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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

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

For the Fiscal Year Ended December 31, 2005                File Number 333-79543

                               CORNERSTONE BANCORP
                 (Name of Small Business Issuer in its Charter)

          South Carolina                                  57-1077978
(State or Other Jurisdiction of            (IRS Employer Identification Number)
 Incorporation or Organization)

               1670 East Main Street, Easley, South Carolina 29640
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 306-1444

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

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

         Check  whether the issuer is not required to file  reports  pursuant to
Section 13 or 15(d) of the Exchange Act.  [ ]

         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
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.
Yes [X] No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ] (Not Applicable)

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

         The issuer's revenues for its most recent fiscal year were $7,254,063.

         The  aggregate  market  value  of  the  voting  Common  Stock  held  by
non-affiliates on March 1, 2006, was approximately  $13,270,298.  The issuer has
no  non-voting  common  equity  outstanding.  As of March 1,  2006,  there  were
1,615,938  shares of the Registrant's  Common Stock, no par value,  outstanding.
For purposes of the  foregoing  calculation  only,  all  directors and executive
officers of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions  of the  Registrant's  2005  Annual  Report  to  Shareholders  are
     incorporated by reference into Part II of this Form 10-KSB
--------------------------------------------------------------------------------

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



<PAGE>



                          10-KSB CROSS REFERENCE INDEX

                                   Part I Page
Item 1   Description of Business.............................................  2
Item 2   Description of Property............................................. 10
Item 3   Legal Proceedings .................................................. 10
Item 4   Submission of Matters to a Vote of Security Holders................. 10
                           Part II
Item 5   Market for Common Equity and Related Stockholder Matters ........... 10
Item 6   Management's Discussion and Analysis or Plan of Operation........... 11
Item 7   Financial Statements................................................ 11
Item 8   Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure....................................... 11
Item 8A                  Controls and Procedures............................. 12
Item 8B  Other Information................................................... 12
                                    Part III
Item 9   Directors and Executive Officers, Promoters and Control
              Persons; Compliance with Section 16(a) of the Exchange Act..... 12
Item 10  Executive Compensation.............................................. 13
Item 11  Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters..................... 16
Item 12  Certain Relationships and Related Transactions...................... 17
                                     Part IV
Item 13  Exhibits............................................................ 18
Item 14  Principal Accountant Fees and Services.............................. 18



<PAGE>

                           FORWARD LOOKING STATEMENTS


         Statements  included in this report which are not  historical in nature
are intended to be, and are hereby  identified as "forward  looking  statements"
for  purposes  of the safe  harbor  provided  by Section  21E of the  Securities
Exchange Act of 1934, as amended. Words such as "estimate", "project", "intend",
"expect",  "believe",  "anticipate",  "plan", and similar  expressions  identify
forward-looking  statements.  The Company  cautions readers that forward looking
statements  including  without  limitation,  those relating to the Company's new
offices, future business prospects,  revenues,  working capital, adequacy of the
allowance for loan losses, liquidity, capital needs, interest costs, and income,
are subject to certain risks and  uncertainties  that could cause actual results
to differ from those indicated in the forward looking statements, due to several
important factors herein  identified,  among others, and other risks and factors
identified from time to time in the Company's  reports filed with the Securities
and Exchange Commission.

         These  forward-looking  statements  are based on current  expectations,
estimates  and  projections  about  our  industry,   management's  beliefs,  and
assumptions made by management.  Such information includes,  without limitation,
discussions  as to estimates,  expectations,  beliefs,  plans,  strategies,  and
objectives concerning the Company's future financial and operating  performance.
These  statements  are not guarantees of future  performance  and are subject to
risks, uncertainties and assumptions that are difficult to predict, particularly
in light of the fact that the Company is a  relatively  new company with limited
operating  history.  Therefore,  actual results may differ materially from those
expressed  or  forecasted  in such  forward-looking  statements.  The  risks and
uncertainties include, but are not limited to:

     o    The Company's growth and ability to maintain growth;

     o    governmental  monetary and fiscal policies, as well as legislative and
          regulatory changes;

     o    the effect of interest  rate changes on our level and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;

     o    the effects of competition from other financial institutions operating
          in the Company's  market areas and elsewhere,  including  institutions
          operating locally, regionally, nationally and internationally;

     o    failure of our customers to repay loans;

     o    failure of assumptions  underlying the  establishment of the allowance
          for loan losses, including the value of collateral securing loans; and

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

                               WEBSITE REFERENCES

         References  to our website  included in, or  incorporated  by reference
into,  this report are for  information  purposes  only, and are not intended to
incorporate our website by reference into this report.


                                     PART I

Item 1.  Description of Business.

General

         Cornerstone  Bancorp (the  "Company") is a South  Carolina  corporation
incorporated  in 1999. The Company is a bank holding  company with no operations
other than those carried on by its wholly owned subsidiary, Cornerstone National
Bank (the "Bank"). The Bank was organized in 1999 and conducts a general banking
business under a national bank charter  granted by the Office of the Comptroller
of the Currency of the United  States (the "OCC")  pursuant to the National Bank


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<PAGE>

Act. The Bank  conducts  its  activities  from its main office in Easley,  South
Carolina,  which opened in September,  1999, and from a branch office located in
the Berea area of Greenville,  South Carolina, which opened in August, 2002, and
from a  branch  office  in the  Powdersville/Piedmont  area of  Anderson,  South
Carolina,  which opened in July 2005.  In 2004,  our bank  established  a wholly
owned subsidiary,  Crescent Financial Services,  Inc. ("Crescent"),  which is an
insurance agency.

         The Bank's primary market areas are the city of Easley,  South Carolina
and the  immediately  surrounding  areas of  Pickens  County,  the Berea area of
Greenville  County,  and the Powdersville and Piedmont areas of Anderson County,
and contiguous areas.  Pickens County and four neighboring  counties make up the
Greenville-Spartanburg-Anderson,  South Carolina  Metropolitan  Statistical Area
(the "Greenville MSA").

         The Bank's business primarily consists of accepting deposits and making
loans.  The Bank seeks deposit  accounts from  households  and businesses in its
primary  market areas by offering a full range of savings  accounts,  retirement
accounts,  checking  accounts,  money market accounts,  and time certificates of
deposit. It also makes commercial,  real estate and installment loans, primarily
on a secured basis, to borrowers in the Upstate area of South Carolina and makes
other  authorized  investments.  The Bank  offers  both  in-house  and  brokered
conventional  residential  mortgage loans.  Brokered loans are funded by a third
party investor. The Bank does not hold any loans for sale.

         As of December 31, 2005, the Bank employed 37 people.

Competition

         South Carolina law permits statewide branching by banks and savings and
loan  associations.  Consequently,  many  financial  institutions  have branches
located  in  several  communities.  Currently,  in  addition  to  the  Bank,  11
commercial banks and 1 savings  institution  operate branches in Pickens County,
22 commercial  banks and 3 savings  institutions  operate branches in Greenville
County,  and 15  commercial  banks  operate  branches  in Anderson  County.  The
principal  areas and  methods of  competition  in the banking  industry  are the
services offered, pricing of those services, the convenience and availability of
the services,  and the degree of expertise and personal  manner with which those
services are offered.

         The Bank  encounters  strong  competition  from  most of the  financial
institutions in its extended market area. In the conduct of certain areas of its
business, the Bank also competes with credit unions, insurance companies,  money
market  mutual  funds and other  financial  institutions,  some of which are not
subject to the same degree of regulation and  restrictions  as the Bank. Most of
these  competitors have  substantially  greater  resources and lending abilities
than  the  Bank and  offer  certain  services,  such as  international  banking,
investment  banking,  and trust  services,  which  the Bank  does not  presently
provide.

                              SERVICES OF THE BANK

Deposits

         The Bank offers the full range of deposit services typically  available
in most banks and savings and loan  associations,  including  checking accounts,
NOW accounts,  retirement accounts (including  Individual  Retirement Accounts),
and savings and other time deposits of various  types,  ranging from daily money
market accounts to longer-term certificates of deposit. The transaction accounts
and  time  certificates  are  tailored  to the  principal  market  area at rates
competitive  with those offered in the area. All deposit accounts are insured by
the Federal  Deposit  Insurance  Corporation  ("FDIC") up to the maximum  amount
permitted by law. The Bank solicits these accounts from individuals, businesses,
associations and organizations,  and government  authorities.  Although the Bank
intends to be competitive in its efforts to attract  deposit  accounts,  it does
not  aggressively  seek jumbo  certificates of deposit  (certificates in amounts
greater than $100,000).

Lending Activities

         The Bank  offers a range of  lending  services,  including,  commercial
loans,  consumer  loans,  and real estate  mortgage  loans. To address the risks
inherent in making  loans,  management  maintains an  allowance  for loan losses
based on, among other things,  an evaluation of the Bank's loan loss experience,
management's  experience at other financial institutions in the market area, the
amount  of  and  trends  in  past  due  and  nonperforming  loans,  current  and
anticipated economic changes and the values of loan collateral.  Based upon such


                                       3
<PAGE>

factors,  management makes various  assumptions and judgments about the ultimate
collectibility  of the loan  portfolio  and provides an allowance  for potential
loan losses based upon a  percentage  of the  outstanding  balances and specific
loans.  However,  because  there are  certain  risks  that  cannot be  precisely
quantified,  management's  judgment of the allowance is necessarily  approximate
and imprecise.  The adequacy and methodology of the allowance for loan losses is
also subject to regulatory examination.

Real Estate Loans

         One of the primary  components  of the Bank's loan  portfolio  is loans
secured by first or second  mortgages on residential and commercial real estate.
These loans generally consist of short to mid-term commercial real estate loans,
construction and development  loans and residential real estate loans (including
home  equity  and  second  mortgage  loans).  Interest  rates  may be  fixed  or
adjustable and the Bank frequently charges an origination fee. The Bank seeks to
manage credit risk in the commercial real estate portfolio by emphasizing  loans
on  owner-occupied  office and retail buildings where the  loan-to-value  ratio,
established by  independent  appraisals,  does not exceed 80%. In addition,  the
Bank  generally  requires  personal  guarantees of the  principal  owners of the
property.  The  loan-to-value  ratio for first and second mortgage loans and for
construction  loans  generally  does not  exceed  80%.  In an effort to  control
interest rate risk, long term residential  mortgages are underwritten and funded
by, and closed in the name of, third party investors.

         The principal  economic risk associated with all loans,  including real
estate loans, is the creditworthiness of the Bank's borrowers.  The ability of a
borrower to repay a real estate loan depends upon a number of economic  factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate  construction  loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically  limited.  In the case of a real estate
purchase  loan,  the  borrower may be unable to repay the loan at the end of the
loan  term and thus may be  forced to  refinance  the loan at a higher  interest
rate,  or,  in  certain  cases,  the  borrower  may  default  as a result of its
inability to refinance  the loan.  Each of these  factors  increases the risk of
nonpayment by the borrower.

         The Bank also  faces  additional  credit  risks to the  extent  that it
engages in making  adjustable  rate mortgage loans  ("ARMs").  In the case of an
ARM, as interest rates increase, the borrower's required payments increase, thus
increasing  the  potential  for default.  The  marketability  of all real estate
loans,  including  ARMs, is also generally  affected by the prevailing  level of
interest rates.

Commercial Loans

         The Bank  makes  loans for  commercial  purposes  in  various  lines of
business.  Commercial loans include both secured and unsecured loans for working
capital  (including  inventory and  receivables),  loans for business  expansion
(including acquisition of real estate and improvements), and loans for purchases
of equipment and  machinery.  Equipment  loans are typically  made for a term of
five  years or less at  either  fixed or  variable  rates,  with the loan  fully
amortized over the term and secured by the financed  equipment.  Working capital
loans  typically  have terms not exceeding  one year and are usually  secured by
accounts  receivable,  inventory or personal guarantees of the principals of the
business.  Commercial loans vary greatly  depending upon the  circumstances  and
loan terms are  structured  on a  case-by-case  basis to better  serve  customer
needs.

         The risks  associated  with  commercial  loans vary with many  economic
factors,  including the economy in the Bank's market areas. The well-established
banks in the Bank's market areas make  proportionately  more loans to medium- to
large-sized  businesses than the Bank makes. Many of the Bank's commercial loans
are made to small- to medium-sized businesses, which are typically smaller, have
shorter operating histories,  and less sophisticated record keeping systems than
larger  entities.  As a  result,  these  smaller  entities  may be less  able to
withstand  adverse  competitive,  economic and financial  conditions than larger
borrowers. In addition, because payments on loans secured by commercial property
generally  depend to a large degree on the results of operations  and management
of the properties,  repayment of such loans may be subject,  to a greater extent
than  other  loans,  to  adverse  conditions  in the real  estate  market or the
economy.

                                       4
<PAGE>


Consumer Loans

         The Bank  makes a variety  of loans to  individuals  for  personal  and
household purposes,  including secured and unsecured installment and term loans,
home equity loans and lines of credit and unsecured  revolving  lines of credit.
The secured  installment and term loans to consumers  generally consist of loans
to  purchase  automobiles,   boats,  recreational  vehicles,  mobile  homes  and
household  furnishings,  with the  collateral  for each loan being the purchased
property.  The  underwriting  criteria for home equity loans and lines of credit
are generally the same as applied by the Bank when making a first mortgage loan,
as described above, and home equity lines of credit typically expire 15 years or
less after origination, unless renewed or extended.

         Consumer  loans  generally  involve  more credit risks than other loans
because of the type and nature of the  underlying  collateral  or because of the
absence  of any  collateral.  Consumer  loan  repayments  are  dependent  on the
borrower's  continuing  financial  stability  and  are  likely  to be  adversely
affected by job loss,  divorce and  illness.  Furthermore,  the  application  of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency  laws,  may limit the amount  which can be recovered on such loans in
the case of default. In most cases, any repossessed  collateral will not provide
an adequate  source of repayment of the outstanding  loan balance.  Although the
underwriting  process for consumer  loans  includes a comparison of the value of
the security,  if any, to the proposed loan amount,  the Bank cannot predict the
extent to which the  borrower's  ability to pay, and the value of the  security,
will be affected by prevailing economic and other conditions.

Other Services

         The  Bank  participates  in a  regional  network  of  automated  teller
machines  that may be used by Bank  customers  in major  cities  throughout  the
Southeast. The Bank offers both VISA and MasterCard brands of bankcards together
with  related  lines of credit.  The lines of credit  may be used for  overdraft
protection as well as pre-authorized credit for personal purchases and expenses.
The Bank also provides  travelers  checks,  direct deposit of payroll and social
security  checks,  and  automatic  drafts  for  various  accounts,  but does not
currently provide  international or trust banking  services,  other than foreign
currency  exchange  through a  correspondent  bank.  The Bank offers an Internet
banking    product    accessible    via   the   Bank's    custom    website   at
www.cornerstonenationalbank.com.  The interactive  banking  product  includes an
electronic bill payment service that allows  customers to make scheduled  and/or
recurring bill payments electronically. Credit cards are underwritten and funded
by a third party  provider.  The Bank also offers  merchant  and other  business
related  services to its commercial  customers.  The Bank also has a residential
mortgage  loan  department  with a highly  experienced  staff  qualified to make
virtually any type of residential mortgage loan.

Asset and Liability Management

         The Bank's  primary  earning  assets  consist of the loan portfolio and
investment portfolio. Management generally makes efforts to match maturities and
rates of loans and the  investment  portfolio  with those of deposits,  although
exact  matching  is  not  possible.   The  majority  of  the  Bank's  securities
investments  are in  marketable  obligations  of the United  States  government,
federal  agencies and state and  municipal  governments,  generally  with varied
maturities.

         Long-term loans are priced primarily to be interest-rate sensitive with
only a small portion of the Bank's  portfolio of long-term loans at fixed rates.
Such  fixed-rate  loans  generally  do not have  maturities  longer than fifteen
years, except in exceptional cases.

         Deposit  accounts  represent  the  majority of the Bank's  liabilities.
These  include  transaction  accounts,  savings and money  market  accounts  and
certificates of deposit. The maturities or repricing horizons of the majority of
interest-sensitive accounts are 12 months or less.

Additional Information

         For  additional  information  about the business of the Company and the
Bank, see Item 6-"Management's Discussion and Analysis or Plan of Operation."

                                       5
<PAGE>


Offices
         The  Company's  and  Bank's  main  office is  located at 1670 East Main
Street in Easley,  South Carolina.  The Bank also maintains  full-service branch
locations  at 45  Farrs  Bridge  Road in the  Berea  area of  Greenville,  South
Carolina and at 11000  Anderson  Highway in the  Powdersville  area of Piedmont,
South Carolina.  The Company owns all of these  properties and believes they are
well-suited to the banking business.


                           SUPERVISION AND REGULATION

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

General

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

         The Company is also subject to limited  regulation  and  supervision by
the South Carolina State Board of Financial Institutions.

Obligations of the Company to its Subsidiary Bank

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

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior


                                       6
<PAGE>

liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision gives depositors a preference over general and subordinated  creditors
and  shareholders  in the event a receiver is appointed to distribute the assets
of the Bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and National Banks

         The various federal bank regulators,  including the Federal Reserve and
the OCC have adopted  risk-based and leverage  capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and  off-balance  sheet  exposures,  as  adjusted  for credit  risks.  In
addition,  the OCC may establish  individual minimum capital  requirements for a
national bank that are different from the general requirements.

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

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

         The Bank exceeded all applicable  capital  requirements at December 31,
2005.  The Company is not  currently  subject to separate  capital  requirements
because the Federal Reserve applies its guidelines on a bank-only basis for bank
holding companies with less than $150 million in consolidated assets.

Payment of Dividends

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

Certain Transactions by the Company with its Affiliates

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

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory factors. In addition, the Bank is subject
to an  assessment  to  pay a pro  rata  portion  of  the  interest  due  on  the
obligations issued by the Financing Corporation ("FICO"). The FICO assessment is
adjusted  quarterly to reflect changes in the assessment bases of the respective
funds based on quarterly Call Report and Thrift  Financial  Report  submissions.
The  Federal  Deposit  Insurance  Reform Act of 2005 will  change the manner and
amount of insurance  assessments beginning in 2006. The changes are not expected
to have a material effect on the Bank in 2006.



                                       7
<PAGE>

Regulation of the Bank

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

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

Other Safety and Soundness Regulations

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

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

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered deposits.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and


                                       8
<PAGE>

other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching laws. South Carolina law permits such interstate  branching but not de
novo branching by an out-of-state bank.

Gramm-Leach-Bliley Act

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

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

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

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

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

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by  financial  institutions.  The privacy  provisions  of the Act have been
implemented by adoption of regulations by various Federal agencies.

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


                                       9
<PAGE>

are  currently  more  capable  than  the  Company  of  taking  advantage  of the
opportunity  to  provide a  broader  range of  services.  However,  the  Company
continues to believe that its commitment to providing high quality, personalized
service to customers will permit it to remain competitive in its market area.

Sarbanes-Oxley Act of 2002

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

Legislative Proposals

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

Fiscal and Monetary Policy

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

Item 2.  Description of Property.

         The Company owns 1.83 acres of land at 1670 East Main Street in Easley,
South  Carolina  where its main office is located.  The Company  also owns 6.772
acres of land at 45 Farrs  Bridge  Road in the Berea area of  Greenville,  South
Carolina where a branch office is located and one acre of land at 11000 Anderson
Road in the Powdersville  area of Piedmont,  South Carolina where another branch
is located.  A portion of the land in the Greenville  parcel is currently  under
contract for sale.

Item 3.  Legal Proceedings.

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

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2005.

                                     PART II

Item 5.  Market for Common Equity and  Related Stockholder Matters

         Although  the common  stock of the  Company  may be traded from time to
time on an individual  basis,  no  established  trading market has developed and
none is expected to develop in the foreseeable  future.  The common stock is not
listed on any exchange nor is it traded on the NASDAQ  National  Market  System,


                                       10
<PAGE>

nor are there any market makers known to  management.  In the fourth  quarter of
2005 and through  January 15, 2006,  the Company  offered  445,000 shares of its
common stock in a secondary offering.  All of the shares were sold at $13.50 per
share.

         As of March 1, 2006, there were  approximately 650 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         The Company  has never paid any cash  dividends,  and to  maintain  its
capital,  does not expect to pay cash dividends in the near future. The dividend
policy of the Company is subject to the discretion of the Board of Directors and
depends upon a number of factors, including earnings, financial conditions, cash
needs  and  general  business  conditions,  as  well  as  applicable  regulatory
considerations.  Because the Company has no  operations  other than those of the
Bank and only has limited income of its own, the Company would rely on dividends
from the Bank as its principal source of cash to pay cash dividends.

         Each national banking  association is required by federal law to obtain
the prior  approval of the OCC for the payment of  dividends if the total of all
dividends  declared  by the  board of  directors  of such  bank in any year will
exceed the total of (i) such bank's net profits (as defined and  interpreted  by
regulation)  for that year plus (ii) the  retained  net  profits (as defined and
interpreted  by  regulation)  for the  preceding  two years,  less any  required
transfers to surplus. In addition,  national banks can only pay dividends to the
extent that retained net profits (including the portion  transferred to surplus)
exceed bad debts (as defined by regulation).

         The  payment  of  dividends  by the  Company  and the  Bank may also be
affected  or limited by other  factors,  such as the  requirements  to  maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which,  depending on the
financial  condition of the Bank, could include the payment of dividends),  such
authority may require, after notice and hearing, that such bank cease and desist
from such practice.  The OCC has indicated that paying  dividends that deplete a
national  bank's  capital  base to an  inadequate  level  would be an unsafe and
unsound banking practice.  The Federal Reserve, the OCC and the FDIC have issued
policy  statements,  which provide that bank holding companies and insured banks
should generally only pay cash dividends out of current operating earnings.

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

         The Company has not in the past year sold any securities  that were not
registered under the Securities Act of 1933.

         No  disclosure  is  required  pursuant  to Item 703 of  Regulation  S-B
because the Company does not have a class of equity securities  registered under
Section 12 of the Securities Exchange Act of 1934.


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

         The information  contained under the caption  "Management's  Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations"  on pages 3
through 20 of the  Company's  Annual Report to  Shareholders  for the year ended
December 31, 2005 is incorporated herein by reference.

Item 7.  Financial Statements.

         The Consolidated  Financial  Statements and notes thereto and Report of
Independent  Registered  Public Accounting Firm contained on pages 21 through 42
of the Company's  Annual Report to Shareholders  for the year ended December 31,
2005 are incorporated herein by reference.

Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable.




                                       11
<PAGE>


Item 8A.  Controls and Procedures.

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

         No disclosure is required  under 17 C.F.R.  Section  228.308(a) or (b).
There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting

Item 8B.  Other Information

         No  information  was  required to be  disclosed in a report on Form 8-K
during the fourth quarter of 2005 that was not disclosed.
                                    PART III

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

Directors and Nominees

         The table  shows,  as to each  director and nominee for election at the
2006 annual meeting of shareholders,  his or her name, age,  positions held with
the  Company  and  principal  occupation  for the past five years and the period
during  which he served as a director of the  Company.  Directors of the Company
serve until the annual meeting of  shareholders  for the year indicated or until
their successors are elected and qualify.
<TABLE>
<CAPTION>

Name                           Age                      Principal Occupation                           Director Since
----                           ---                      --------------------                           --------------

         Nominees for the Board of Directors whose terms of office will continue
until the Annual Meeting of Shareholders of the Company in 2006 are:

<S>                            <C>   <C>                                                                    <C>
Joe E. Hooper                  67    President, Pride Mechanical and Fabrication Company, Inc.              1999

Robert R. Spearman             66    Surveyor/Retired                                                       1999

John M. Warren, Jr., M.D.      56    Physician, Easley OB-GYN Associates, P.A.                              1999

George I. Wike, Jr.            61    Investor; retired Optometrist                                          1999

         Nominee for the Board of Directors  whose term of office will  continue
until the Annual Meeting of Shareholders in 2008:

Jennifer M. Champagne          38    Senior Vice President and Chief Financial Officer of the
                                     Company since October 2002; Senior Manager, Elliott Davis,
                                     LLC (registered public accounting firm) from August 2000
                                     to October 2002; certified public accountant

         Members of the Board of Directors  whose terms of office continue until
the Annual Meeting of Shareholders of the Company in 2008 are:

Ben L. Garvin                  61    President of Cornerstone National Bank since 2001;                     2001
                                     Secretary and Treasurer of the Company since 2003; Senior
               Vice President of Central Carolina Bank, 1983-2001

J. Bruce Gaston                49    Gaston and Gaston, C.P.A.'s, P.A.                                      1999


                                       12
<PAGE>

S. Ervin Hendricks, Jr.        63    President and Co-owner, Nu-Life Environmental, Inc.,                   1999
                                     Easley, SC; President and Owner of Advance Machine Works
                                     since 1995.

         Members of the Board of Directors  whose terms of office continue until
the Annual Meeting of Shareholders of the Company in 2007 are:

J. Rodger Anthony              60    President and Chief Executive Officer of the Company since             1999
                                     1999; Chairman and Chief Executive Officer of the Bank
                                     since 1999; Chief Executive Officer, First National Bank
                                     of Pickens County, Easley, SC, 1996 to 1998

Walter L. Brooks               78    President, G&B Enterprises, Liberty, SC (egg production)               1999

T. Edward Childress, III       60    Registered pharmacist and long-term care facility owner;               1999
                                     Shareholder of Health Management Resources, Inc.; Chairman
                                     Cornerstone Bancorp since 1999
</TABLE>

         None of the principal  executive officers nor any director nominees are
related by blood, marriage or adoption in the degree of first cousin or closer.

Executive Officers

         The executive officers of the Company are J. Rodger Anthony,  President
and Chief Executive Officer and Jennifer M. Champagne,  Chief Financial Officer.
The age and business  experience of Mr. Anthony and Mrs. Champagne are set forth
above under "-Directors and Nominees." None of the principal  executive officers
or any  directors  are  related by blood,  marriage or adoption in the degree of
first cousin or closer.

Audit Committee Financial Expert

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

Code of Ethics

         The  Company  has  adopted a code of ethics  (as  defined  by 17 C.F.R.
228.406) that applies to its principal executive officer and principal financial
officer.  The Company will provide a copy of the code of ethics, free of charge,
to any person upon written  request to Jennifer M.  Champagne,  Chief  Financial
Officer,  Cornerstone  Bancorp,  1670 East Main Street,  Easley,  South Carolina
29640.

Item 10. Executive Compensation.

The  following  table sets forth the  remuneration  paid  during the years ended
December 31, 2005, 2004 and 2003 to the President and Chief Executive Officer of
the Company,  to the President of the Bank and to the Senior Vice  President and
Chief  Financial  Officer  of the  Company.  No other  principal  officer of the
Company or the Bank was paid remuneration in excess of $100,000.


                                       13
<PAGE>


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                Annual Compensation (1)           Long Term Compensation
                                                -----------------------           ----------------------
                                                                               Number of
                                                                              Securities
                                                                              Underlying
                                                                                Options           All Other
Name and Principal Position            Year     Salary         Bonus            Awarded        Compensation (2)
---------------------------            ----     ------         -----            -------        ----------------
<S>                                    <C>      <C>          <C>                <C>                <C>
J. Rodger Anthony, President and       2005     $142,000     $ 16,293           2,640              $ 4,260
Chief Executive Officer                2004     $135,200     $      -           2,904              $ 4,056
                                       2003     $130,000     $  5,592               -              $ 4,027

Ben L. Garvin, President               2005     $119,250     $ 13,682           2,640              $ 3,577
Cornerstone National Bank              2004     $113,500     $      -           2,904              $ 3,407
                                       2003     $109,200     $  4,697               -              $ 3,383

Jennifer M. Champagne, Senior          2005     $100,000     $ 11,474           1,320              $ 3,000
Vice President and Chief               2004     $ 92,000     $                  1,452              $ 2,760
Financial Officer                      2003     $ 85,000     $  3,656               -              $ 2,636
</TABLE>
---------------------
(1)  Perquisites  and personal  benefits did not exceed the lesser of $50,000 or
     10% of salary plus bonus payments.
(2)  Contributions  by the Bank to the  Bank's  Simple IRA Plan on behalf of Mr.
     Anthony, Mr. Garvin and Ms. Champagne.

                            ORGANIZERS' STOCK OPTIONS

         On  December  14,  1999,  the Board of  Directors  of the  Company,  in
consideration  of the  time and  efforts  of the  directors  of the  Company  in
organizing the Company and its subsidiary  bank and each  director's  personally
guaranteeing a portion of the organizational  expenses,  granted options to each
director to purchase up to 4,000 shares of the common stock of the Company for a
purchase  price of $10.00  per  share,  which was the price at which the  common
stock was sold to the public in 1999.  The options became  exercisable  for each
director  one-third  each year  beginning  on  December  14,  2000 and expire on
December 14, 2009,  unless they terminate sooner as the result of the director's
ceasing to be a director of the  Company,  in which case the options  expire six
months after the holder ceases to be a director.  As described in Note 17 to the
Consolidated  Financial  Statements  of the  Company,  the  Company's  Board  of
Directors  declared 10 percent stock  dividends to shareholders of record on May
10, 2005, May 11, 2004,  March 17, 2003 and April 30, 2002. The Company's  stock
option  agreements  provide  for  appropriate   adjustments  of  the  number  of
outstanding  stock  options in the event of stock  dividends  and other  similar
stock transactions.  The agreements also provide for the aggregate consideration
to be paid upon exercise of the options to be proportionately adjusted following
a stock  dividend.  Therefore,  at December  31,  2005,  each of the  organizing
directors held adjusted  options to purchase 5,856 shares with an exercise price
of $6.83 per share.

                             2003 STOCK OPTION PLAN

         In 2003  shareholders  of the Company  approved a stock option plan for
the benefit of employees  and  directors of the Company  ("the 2003 Plan").  The
2003 Plan reserved  125,000 shares of common stock for issuance upon exercise of
options.  During 2005  options to purchase  18,000  shares of common  stock were
granted under the 2003 Plan. These options vest over a three year period and are
exercisable  for a period of ten years at the estimated fair market value on the
date of grant, which was $13.00 per share. On December 20, 2005, in anticipation
of  adoption of SFAS  123(R),  the Board of  Directors  voted to vest all of the
options granted in 2005. The Board of Directors  declared 10% stock dividends in
May 2005 and 2004,  which  increased the number of shares  reserved for issuance
under the 2003 Plan to  151,250,  increased  the  number  of shares  subject  to
outstanding  options  under the 2003  Plan to 41,580  shares,  and  reduced  the
weighted  average purchase price to $11.04 per share, all in accordance with the
provisions of the 2003 Plan.




                                       14
<PAGE>


                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                   Number of
                                   Securities        % of Total Options
                               Underlying Options   Granted to Employees
            Name                    Granted                in 2005            Exercise Price       Expiration Date
            ----                    -------                -------            --------------       ---------------
<S>                                  <C>                    <C>                   <C>                  <C>
J. Rodger Anthony                    2,640                  28.6%                 $11.82               1/4/2015
Ben L. Garvin                        2,640                  28.6%                 $11.82               1/4/2015
Jennifer M. Champagne                1,320                  14.3%                 $11.82               1/4/2015
</TABLE>

         On December  20, 2005,  the Board of Directors  voted to vest the above
options.  They are  exercisable  for ten years from the date of grant.  All have
been adjusted to reflect the 2005 10% stock dividend.


          OPTION EXERCISES AND YEAR END OPTIONS OUTSTANDING AND VALUES

         The  following  table  presents  information  about options held by the
persons named in the Summary Compensation Table at December 31, 2005. No options
were exercised by such persons in 2005.

<TABLE>
<CAPTION>
                                                             Number of Securities                  Value of Unexercised
                                                            Underlying Unexercised                     In-the-Money
                                                               Options 12/31/05                    Options 12/31/03(1)
                                                               ----------------                    -------------------
Name                                                     Exercisable        Unexercisable     Exercisable      Unexercisable
                                                         -----------        -------------     -----------      -------------

<S>                                                         <C>                   <C>           <C>                  <C>
J. Rodger Anthony                                           11,400                -             $ 52,703             -
Ben L. Garvin                                               5,544                 -             $ 13,644             -
Jennifer M. Champagne                                       2,772                 -             $  6,822             -
</TABLE>
---------------
(1) Based on exercise prices of $6.83 per share for the 1999 Organizers Plan and
$10.33 and $11.82 for 2004 and 2005  grants,  respectively,  under the 2003 Plan
and  assuming  that  the fair  market  value of the  Company's  common  stock on
December  31,  2005  was  $13.50  per  share,  which is the  price at which  the
Company's  common stock was sold in a public offering during late 2005 and early
2006. The numbers of shares subject to options and the exercise prices have been
adjusted to reflect 10% stock dividends issued in each of 2005 and 2004.

Change of Control Agreements

         The  Company  has entered  into  Change of Control  Agreements  with J.
Rodger  Anthony,  its  President  and Chief  Executive  Officer,  Ben L. Garvin,
President of the Bank and  Corporate  Secretary of the Company,  and Jennifer M.
Champagne,  Senior Vice  President  and Chief  Financial  Officer of the Company
(each referred to as an "Executive"). The agreements provide that, if there is a
"change  of  control"  of the  Company  within  five  years  of the  date of the
agreements,  and the Executive terminates his employment with the Company or the
Company  terminates his employment  within six months of such change of control,
the Executive  will be entitled to a lump sum payment equal to a multiple of his
annual salary in effect at the date of termination. The agreements automatically
renew each year unless,  30 days prior to an annual  anniversary date, notice is
given by the Company that the  agreements  will not renew. A "change of control"
is deemed to occur  under the  agreements  if either (i)  voting  control of the
Company is acquired,  directly or  indirectly,  by any person or group acting in
concert,  (ii) the  Company  is  merged  with or into any other  entity  and the
Company is not the surviving  entity of the merger,  (iii) voting control of any
subsidiary of the Company by which subsidiary  Executive is principally employed
is acquired,  directly or indirectly,  by any person or group acting in concert,
or (iv) any subsidiary of the Company by which Executive is principally employed
is merged with or into  another  entity  which is not also a  subsidiary  of the
Company and such subsidiary is not the surviving entity of the merger.

         The  foregoing is merely a summary of the Change of Control  Agreements
and is not intended to create any rights in any person,  and is qualified in its
entirety by reference to such agreements.


                                       15
<PAGE>


Compensation of Directors

         Directors  are not  paid  for  service  as  directors  of the  Company.
However,  the  directors  of the Company also serve as directors of the Bank and
receive fees for meetings of the Bank Board of Directors and committee  meetings
of the Bank  Board.  The Bank paid  directors  $500 per board  meeting  in 2005,
except Mr. Childress,  who was paid $600 per board meeting due to his additional
duties as Chairman of the Company's  board.  Non-management  Directors were paid
$100 for each  committee  meeting  attended in person and $25 for each committee
meeting  attended by telephone.  Total  director fees were $69,175 in 2005.  For
2006, the Board of Directors has increased  monthly  directors' fees to $700 per
meeting.  Committee  fees remain at $100 per meeting  attended in person and $25
per meeting attended by telephone. See also "Organizers Stock Options" above for
information about stock options granted to the Company's original directors.

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

         The number of shares owned and the  percentage  of  outstanding  common
stock such number  represents at March 1, 2006,  for all directors and executive
officers of the Company and for all persons who are currently  beneficial owners
of 5% or more of the Company's common stock is set forth below.

<TABLE>
<CAPTION>
Name (and Address of 5% Owners)                       Number of Shares                   % of Outstanding
                                                  Beneficially Owned (1)(2)                Common Stock
-------------------------------------------    --------------------------------   -------------------------------
<S>                                                        <C>                                 <C>
J. Rodger Anthony (3)                                       69,373                             4.07%
Walter L. Brooks (4)                                        21,082                             1.30
Jennifer M. Champagne                                        5,137                              .32
T. Edward Childress, III                                   155,435                             9.62
    100 McAlister Lake Drive
    Easley, South Carolina 29642
Ben L. Garvin                                               34,457                             2.13
J. Bruce Gaston                                             40,589                             2.51
S. Ervin Hendricks, Jr.                                     50,354                             3.12
Joe E. Hooper                                               59,871                             3.71
Robert R. Spearman                                          13,020                              .81
John M. Warren, Jr., M.D.                                   28,200                             1.75
George I. Wike, Jr. (5)                                    155,435                             9.62
    PO Box 98
    Tigerville, SC
All directors and executive                               ________
officers as a group (11 persons)                           632,953                            39.17%
</TABLE>
--------------------
(1)  Includes for each individual,  except Mr. Garvin and Ms.  Champagne,  5,856
     vested  stock  options  that are  currently  exercisable.  Options that are
     neither currently exercisable nor exercisable within 60 days are omitted.
(2)  In  addition  to options  noted  above,  includes  2,772  options  that are
     currently   exercisable  granted  under  the  2003  option  plan  for  each
     individual,  except  Mr.  Garvin  and Mr.  Anthony,  who  each  have  5,544
     exercisable options included above under the 2003 Plan.
(3)  Includes 4,050 shares owned by Mr. Anthony's wife.
(4)  Includes  9,320  shares  owned by a  partnership  in which Mr.  Brooks is a
     partner. Also includes 2,549 shares owned by Mr. Brooks' wife.
(5)  Includes 2,549 shares owned by Mr. Wike's wife.

Except as otherwise  indicated,  to the knowledge of management,  all shares are
owned directly with sole voting power.


                                       16
<PAGE>

                      Equity Compensation Plan Information

         The  following  table sets forth  information  as of December  31, 2005
about all of the Company's compensation plans (including individual compensation
arrangements)  under which equity  securities of the Company are  authorized for
issuance.

<TABLE>
<CAPTION>
                            Number of securities                                      Number of securities remaining
                             to be issued upon            Weighted-average            available for future issuance
                                exercise of               exercise price of          under equity compensation plans
                            outstanding options,        outstanding options,         (excluding securities reflected
Plan Category               warrants and rights          warrants and rights                  in column (a))
-------------------------- ----------------------- --- ------------------------ --- -----------------------------------
                                    (a)                          (b)                              (c)
<S>                                <C>                         <C>                               <C>
Equity compensation
plans approved by
security holders                   41,580                      $10.55                            109,670

Equity compensation
plans not approved by
security holders                   52,707                      $ 6.83                                  -
                           -----------------------                                  -----------------------------------

Total                              94,287                      $ 8.68                            109,670
                           =======================                                  ===================================
</TABLE>


         The equity  securities  under plans not  approved  by security  holders
shown in the table are stock options  granted to directors  pursuant to the 1999
Organizers  Agreements.  The equity securities in the table under plans approved
by security  holders shown in the table are stock  options  granted to employees
and directors pursuant to the 2003 Stock Option Plan. Further  information about
the options is set forth in Item 10 under  "Organizers' Stock Options" and "2003
Stock Option Plan".

Item 12. Certain Relationships and Related Transactions.

         Extensions of Credit. The Bank, in the ordinary course of its business,
makes loans to and has other  transactions with directors,  officers,  principal
shareholders,  and their  associates.  Loans are made on substantially  the same
terms,  including  rates and  collateral,  as those  prevailing  at the time for
comparable  transactions  with other  persons and do not  involve  more than the
normal risk of collectibility or present other  unfavorable  features.  The Bank
expects  to  continue  to enter  into  transactions  in the  ordinary  course of
business on similar terms with directors,  officers, principal stockholders, and
their  associates.  The  aggregate  dollar amount of such loans  outstanding  at
December 31, 2005 was $6.3 million.  During 2005, $4.4 million of new loans were
made and repayments totaled $2.6 million.

     Organizers  Options.  See  the  discussion  in Item 10  under  the  caption
"ORGANIZERS' STOCK OPTIONS."





                                       17
<PAGE>


Item 13. Exhibits

(a)      Description of Exhibits.
<TABLE>
<CAPTION>

Exhibit No.              Description
<C>                      <C>
3.1                      Articles of Incorporation of Registrant (1)
3.2                      Bylaws of Registrant (1)
10                       Form of Change Of Control Agreements between the Company and each of
                         Ben L. Garvin and J. Rodger Anthony (2)
10.1                     Form of Organizers Option Agreements (3)
10.2                     Cornerstone Bancorp 2003 Stock Option Plan (4)
10.3                     Information about increases in director fees and executive  compensation
                         (Incorporated by reference to Form 8-K filed February 17, 2005)
10.4                     Change  of  Control  Agreement  between  the  Company  and  Jennifer  M.
                         Champagne
13                       Portions  of  2005  Annual  Report  to   Shareholders   incorporated  by
                         reference into this Form 10-KSB
21                       Subsidiaries of Registrant
31-1                     Rule 15d-14(a) Certifications
31-2                     Rule 15d-14(a) Certifications
32                       Section 1350 Certifications
</TABLE>
-----------------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form SB-2 (No.
     333-79543).
(2)  Incorporated  by  reference  to  Quarterly  Report on Form  10-QSB  for the
     quarter ended June 30, 2004.
(3)  Incorporated  by  reference  to Annual  Report on Form  10-KSB for the year
     ended December 31, 1999.
(4)  Incorporated  by  reference  to  Quarterly  Report on Form  10-QSB  for the
     quarter ended June 30, 2003.

Item 14.  Principal Accountant Fees and Services

                  Set  forth  below is  information  about  fees  billed  by the
         Company's   independent   auditors  for  audit  services   rendered  in
         connection with the consolidated  financial  statements and reports for
         the years  ended  December  31, 2005 and 2004,  and for other  services
         rendered  during such years,  on behalf of the Company and the Bank, as
         well as all  out-of-pocket  expenses  incurred in connection with these
         services, which have been billed to the Company.

         (1)  Audit Fees

                  Audit  fees  include  fees  billed for  professional  services
         rendered  for  the  audit  of  the  Company's   consolidated  financial
         statements and review of the interim condensed  consolidated  financial
         statements  included  in  quarterly  reports,  and  services  that  are
         normally  provided by the Company's  independent  auditor in connection
         with  statutory  and  regulatory  filings  or  engagements,  and attest
         services,  except those not required by statute or regulation.  For the
         years ended  December 31, 2004 and 2005,  respectively,  Elliott Davis,
         LLC billed, or expects to bill, the Company an aggregate of $26,240 and
         $27,600 for audit fees.

         (2)  Audit-Related Fees

                  Audit-related  fees  include  fees  billed for  assurance  and
         related services that are reasonably  related to the performance of the
         audit or review of the Company's  consolidated financial statements and
         are not reported under "Audit Fees".  Elliott  Davis,  LLC did not bill
         the Company for audit-related fees in 2005 or 2004.

         (3)  Tax Fees

                  Tax fees include fees for tax compliance/preparation and other
         tax  services.  Tax  compliance/preparation  include  fees  billed  for
         professional  services related to federal,  state and international tax
         compliance.  Other tax services  include fees billed for filing of Form
         5500 for the Company's  Section 125 Flexible  Spending  Account benefit
         plan.  For each of the years ended  December  31, 2004 and 2005 Elliott
         Davis,  LLC  billed  the  Company  an  aggregate  of $3,605  and $3,200
         respectively, for tax fees.

                                       18
<PAGE>

         (4)  All Other Fees

                  All other fees include fees for all services  other than those
         reported above.  For the year ended December 31, 2005, "All Other Fees"
         included $7,200 related to the Company's  secondary  offering of common
         stock,   including   review  of  and  consents  in  connection  with  a
         registration  statement  on Form SB-2  filed  with the  Securities  and
         Exchange  Commission.  For the year ended  December 31,  2004,  Elliott
         Davis, LLC did not bill the Company for other fees.

                  In making its decision to appoint  Elliott  Davis,  LLC as the
         Company's  independent auditors for the fiscal year ending December 31,
         2006, the Audit Committee  considered whether services other than audit
         and  audit-related  services  provided by that firm are compatible with
         maintaining the independence of Elliott Davis, LLC.

         (5) Audit Committee  Pre-Approval  of Audit and  Permissible  Non-Audit
Services of Independent Auditors

                  The Audit  Committee  pre-approves  all  audit  and  permitted
         non-audit  services  (including the fees and terms thereof) provided by
         the independent  auditors,  subject to possible limited  exceptions for
         non-audit services described in Section 10A of the Securities  Exchange
         Act of  1934,  which  are  approved  by the  Audit  Committee  prior to
         completion  of the audit.  The  Committee  may  delegate to one or more
         designated  members of the Committee the authority to pre-approve audit
         and permissible non-audit services, provided such pre-approval decision
         is presented to the full Committee at its next scheduled meeting. Prior
         to  the  performance  of any  services  by  the  Company's  independent
         auditors,  executive management requests an estimate of the fees and an
         outline of the proposed  services.  The estimated fees are submitted in
         advance to the audit  committee via letter  directly from Elliott Davis
         to the chairman of the Audit Committee.  At its next scheduled meeting,
         the Audit Committee  approves the estimated fees and services  expected
         to be provided and advises management of their decision.





                                       19
<PAGE>


         SIGNATURES

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

                               Cornerstone Bancorp


March 24, 2006           By: s/J. Rodger Anthony
                            ----------------------------------------------------
                               J. Rodger Anthony
                               President and Chief Executive Officer

                         By: s/Jennifer M. Champagne
                            ----------------------------------------------------
                               Jennifer M. Champagne
                               Chief Financial Officer
                               (Principal Financial and Principal Accounting
                                Officer)

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

<TABLE>
<CAPTION>
Signature                                Title                                              Date

<S>                                      <C>                                                <C>
s/J. Rodger Anthony
--------------------------               President, Chief Executive Officer, Director       March  24, 2006
J. Rodger Anthony

s/Walter L. Brooks
--------------------------               Director                                           March  24, 2006
Walter L. Brooks

s/T. Edward Childress, III
--------------------------               Director                                           March  24, 2006
T. Edward Childress, III

s/Ben L. Garvin
--------------------------               Director                                           March  24, 2006
Ben L. Garvin

s/J. Bruce Gaston
--------------------------               Director                                           March  24, 2006
J. Bruce Gaston

--------------------------               Director                                           March  __, 2006
S. Ervin Hendricks, Jr.

--------------------------               Director                                           March  __, 2006
Joe E. Hooper

--------------------------               Director                                           March  __, 2006
Robert R. Spearman

s/John M. Warren, Jr., M.D.
--------------------------               Director                                           March  24, 2006
John M. Warren, Jr., M.D.

--------------------------               Director                                           March  __, 2006
George I. Wike, Jr.
</TABLE>




                                       20
<PAGE>


Supplemental  Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-reporting Issuers

         The registrant  plans to furnish annual reports and proxy  materials to
security  holders  subsequent to the filing of this Form 10-KSB and will furnish
copies of such material to the Commission when it is sent to security holders.


Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.              Description
<C>                      <C>
3.1                      Articles of Incorporation of Registrant (1)
3.2                      Bylaws of Registrant (1)
10                       Form of Change Of Control Agreements between the Company and each of
                         Ben L. Garvin and J. Rodger Anthony (2)
10.1                     Form of Organizers Option Agreements (3)
10.2                     Cornerstone Bancorp 2003 Stock Option Plan (4)
10.3                     Information about increases in director fees and executive  compensation
                         (Incorporated by reference to Form 8-K filed February 17, 2005)
10.4                     Change  of  Control  Agreement  between  the  Company  and  Jennifer  M.
                         Champagne
13                       Portions  of  2005  Annual  Report  to   Shareholders   incorporated  by
                         reference into this Form 10-KSB
21                       Subsidiaries of Registrant
31-1                     Rule 15d-14(a) Certifications
31-2                     Rule 15d-14(a) Certifications
32                       Section 1350 Certifications
</TABLE>
-----------------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form SB-2 (No.
     333-79543).
(2)  Incorporated  by  reference  to  Quarterly  Report on Form  10-QSB  for the
     quarter ended June 30, 2004.
(3)  Incorporated  by  reference  to Annual  Report on Form  10-KSB for the year
     ended December 31, 1999.
(4)  Incorporated  by  reference  to  Quarterly  Report on Form  10-QSB  for the
     quarter ended June 30, 2003.



                                       21