
|Net income                                                  |                  |                 
|Adjustments to reconcile net income to net cash provided by |                  |                 
|operating activities:                                       |                  |                 
|Provision for loan losses                                   |                  |                 
|Depreciation and amortization                               |                  |                 
|Loss on equipment disposal                                  |                  |                 
|Stock option compensation                                   |                  |                 
|Increase in accrued interest receivable                     |                  |                 
|Increase (decrease) in accrued interest payable             |                  |                 
|Increase (decrease) in accrued expenses                     |                  |                 
|Decrease (increase) in other assets                         |                  |                 
|Decrease in other liabilities                               |                  |                 
|                                                            |                  |                 
|Net cash provided by operating activities                   |                  |                 
|                                                            |                  |                 
|Investing activities                                        |                  |                 
|Net increase in loans outstanding                           |                  |                 
|Increase in bank owned life insurance                       |                  |                 
|Purchase of investments                                     |                  |                 
|Purchase of property and equipment                          |                  |                 
|                                                            |                  |                 
|Net cash used in investing activities                       |                  |                 
|                                                            |                  |                 
|Financing activities                                        |                  |                 
|Net increase in deposit accounts                            |                  |                 
|Cash paid for fractional shares                             |                  |                 
|Stock options exercised                                     |                  |                 
|                                                            |                  |                 
|Net cash provided by financing activities                   |                  |                 
|                                                            |                  |                 
|Net increase in cash and cash equivalents                   |                  |                 
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD              |                  |                 
|                                                            |                  |                 
|CASH AND CASH EQUIVALENTS, END OF PERIOD                    |                  |                 
|                                                            |                  |                 

# See notes to
consolidated financial statements.

6

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# Notes to Unaudited
Consolidated Financial Statements

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

Business Activity and Organization
CommunitySouth Financial Corporation (the Company) is a South
Carolina corporation organized for the purpose of owning and controlling all of the
capital stock of CommunitySouth Bank and Trust (the Bank). The Bank is a state
chartered bank organized under the laws of South Carolina. From inception on March 20,
2004 through January 18, 2005, the Company engaged in organizational and pre-opening
activities necessary to obtain regulatory approvals and to prepare its subsidiary, the
Bank, to commence business as a financial institution. The Company received approval from
the Federal Deposit Insurance Corporation (FDIC), Federal Reserve
(FRB) and the State Board of Financial Institutions in January 2005.

The Bank began operations on January
18, 2005. The Bank primarily is engaged in the business of accepting deposits insured by
the FDIC, and providing commercial, consumer and mortgage loans to the general public.

The Company sold 4,681,069 shares of
common stock at $6.40 per share in an initial public offering that was completed on
February 15, 2005 (as adjusted for all stock splits). The offering raised $29,430,810, net
of offering costs. The directors and officers of the Company purchased 659,531 shares at
$6.40 per share for a total of $4,221,000.

Basis of Presentation The accompanying financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions
to Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the
three month period ended June 30, 2007 is not necessarily indicative of the results that
may be expected for the year ending December 31, 2007. For further information, refer to
the audited consolidated financial statements and footnotes dated December 31, 2006
included in the Companys Form 10-KSB for the year ended December 31, 2006 as filed
with the Securities and Exchange Commission.

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.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation The consolidated financial statements include the accounts of CommunitySouth Financial
Corporation, the parent company, and CommunitySouth Bank and Trust, its wholly owned
subsidiary. All significant intercompany items have been eliminated in the consolidated
statements.

Managements Estimates
 The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.

Disclosure Regarding Segments
 The Company reports as one operating segment, as management reviews the results of
operations of the Company as a single enterprise.

Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, short-term interest bearing deposits and federal funds sold.
Cash and cash equivalents have an original maturity of three months or less.

Concentrations of Credit Risk
 Financial instruments, which potentially subject the Company to concentrations of
credit risk, consist principally of loans receivable, investment securities, federal funds
sold and amounts due from banks.

The Company makes loans to
individuals and small businesses for various personal and commercial purposes primarily in
the upstate region of South Carolina. The Companys loan portfolio is not
concentrated in loans to any single borrower or to a relatively small number of borrowers.
Additionally, management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.

7

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In addition to monitoring potential
concentrations of loans to particular borrowers or groups of borrowers, industries and
geographic regions, management monitors exposure to credit risk that could arise from
potential concentrations of lending products and practices such as loans that subject
borrowers to substantial payment increases (e.g. principal deferral periods, loans with
initial interest-only periods, etc), and loans with high loan-to-value ratios.
Additionally, there are industry practices that could subject the Company to increased
credit risk should economic conditions change over the course of a loans life. For
example, the Company makes variable rate loans and fixed rate principal-amortizing loans
with maturities prior to the loan being fully paid (i.e. balloon payment loans). These
loans are underwritten and monitored to manage the associated risks. Management has
determined that there is no concentration of credit risk associated with its lending
policies or practices.

The Companys investment
portfolio consists of both marketable and nonmarketable equity securities. Management
believes credit risk associated with the equity securities is not significant because the
Company does not invest a material amount in equity securities. The Company places its
deposits and correspondent accounts with and sells its federal funds to high quality
institutions. Management believes credit risk associated with correspondent accounts is
not significant.

Other Investments Other
investments consist primarily of the Companys investment in the stock of the Federal
Home Loan Bank of Atlanta (FHLB). The stock has no quoted market value and no
ready market exists. Investment in the FHLB is a condition of borrowing from the FHLB, and
the stock is pledged to collateralize such borrowings. At June 30, 2007, the
Companys investment in FHLB stock was $446,800. The dividend received on this stock
is included in interest and dividends on investments.

Loans Receivable  Loans
are stated at their unpaid principal balance less an allowance for loan losses and net
deferred loan origination fees. Interest income is computed using the simple interest
method and is recorded in the period earned. Loan origination fees collected and certain
loan origination costs are deferred and the net amount is accreted as income using a
method that approximates the level yield method over the life of the related loans.

When serious doubt exists as to the
collectibility of a loan or when a loan becomes ninety days past due as to principal or
interest, interest income generally is discontinued unless the estimated net realizable
value of collateral exceeds the principal balance and accrued interest. When interest
accruals are discontinued, income earned but not collected is reversed.

The Company identifies impaired loans
through its normal internal loan review process. Loans on the Companys problem loan
watch list are considered potentially impaired loans. These loans are evaluated in
determining whether all outstanding principal and interest are expected to be collected.
Loans are not considered impaired if a minimal payment delay occurs and all amounts due,
including accrued interest at the contractual interest rate for the period of delay, are
expected to be collected. There were no loans in non-accrual status at June 30, 2007.

Allowance for Loan Losses
 The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is
evaluated on a regular basis by management and is based upon managements periodic
review of the collectibility of the loans in light of historical experiences, the nature
and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

The allowance consists of specific,
general and unallocated components. The specific component relates to loans that are
classified as either doubtful, substandard or special mention. For such loans that are
also classified as impaired, an allowance is established when the discounted cash flows
(or collateral value or observable market price) of the impaired loan is lower than the
carrying value of the loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors. An unallocated component
is maintained to cover uncertainties that could affect managements estimate of
probable losses. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.

A loan is considered impaired when,
based on current information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments due. Loans that experience insignificant payment
delays and payment shortfalls generally

8

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are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for commercial
and construction loans by either the present value of expected future cash flows
discounted at the loans effective interest rate, the loans obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does
not separately identify individual consumer and residential loans for impairment
disclosures, unless such loans are the subject of a restructuring agreement.

Property and Equipment 
Premises, furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation expense is computed by the straight-line method, based on the estimated
useful lives for furniture and equipment of 5 to 10 years. Leasehold improvements are
amortized over the life of the lease. Maintenance and repairs are charged to current
expense. The costs of major renewals and improvements are capitalized.

Residential Loan Origination
Fees  The Company offers residential loan origination service to its customers
in its immediate market area. The loans are offered on terms and prices offered by the
Companys correspondents and are closed in the name of the correspondents. The
Company receives fees for services it provides in conjunction with the origination
services it provides. The fees are recognized at the time the loans are closed by the
Companys correspondents.

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

Income Taxes  Income
taxes are the sum of amounts currently payable to taxing authorities and the net changes
in income taxes payable or refundable in future years. Income taxes deferred to future
years are determined utilizing an asset and liability approach. This method gives
consideration to the future tax consequences associated with differences between financial
accounting and tax bases of certain assets and liabilities which are principally the
allowance for loan losses, depreciable premises and equipment, and net operating loss
carryforwards.

Earnings Per Share 
Basic earnings per share represents the net income allocated to shareholders divided by
the weighted-average number of common shares outstanding during the period. Dilutive
earnings per share reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued. Potential common shares that may be
issued by the Company relate to both outstanding warrants and stock options, and are
determined using the treasury stock method.

Stockbased Compensation
 On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payments, which is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation, to account for
compensation costs under its stock option plans.

In adopting SFAS No. 123(R), the
Company elected to use the modified prospective method to account for the transition from
the intrinsic value method to the fair value recognition method. Under the modified
prospective method, compensation cost is recognized from the adoption date forward for all
new stock options granted and for any outstanding unvested awards as if the fair value
method had been applied to those awards as of the date of grant.

Off-Balance-Sheet Financial
Instruments  In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend credit and
letters of credit. These financial instruments are recorded in the financial statements
when they become payable by the customer.

Recently Issued Accounting
Standards The following is a summary of recent authoritative pronouncements
that could impact the accounting, reporting, and / or disclosure of financial information
by the Company.

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
 Including an amendment of FASB Statement No. 115. This statement permits,
but does not require, entities to measure many financial instruments at fair value. The
objective is to provide entities with an opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report unrealized gains
and losses on such

9

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instruments in current earnings. This statement
1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only
to entire instruments. One exception is demand deposit liabilities which are explicitly
excluded as qualifying for fair value. With respect to SFAS No. 115, available-for-sale
and held-to-maturity securities at the effective date are eligible for the fair value
option at that date. If the fair value option is elected for those securities at the
effective date, cumulative unrealized gains and losses at that date shall be included in
the cumulative-effect adjustment and thereafter, such securities will be accounted for as
trading securities. SFAS No. 159 is effective for the Company on January 1, 2008. Earlier
adoption is permitted in 2007 if the Company also elects to apply the provisions of SFAS
No. 157, Fair Value Measurement. The Company is currently analyzing the fair value
option provided under SFAS No. 159.

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies are not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.

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

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

Reclassifications 
Certain captions and amounts in the 2006 financial statements were reclassified to conform
to the 2007 presentation. Such reclassifications had no effect on previously reported net
income or shareholders equity.

# NOTE 3  LEASES

Spartanburg location 
The Company has a ten year lease beginning November 15, 2005 for its Spartanburg office
with an initial monthly rental payment of $6,500, which increases over the term of the
lease up to $9,275 in the tenth year. The lease may be renewed for two consecutive
five-year terms with rental payments increasing 3% each year.

Mauldin location  The
Company has a ten year lease beginning November 15, 2005 for its Mauldin office with an
initial monthly rental payment of $2,417, which increases over the life of the lease up to
$2,872 per month in years seven through ten. The lease may be renewed for one five-year
term at a monthly rent of $3,302.

Anderson location  The
Company has a ten year lease beginning June 1, 2006 for its Anderson office with an
initial monthly rental payment of $3,690, which increases over the term of the lease up to
$4,803 in years six through ten. The lease may be renewed for two consecutive five-year
terms with rental payments increasing 2% each year.

Greer location  The
Company has a ten year lease beginning November 20, 2006 for its Greer office with an
initial monthly rental payment of $4,600, which increases over the term of the lease up to
$5,000 in years six through ten. The lease may be renewed for two consecutive five-year
terms with rental payments increasing 2% each year.

# NOTE 4  RELATED
PARTY TRANSACTIONS

Certain parties (principally certain
directors and executive officers of the Company, their immediate families and business
interests) are loan and deposit customers in the normal course of business with the Bank.
The loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The deposits are
accepted on the same terms, including interest rate as those offered for comparable
transactions with unrelated persons.

10

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# NOTE 5  STOCK
BASED COMPENSATION

Upon completion of the initial public
offering, the Company agreed to issue warrants to the organizing directors for the
purchase of one share of common stock at $6.40 per share for every two shares purchased in
the stock offering, up to a maximum of 15,625 warrants per director. The warrants were
fully vested 120 days after January 18, 2005 and will expire on January 18, 2015. Warrants
held by the Companys directors will expire 90 days after the director ceases to be a
director or officer of the Company (365 days if due to death or disability). The Company
issued a total of 171,406 warrants. In addition, the Company has adopted a stock option
plan. As of June 30, 2007 the Company has 759,480 options outstanding to employees and
directors. Under the plan, the Company may grant options for up to 21% of its issued
shares of common stock. The exercise price of each option is equal to the market price of
the Companys stock on the date of grant. The maximum term is ten years, and the
options vest in no greater than five years. When necessary, the Company may purchase
shares on the open market to satisfy share option exercises. During the ensuing year, the
Company is not expected to acquire shares for such purpose.

The table set forth below summarizes
stock option activity for the Companys stock compensation plans for the period ended
June 30, 2007 as adjusted for the 5-for-4 stock splits effective January 16, 2006 and
January 16, 2007.

|                                 | Stock Options | Warrants
|-------------------------------- | ------------- | --------
|
|
|Outstanding at December 31, 2006 |               |         
|Granted                          |               |         
|Forfeited                        |               |         
|Exercised                        |               |         
|                                 |               |         
|Outstanding at June 30, 2007     |               |         
|                                 |               |         

The table set forth below summarizes
non-vested stock options as of June 30, 2007.

|                                 | Weighted- Average | 
|-------------------------------- | ----------------- | 
|
|Outstanding at December 31, 2006 |                   | 
|Granted                          |                   | 
|Vested during the period         |                   | 
|Forfeited during the period      |                   | 
|                                 |                   | 
|Outstanding at June 30, 2007     |                   | 
|                                 |                   | 

As of June 30, 2007, there was
$270,917 total unrecognized compensation cost related to nonvested share-based
compensation arrangements, which is expected to be recognized over a weighted average
period of 55 months.

The fair value of each option granted
is estimated on the grant date using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, expected term of 10 years, risk-free interest
rate of 5.0%, expected life of 10 years, and expected volatility of 20%.

The following table summarizes
information about stock options outstanding under the Companys plans at June 30,
2007 as adjusted for the 5-for-4 stock splits effective January 16, 2006 and January 16,
2007.

|                                | Outstanding | Exercisable
|------------------------------- | ----------- | -----------
|
|Number of options               |             |            
|Weighted average remaining life |             |            
|Weighted average exercise price |             |            
|High exercise price             |             |            
|Low exercise price              |             |            

Cash received from the exercise of
options during the year was $6,400. The intrinsic value of options exercised during 2007
was $2,280.

11

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# Item 2.
Managements Discussion and Analysis or Plan of Operation.

The following discussion reviews
our results of operations and assesses our financial condition. You should read the
following discussion and analysis in conjunction with the accompanying consolidated
financial statements. The commentary should be read in conjunction with the discussion of
forward-looking statements, the financial statements, and the related notes and the other
statistical information included in this report.

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

This report contains
forward-looking statements relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and projections of
revenues and other financial items that are based on the beliefs of management, as well as
assumptions made by and information currently available to management. The words
may, will, anticipate, should,
would, believe, contemplate, expect,
estimate, continue, and intend, as well as other
similar words and expressions of the future, are intended to identify forward-looking
statements. Our actual results may differ materially from the results discussed in the
forward-looking statements, and our operating performance each quarter is subject to
various risks and uncertainties that include, without limitation, those described under
the heading Risk Factors in our Annual Report on Form 10-KSB for the year
ended December 31, 2006 as filed with the Securities and Exchange Commission and the
following:

| |  | our rapid growth to date and short operating history;
| | - | -----------------------------------------------------

| |  | the opening of additional  full-service  branches and the resulting  pressure
this could cause on our management team;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | significant  increases in  competitive  pressure in the banking and financial
services industries;
| | - | --------------------------------------------------------------------------------------------------

| |  | changes in the interest rate  environment  which could reduce  anticipated or
actual margins;
| | - | ---------------------------------------------------------------------------------------------

| |  | changes  in  political   conditions   or  the   legislative   or   regulatory
environment;
| | - | ------------------------------------------------------------------------------------------

| |  | general economic conditions, either nationally or regionally and especially in our primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes in deposits flows;
| | - | --------------------------

| |  | changes in monetary and tax policies;
| | - | -------------------------------------

| |  | the lack of  seasoning  of our loan  portfolio,  especially  given  our rapid
loan growth;
| | - | ------------------------------------------------------------------------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | adverse  changes in asset quality and resulting  credit  risk-related  losses
and expenses;
| | - | -------------------------------------------------------------------------------------------

| |  | loss  of  consumer  confidence  and  economic   disruptions   resulting  from
terrorist activities;
| | - | ---------------------------------------------------------------------------------------------------

| |  | changes in the securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

All forward-looking statements in
this report are based on information available to us as of the date of this report. We
undertake no obligation to publicly update or otherwise revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.

# Overview

CommunitySouth Financial Corporation
is a bank holding company headquartered in Easley, South Carolina. Our subsidiary,
CommunitySouth Bank and Trust, opened for business on January 18, 2005. In addition to the
main office in Easley, the Bank has four branch locations in the upstate region of South
Carolina. We opened our Mauldin branch in the fourth quarter of 2005, our Spartanburg
branch in the first quarter of 2006, Anderson branch in the third quarter of 2006, and our
Greer branch in the fourth quarter of 2006. We anticipate continued branch expansion in
the upstate region as opportunities arise. The bank provides banking services to domestic
markets, principally in the upstate of South Carolina. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation. All share and per share information
in this report has been adjusted for the 5-for-4 stock splits effected in the form of a
stock dividend paid on January 16, 2006 and January 16, 2007 to shareholders of record as
of December 15, 2005 and December 15, 2006, respectively.

Like most community banks, we derive
most of our income from interest we receive on our loans and investments. Our primary
source of funds for making these loans and investments is our deposits, on which we pay
interest. Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as
deposits.

12

---

Another key measure is the spread
between the yield we earn on these interest-earning assets and the rate we pay on our
interest-bearing liabilities.

Of course, there are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb probable losses on
existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings. In the following
section we have included a detailed discussion of this process.

In addition to earning interest on
our loans and investments, we earn income through fees and other expenses we charge to our
customers. We describe the various components of this noninterest income, as well as our
noninterest expense, in the following discussion.

# Results of Operations

Three Months ended June
30, 2007 and 2006

Overview

Our net income was $462,129 for the
three months ended June 30, 2007 as compared to $260,255 for the three months ended June
30, 2006. Since we began operations in the first quarter of 2005, we have experienced
significant growth, which has led to a substantial increase in revenues and expenses. Due
to our growth over the past two years, we have now attained a level of earning assets that
supports our costs and we are currently operating profitably. For the three months ended
June 30, 2007, we realized $5,591,467 in interest income, of which $398,882 was from
investment activities and $5,192,585 was from loan activities. For the three months ended
June 30, 2006, we realized $3,318,944 in interest income, of which $201,705 was from
investment activities and $3,117,239 was from loan activities. The substantial increase in
our interest income is primarily a result of our continued loan growth during our second
year of operation. We anticipate the growth in loans will continue to drive the growth in
assets and the growth in interest income. The primary source of funding for our loan
portfolio is deposits that are acquired both locally and via the national brokered
certificate market. We incurred interest expense of $3,116,024 and $1,540,887 for the
three months ended June 30, 2007 and June 30, 2006, respectively. This increase in our
interest expense was a result of increased levels of interest bearing deposits and higher
average interest rates on those deposits. We have experienced a decline in our net
interest margin to 3.49% from 4.20% for the quarters ended June 30, 2007 and 2006,
respectively. The decline was due to repricing of deposits and competitive pressure on
commercial loan pricing.

Provision for Loan Losses

Our provision for loan losses for the
three months ended June 30, 2007 was $270,000 compared to $496,000 for the comparable
prior year period. The $226,000 decrease was the result of greater loan production in 2006
compared to the same period in 2007. The net increase in loans outstanding was $19.5
million for the second quarter of 2007 as compared to a net increase of $33.0 million for
the second quarter of 2006.

Noninterest Income

We had noninterest income of $398,091
and $143,752 for the three months ended June 30, 2007 and 2006, respectively. Mortgage
origination fee income for the three months ended June 30, 2007 was $276,276. We had
$122,518 in mortgage origination fee income in the second quarter of 2006. The increase
was the result of additions to our mortgage lending staff over the past year. If interest
rates continue to rise, we would not anticipate this type of continued growth. Further,
changes in state and federal laws regarding the oversight of mortgage brokers and lenders
could increase our costs of operations and affect our mortgage origination volume which
could negatively impact our noninterest income in the future.

Noninterest Expense

We incurred noninterest expense of
$1,878,558 during the three months ended June 30, 2007. Included in the expense was
$1,047,241 of salaries and employee benefits, $112,226 of occupancy expense, $80,800 of
professional expense, $138,154 of data processing expense, $42,771 of advertising expense,
and $24,085 of expense related to supplies. The noninterest expense incurred in the three
months ended June 30, 2006 was $1,167,050. Included in the expense was $634,630 of
salaries and employee benefits, $55,600 of occupancy expense, $35,853 of professional
expense, $71,709 of data processing expense, $66,877 of advertising expense, and $36,314
of expense related to supplies.

13

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For the three months ended June 30,
2007, we incurred $173,272 in other fixed asset expenses, which included $150,181 in
depreciation and $23,091 in equipment maintenance and rental. For the three months ended
June 30, 2006, we incurred $93,040 in other fixed asset expense, which included $80,310 in
depreciation and $12,730 in equipment maintenance and rental. We incurred $112,226 and
$55,600 in occupancy expense related to all of our office locations for the three months
ended June 30, 2007 and 2006, respectively.

The increase in noninterest expense
is the result of the addition of new branches and personnel over the past year.

Six Months ended June 30, 2007
and 2006

Overview

Our net income was $670,501 for the
six months ended June 30, 2007 as compared to $452,541 for the six months ended June 30,
2006. Since we began operations in the first quarter of 2005, we have experienced
significant growth, which has led to a substantial increase in revenues and expenses. Due
to our growth over the past two years, we have now attained a level of earning assets that
supports our costs and we are currently operating profitably. For the six months ended
June 30, 2007, we realized $10,506,276 in interest income, of which $709,038 was from
investment activities and $9,797,238 was from loan activities. For the six months ended
June 30, 2006, we realized $5,955,654 in interest income, of which $385,451 was from
investment activities and $5,570,203 was from loan activities. The substantial increase in
our interest income is primarily a result of our continued loan growth during our second
year of operation. We anticipate the growth in loans will continue to drive the growth in
assets and the growth in interest income. The primary source of funding for our loan
portfolio is deposits that are acquired both locally and via the national brokered
certificate market. We incurred interest expense of $5,880,587 and $2,652,191 for the six
months ended June 30, 2007 and June 30, 2006, respectively. This increase in our interest
expense was a result of increased levels of interest bearing deposits and higher average
interest rates on those deposits. We have experienced a decline in our net interest margin
to 3.46% from 4.27% for six months ended June 30, 2007 and 2006, respectively. The decline
was due to repricing of deposits and competitive pressure on commercial loan pricing.

Provision for Loan Losses

Our provision for loan losses for the
six months ended June 30, 2007 was $632,000 compared to $834,500 for the comparable prior
year period. The $202,500 decrease was the result of greater loan production in 2006
compared to the same period in 2007. The net increase in loans outstanding was $55.5
million for the first six months of 2006 as compared to a net increase of $46.2 million
for the first six months of 2007.

Noninterest Income

We had noninterest income of $742,774
and $346,510 for the six months ended June 30, 2007 and 2006, respectively. Mortgage
origination fee income for the six months ended June 30, 2007 was $522,012. We had
$287,979 in mortgage origination fee income in the first six months of 2006. The increase
was the result of additions to our mortgage lending staff over the past year. If interest
rates continue to rise, we would not anticipate this type of continued growth. Further,
changes in state and federal laws regarding the oversight of mortgage brokers and lenders
could increase our costs of operations and affect our mortgage origination volume which
could negatively impact our noninterest income in the future.

Noninterest Expense

We incurred noninterest expense of
$3,667,893 during the six months ended June 30, 2007. Included in the expense was
$2,040,461 of salaries and employee benefits, $244,125 of occupancy expense, $123,011 of
professional expense, $259,014 of data processing expense, $73,640 of advertising expense,
and $76,267 of expense related to supplies. The noninterest expense incurred in the six
months ended June 30, 2006 was $2,265,283. Included in the expense was $1,258,062 of
salaries and employee benefits, $126,143 of occupancy expense, $72,471 of professional
expense, $137,047 of data processing expense, $88,949 of advertising expense, and $85,053
of expense related to supplies.

For the six months ended June 30,
2007, we incurred $334,592 in other fixed asset expenses, which included $281,228 in
depreciation and $53,364 in equipment maintenance and rental. For the six months ended
June 30, 2006, we incurred $173,357 in other fixed asset expense, which included $136,453
in depreciation and $36,904 in equipment maintenance and rental. We incurred $244,125 and
$126,143 in occupancy expense related to our offices in Easley, Spartanburg, Mauldin,
Anderson, Greer and Greenwood for the six months ended June 30, 2007 and 2006,
respectively.

The increase in noninterest expense
is the result of the addition of new branches and personnel over the past year.

14

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# Assets and Liabilities

General

At June 30, 2007, total assets
increased 29% to $319.8 million as compared to $248.3 million at December 31, 2006. Gross
loans increased $46.2 million, or 21%, during the first six months of 2007. Federal funds
sold increased to $40.8 million at June 30, 2007 compared to $17.9 million at December 31,
2006. Cash and cash equivalents increased $25.6 million, or 121.5%, since December 31,
2006. Deposits increased $70.6 million, or 32.5%, during the first six months of 2007. At
June 30, 2007, shareholders equity was $30.4 million.

Investment Securities

Other investments increased by
$176,000 since December 31, 2006 due to the purchase of additional FHLB stock.

Loans

Since loans typically provide higher
interest yields than other types of interest earning assets, we allocate the majority of
our earning assets to our loan portfolio. Gross loans increased by $46.2 million, or
21.2%, during the first six months of 2007. Balances within major loan categories are as
follows:

|                               | June 30, 2007 | December 31, 2006
|------------------------------ | ------------- | -----------------
|
|Real estate - construction     |               |                  
|Real estate - mortgage         |               |                  
|Commercial and industrial      |               |                  
|Consumer and other             |               |                  
|                               |               |                  
|Total loans, gross             |               |                  
|Less allowance for loan losses |               |                  
|                               |               |                  
|Total loans, net               |               |                  
|                               |               |                  

We will discontinue accrual of
interest on a loan when we conclude it is doubtful that we will be able to collect
interest from the borrower. We will reach this conclusion by taking into account factors
such as the borrowers financial condition, economic and business conditions, and the
results of our previous collection efforts. Generally, we will place a delinquent loan in
nonaccrual status when the loan becomes 90 days or more past due. When we place a loan in
nonaccrual status, we will reverse all interest which has been accrued on the loan but
remains unpaid and we will deduct this interest from earnings as a reduction of reported
interest income. We will not accrue any additional interest on the loan balance until we
conclude the collection of both principal and interest is reasonably certain. At June 30,
2007, there were no loans that were non-accruing.

Provision and Allowance
for Loan Losses

We have established an allowance for
loan losses through a provision for loan losses charged to expense on our statement of
income. The allowance for loan losses represents an amount which we believe is adequate to
absorb probable losses on existing loans that may become uncollectible. Our judgment as to
the adequacy of the allowance for loan losses is based on a number of assumptions about
future events, which we believe to be reasonable, but which may or may not prove to be
accurate. Our determination of the allowance for loan losses is based on evaluations of
the collectibility of loans, including consideration of factors such as the balance of
impaired loans, the quality, mix, and size of our overall loan portfolio, economic
conditions that may affect the borrowers ability to repay, the amount and quality of
collateral securing the loans, our historical loan loss experience, and a review of
specific problem loans. We also consider subjective issues such as changes in the lending
policies and procedures, changes in the local/national economy, changes in volume or type
of credits, changes in volume/severity of problem loans, quality of loan review and board
of director oversight, concentrations of credit, and peer group comparisons. Due to our
limited operating history, to date the provision for loan losses has been made primarily
as a result of our assessment of general loan loss risk compared to banks of similar size
and maturity. Due to our short operating history, the loans in our loan portfolio and our
lending relationships are of very recent origin. In general, loans do not begin to show
signs of credit deterioration or default until they have been outstanding for some period
of time, a process known as seasoning. As a result, a portfolio of older loans will
usually behave more predictably than a newer portfolio. Because our loan portfolio is new,
the current level of delinquencies and defaults may not be representative

15

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of the level that will prevail when
the portfolio becomes more seasoned, which may be higher than current levels. If
delinquencies and defaults increase, we may be required to increase our provision for loan
losses, which would adversely affect our results of operations and financial condition.
Periodically, we adjust the amount of the allowance based on changing circumstances. We
charge recognized losses to the allowance and add subsequent recoveries back to the
allowance for loan losses. There can be no assurance that charge-offs of loans in future
periods will not exceed the allowance for loan losses as estimated at any point in time or
that provisions for loan losses will not be significant to a particular accounting period.

Deposits

Our primary source of funds for loans
and investments is our deposits. We have chosen to obtain a portion of our certificates of
deposits from areas outside of our market, which are brokered deposits. The deposits
obtained outside of our market area generally have rates comparable to those being offered
for certificates of deposits in our local market. As of June 30, 2007, total deposits had
increased by $70.6 million, or 32.5%, from December 31, 2006. The largest percentage
increase was in interest bearing demand deposits, which increased $11.6 million, or 210%,
from December 31, 2006 to June 30, 2007.

Balances within the major deposit
categories are as follows:

|                              | June 30, 2007 | December 31, 2006
|----------------------------- | ------------- | -----------------
|
|Non-interest bearing demand   |               |                  
|Interest bearing demand       |               |                  
|Savings                       |               |                  
|Time deposits less than $100  |               |                  
|Time deposits of $100 or over |               |                  
|Brokered deposits             |               |                  
|                              |               |                  
|Total deposits                |               |                  
|                              |               |                  

# Liquidity

Liquidity is the ability to meet
current and future obligations through liquidation or maturity of existing assets or the
acquisition of liabilities. We manage both assets and liabilities to achieve appropriate
levels of liquidity. Cash and short-term investments are our primary sources of asset
liquidity. These funds provide a cushion against short-term fluctuations in cash flow from
both deposits and loans. Individual and commercial deposits and borrowings are our primary
source of funds for credit activities. At June 30, 2007, we had lines of credit with
unrelated banks totaling $15 million. These lines, which are unsecured, are available on a
one-to-seven day basis for general corporate purposes. We believe our liquidity sources
are adequate to meet our operating needs as well as our construction commitments. The
level of liquidity is measured by the cash and cash equivalents-to-total assets ratio,
which was at 14.6% at June 30, 2007.

As members of the Federal Home Loan
Bank of Atlanta, we have credit availability of up to 10% of the banks total assets,
which meant $28.4 million was available as of June 30, 2007. Advances under this credit
facility are subject to qualifying collateral.

# Impact of Off-Balance
Sheet Instruments

Through the operations of our bank,
we have made contractual commitments to extend credit in the ordinary course of our
business activities. These commitments are legally binding agreements to lend money to our
customers at predetermined interest rates for a specified period of time. At June 30,
2007, we had issued commitments to extend credit of $50.5 million through various types of
lending arrangements. We evaluate each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, commercial and
residential real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes. The following table summarizes our
off-balance-sheet financial instruments whose contract amounts represent credit risk:

|                             |  | June 30, 2007 | December 31, 2006 | 
|---------------------------- |  | ------------- | ----------------- | 
|Commitments to extend credit |  |               |                   | 
|                             |  |               |                   | 
|Standby letters of credit    |  |               |                   | 
|                             |  |               |                   | 

16

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# Capital Resources

Total shareholders equity
increased from $29.7 million at December 31, 2006 to $30.4 million at June 30, 2007. The
increase is principally due to the net income for the period of $670,501.

The Federal Reserve and bank
regulatory agencies require bank holding companies and financial institutions to maintain
capital at adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100%. The Federal Reserve
guidelines contain an exemption from the capital requirements for small bank holding
companies. On March 30, 2006, the Federal Reserve expanded the definition of a
small bank holding company to include bank holding companies with less than
$500 million in total assets. Bank holding companies that have less than $500 million in
total assets do not qualify under the expanded definition if they (i) are engaged in
significant non-banking activities either directly or indirectly through a subsidiary,
(ii) conduct significant off-balance sheet activities, including securitizations or
managing or administering assets for third parties, or (iii) have a material amount of
debt or equity securities (including trust preferred securities) outstanding that are
registered with the SEC. Although we have less than $500 million in total assets, it is
unclear at this point whether we otherwise meet the requirements for qualifying as a
small bank holding company. According to the Federal Reserve, the revision of
the criterion to exclude any bank holding company that has outstanding a material amount
of SEC-registered debt or equity securities reflects the fact that SEC registrants
typically exhibit a degree of complexity of operations and access to multiple funding
sources that warrants excluding them from the new policy statement and subjecting them to
the capital guidelines.   In the adopting release for the new rule, the Federal
Reserve stated that what constitutes a material amount of SEC-registered debt
or equity for a particular bank holding company depends on the size, activities and
condition of the relevant bank holding company.  In lieu of using fixed measurable
parameters of materiality across all institutions, the rule provides the Federal Reserve
with supervisory flexibility in determining, on a case-by-case basis, the
significance or materiality of activities or securities outstanding such that a bank
holding company should be excluded from the policy statement and subject to the capital
guidelines. Prior to adoption of this new rule, our holding company was not subject to
these capital guidelines, as it had less than $150 million in assets at the time. Until
the Federal Reserve provides further guidance on the new rules, it will be unclear whether
our holding company will be subject to the exemption from the capital requirements for
small bank holding companies. Regardless, our Bank is well capitalized under
these minimum capital requirements as set per bank regulatory agencies.

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

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Banks Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total capital
for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2
capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total
risk-based capital.

The Bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum.

The Bank exceeded the regulatory
capital requirements at June 30, 2007 and December 31, 2006 as set forth in the following
table.

|                                       | June 30, 2007 | December 31, 2006
|-------------------------------------- | ------------- | -----------------
|
|
|Total capital to risk weighted assets  |               |                  
|Tier 1 capital to risk weighted assets |               |                  
|Tier 1 capital to average assets       |               |                  

17

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# Critical Accounting
Policies

We have adopted various accounting
policies that govern the application of accounting principles generally accepted in the
United States and with general practices within the banking industry in the preparation of
our financial statements. Our significant accounting policies are described in Note 1 to
the financial statements in Item 1.

Certain accounting policies involve
significant judgments and assumptions by us that have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies to be
critical accounting policies. The judgment and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the circumstances.
Because of the nature of the judgment and assumptions we make, actual results could differ
from these judgments and estimates that could have a material impact on the carrying
values of our assets and liabilities and our results of operations.

We believe the allowance for loan
losses is the critical accounting policy that requires the most significant judgment and
estimates used in preparation of our consolidated financial statements. Some of the more
critical judgments supporting the amount of our allowance for loan losses include
judgments about the credit worthiness of borrowers, the estimated value of the underlying
collateral, the assumptions about cash flows, determination of loss factors for estimating
credit losses, the impact of current events, and conditions, and other factors impacting
the level of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different from
managements estimates provided in our consolidated financial statements. Refer to
the portion of this discussion that addresses our allowance for loan losses for a more
complete discussion of our processes and methodology for determining our allowance for
loan losses.

# Item 3. Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of June 30, 2007. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

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

18

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# Part II  Other
Information

# Item 1. Legal
Proceedings.

Not Applicable.

# Item 2.Unregistered
Sales of Equity Securities and Use of Proceeds.

Not applicable.

# Item 3. Defaults Upon
Senior Securities.

Not applicable.

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

There were three matters submitted to
a vote of security holders during the three months ended June 30, 2007 at our annual
meeting of shareholders held on May 15, 2007.

Proposal
#1  Amendment to the Articles of Incorporation for Name Change

The shareholders approved the
proposal for the Amendment to the Articles of Incorporation for CommunitySouth Bancshares,
Inc. to change its name to CommunitySouth Financial Corporation with 3,406,490 votes cast
in favor of the proposal, 1,231 against, and 62,111 abstained.

Proposal
#2  Amendment of the Bylaws

The shareholders approved the
proposal for the Amendment to the Bylaws for the Company regarding indemnification of
Company directors and officers and of other employees or agents as determined by the Board
of Directors with 3,390,115 votes cast in favor of the proposal, 55,846 against, and
23,871 abstained.

Proposal
#3  Election of Class III Directors

Our
board of directors is divided into three classes with each class to be as nearly equal in
number as possible. The three classes of directors have staggered terms, so that the terms
of only approximately one-third of the board members will expire at each annual meeting of
shareholders. The current Class I directors are C. Allan Ducker, III, W. Michael Riddle,
R. Wesley Hammond, and David W. Edwards. The current Class II directors are David A.
Miller, David L. Brotherton, Arnold J. Ramsey, and J. Neal Workman, Jr. The current Class
III directors are G. Dial DuBose, Joanne Rogers, B. Lynn Spencer, Daniel E. Youngblood,
and John W. Hobbs. The Class III directors were up for reelection at this years
annual meeting held on May 15, 2007. Each of the existing Class III directors were
re-elected at the annual meeting for a three-year term expiring at the 2010 annual meeting
of shareholders. For Mr. DuBose, 3,431,318 votes were cast in favor of his reelection as
director with 38,514 abstained. For Mrs. Rogers, 3,429,912 votes were cast in favor of her
reelection as director with 39,920 abstained. For Mr. Spencer, 3,430,693 votes were cast
in favor of his reelection as director with 50,075 abstained. For Mr. Hobbs, 3,431,474
votes were cast in favor of his election as a director with 38,358 abstained. The terms of
the Class I directors will expire at the 2008 annual shareholders meeting, and the terms
of the Class II directors will expire at the 2009 annual shareholders meeting.

# Items 5. Other
Information.

Not applicable.

# Item 6. Exhibits.

31.1      Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2      Rule 13a-14(a) Certification of the Principal Financial Officer.

32         Section 1350
Certifications.

18

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# SIGNATURES

In accordance with the requirements
of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

|Date:  July 30, 2007 |  | By:   /s/  C. Allan Ducker, III                     
|-------------------- |  | ----------------------------------------------------
|                     |  | C. Allan Ducker, III                                
|                     |  | Chief Executive Officer(Principal Executive Officer)

|Date:  July 30, 2007 |  | By:   /s/  John W. Hobbs                                           
|-------------------- |  | -------------------------------------------------------------------
|                     |  | John W. Hobbs                                                      
|                     |  | Chief Financial Officer(Principal Financial and Accounting Officer)

20

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# EXHIBIT INDEX

ExhibitNumber         Description

31.1      Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2      Rule 13a-14(a) Certification of the Principal Financial Officer.

32         Section 1350
Certifications.

21