SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB


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

For the Fiscal Year Ended December 31, 2002                File Number 333-79543

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

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

         The issuer's revenues for its most recent fiscal year were $3,765,298.

         The  aggregate  market  value  of  the  voting  Common  Stock  held  by
non-affiliates on March 1, 2003, was approximately $6,473,600. The issuer has no
non-voting  common equity  outstanding.  As of March 1, 2003, there were 879,994
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)      None

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







<PAGE>



                          10-KSB CROSS REFERENCE INDEX

<TABLE>
<CAPTION>
                                                          Part I                                                                Page
<S>                <C>                                                                                                          <C>
Item 1             Description of Business..............................................................................         2
Item 2             Description of Property..............................................................................         9
Item 3             Legal Proceedings....................................................................................         9
Item 4             Submission of Matters to a Vote of Security Holders..................................................         9
                                                          Part II
Item 5             Market for Common Equity and Related Stockholder Matters.............................................         9
Item 6             Management's Discussion and Analysis or Plan of Operation............................................        10
Item 7             Financial Statements.................................................................................        25
Item 8             Changes in and Disagreements with Accountants on Accounting
                        and Financial Disclosure........................................................................        45
                                                         Part III
Item 9             Directors and Executive Officers, Promoters and Control
                        Persons; Compliance with Section 16(a) of the Exchange Act......................................        45
Item 10            Executive Compensation...............................................................................        46
Item 11            Security Ownership of Certain Beneficial Owners and
                        Management and Related Stockholder Matters......................................................        47
Item 12            Certain Relationships and Related Transactions.......................................................        48
                                                          Part IV
Item 13            Exhibits and Reports on Form 8-K.....................................................................        48
Item 14            Controls and Procedures..............................................................................        49
</TABLE>



<PAGE>

                                     PART I

            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.


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 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 Act.  The Bank was
organized in 1999. The Bank conducts its activities  from its main office opened
in September of 1999, located in Easley, South Carolina and from a branch office
located in Greenville, South Carolina.

         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 contiguous  areas.  Pickens County and four neighboring
counties   make   up   the   Greenville-Spartanburg-Anderson,   South   Carolina
Metropolitan  Statistical Area (the "Greenville  MSA"). The MSA was the nation's
52nd  largest  metro area in 1999.  The  official  2001  population  estimate is
978,213  residents,  with projections for having a 1  million-person  population
count by 2010.  Over 90% of those employed were in  non-agricultural  employment
with over 50% of those employed in  manufacturing  and trades,  in roughly equal
numbers.

         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 (including Individual 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 of South  Carolina  and makes  other  authorized  investments.  Both
in-house and conventional residential mortgage loans are offered at the Bank. As
of December 31, 2002, the Bank employed 27 people.

         In August 2002,  Cornerstone National Bank opened a full service branch
location. The branch maintains a staff of approximately five experienced banking
personnel and an experienced  on-site mortgage lender.  The office is located at
45 Farrs Bridge Road in Greenville, South Carolina.

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, 8 commercial
banks and 1 savings  institution operate branches in Pickens County. In addition
to the bank, 14 commercial banks and 5 savings  institutions operate branches in
Greenville 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


                                       2
<PAGE>

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,  that  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, 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.  In  addition,
retirement accounts such as IRA's (Individual  Retirement Accounts) are offered.
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) and does
not generally accept brokered deposit accounts.

Lending Activities

         The Bank  offers a range of  lending  services,  including,  commercial
loans,  consumer loans,  and real estate mortgage loans.  Consumer loans include
both installment and term loans,  and include loans for  automobiles,  household
goods, education,  boats and general personal expenses. During the third quarter
of 2001, the Bank opened a residential  mortgage loan  department  with a highly
experienced  staff qualified to make virtually any type of residential  mortgage
loan. These loans are sold by the Bank upon origination in most cases.

         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 past due and nonperforming loans,
current  and  anticipated  economic  changes  and the  values  of  certain  loan
collateral.  Based upon such 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 subject  to  regulatory  examination  and
compared to a peer group of financial institutions identified by the regulators.

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 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%. The loan-to-value ratio for first
and second mortgage loans and for  construction  loans generally does not exceed
80%.  In  addition,  the Bank  generally  requires  personal  guarantees  of the
principal owners of the property.

         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.  Each of  these  factors
increases the risk of  nonpayment by the borrower.  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.  In either case,  the risk of nonpayment by the
borrower is increased.



                                       3
<PAGE>

         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 Easley/Pickens/Greenville County area. The
well-established  banks  in  the  Easley/Pickens/Greenville   County  area  make
proportionately  more loans to medium- to large-sized  businesses than the Bank.
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.

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
such as credit  cards.  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.  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.  The Bank also offers merchant and other
business related services to its commercial customers.


                                       4
<PAGE>

Asset and Liability Management

         The primary  earning  assets of the Bank consist of the loan  portfolio
and investment  portfolio.  Efforts are made  generally 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 liabilities of the Bank.
These include transaction  accounts,  time deposits and certificates of deposit.
The maturities of the majority of  interest-sensitive  accounts are 12 months or
less.

                           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.



                                       5
<PAGE>

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

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
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 Board 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
recently issued  additional  capital  guidelines for bank holding companies that
engage in certain trading activities.

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

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.  However,  because  legislation
enacted in 1996  requires  that  insured  deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"). To
cover those  obligations,  during 2002, the FDIC assessed both  BIF-insured  and
SAIF insured deposits a range of 1.82 to 1.70 basis points per $100 of deposits.
Currently,  the FDIC is assessing BIF-insured deposits and SAIF-insured deposits
each 1.68 basis  points per $100 of deposits  to cover the  interest on the FICO
obligations.  The FICO  assessment  will  continue to be adjusted  quarterly  to
reflect  changes  in the  assessment  bases  of the  respective  funds  based on
quarterly Call Report and Thrift Financial Report submissions.



                                       6
<PAGE>

Regulation of the Bank

         The Bank is subject to the limitations of 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 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;
the Fair Credit Reporting Act, governing the use and provision of information to
credit  reporting  agencies;  the Bank Secrecy Act,  dealing  with,  among other
things,  the  reporting  of  certain  currency  transactions;  and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the Bank are subject to the Truth
in  Savings  Act,  requiring  certain  disclosures  about  rates paid on savings
accounts;  the Expedited Funds  Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks;  the Right to Financial  Privacy Act,  which  imposes a duty to
maintain  certain   confidentiality  of  consumer  financial  records,  and  the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

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

Other Safety and Soundness Regulations

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

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

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

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

                                       7
<PAGE>

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,  was
adopted on November 12, 1999. The Act removes  Depression-era  barriers that had
separated  banks and  securities  firms,  and seeks to  protect  the  privacy of
consumers' financial information.  Most of the provisions of the Act require the
applicable   regulators  to  adopt  regulations  in  order  to  implement  these
provisions, and significant numbers of regulations have been adopted.

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

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

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

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

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

         The  Company  anticipates  that  the Act and  the  regulations  adopted
pursuant to the Act will be likely to create new  opportunities  for it to offer
expanded  services to  customers  in the future,  though the Company has not yet
determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company  further  expects that the Act
will increase competition from larger financial  institutions that are currently
more capable than the Company of taking  advantage of the opportunity to provide
a broader range of services.  However, the Company continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.



                                       8
<PAGE>

Legislative Proposals

         New proposed legislation, which could significantly affect the business
of banking,  has been  introduced  or may be introduced in Congress from time to
time.  Management  of the  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  purchased  6.772
acres of land on the 40 block of Farrs Bridge Road in Berea,  South  Carolina on
which it  constructed  a permanent  branch  office that opened  during the third
quarter  of  2002.   The  cost  of  building  and   furnishing  the  office  was
approximately $1.3 million. Both properties are considered to be well suited for
the Company's purposes.

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 2002.

                                     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,
nor are there any market  makers known to  management.  During the past calendar
year,  management was aware of a number of  transactions  in which the Company's
common stock traded at $12.50 per share. However, management has not ascertained
that these transactions were the result of arm's length negotiations between the
parties, and because of the limited number of shares involved,  these prices may
not be indicative of the market value of the common stock.

         As of March 1, 2003, there were  approximately 484 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


                                       9
<PAGE>

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.

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

         Cornerstone Bancorp,  (the "Company") is a bank holding company and has
no  operations  other than those  carried  on by its  wholly  owned  subsidiary,
Cornerstone National Bank (the "Bank"). The Bank commenced business on September
15, 1999. It conducts a general banking  business from two offices in Easley and
Greenville, South Carolina.

         The following  information  describes  various financial aspects of the
Bank's  business.  This  information  should  be read in  conjunction  with  the
financial statements of the Company, which appear elsewhere in this document.

Critical Accounting Policies

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

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

         The  Company  believes  the  allowance  for loan  losses is a  critical
accounting  policy that  requires the most  significant  judgments and estimates
used in  preparation  of its  consolidated  financial  statements.  Refer to the
section "Allowance for Loan Losses" for a detailed  description of the Company's
estimation process and methodology related to the allowance for loan losses.

Earnings Performance

         The Company earned $247,000 or $.28 per basic and diluted share for the
year ended December 31, 2002. The Company had a net loss from operations for the
year ended  December  31, 2001 of $138,000 or $.15 per basic and diluted  common
share,  compared to a net income for the year ended December 31, 2000 of $84,000
or $.10 per  basic  and $.09 per  diluted  common  share.  The  Company  had net
interest income (the  difference  between  interest  earned on interest  earning


                                       10
<PAGE>

assets and interest paid on interest bearing liabilities) of $2.1 million,  $1.5
million and $1.2 million for 2002,  2001,  and 2000,  respectively.  The Company
also had other operating income (principally  mortgage loan origination fees and
service fees on deposits) of $472,000,  $191,000 and $73,000 in 2002,  2001, and
2000, respectively.  The Company provided $183,000, $181,000 and $102,000 to its
reserve for loan losses in 2002,  2001,  and 2000,  respectively,  and had other
operating  expenses   (principally  salaries  and  benefits  and  occupancy  and
equipment  expenses)  of $2.1  million  in 2002,  $1.7  million in 2001 and $1.1
million in 2000.

Net Interest Income

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

         For the years ended  December  31,  2002,  2001,  and 2000 net interest
income was $2.1  million  $1.5  million  and $1.2  million,  respectively.  This
increase was  primarily  attributable  to an increase in the volume of loans and
investments.  Average  interest  earning assets increased to $56,718,000 in 2002
from  $40,973,000 in 2001 and $25,692,000 in 2000. The Bank's  relatively  young
age makes growth a primary driver of net interest  income.  However,  during the
past 2 years,  interest rates have been at  unprecedented  low levels,  and have
also had an impact on net interest income. The average yield on interest earning
assets  decreased from 7.14% in 2001 to 5.81% in 2002 and from 8.00% to 7.14% in
2000 to 2001, while the average cost of interest bearing  liabilities  decreased
from 4.44% in 2001 to 2.59% in 2002 and from 4.92% in 2000 to 4.44% in 2001. The
net yield on average  interest earning assets remained the same in 2002 and 2001
at 3.67%. It decreased from 4.75% in 2000 to 3.67% in 2001.




                                       11
<PAGE>

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

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                         Year Ended December 31, 2002           Year Ended December 31, 2001
                                                         ----------------------------           ----------------------------
                                                                      Interest                             Interest
                                                        Average       Income/     Yields/     Average       Income/    Yields/
                                                      Balances(1)     Expense    Rates(2)   Balances(1)     Expense   Rates(2)
                                                      -----------     -------    --------   -----------     -------   --------
Assets
<S>                                                    <C>            <C>          <C>         <C>           <C>        <C>
Securities ........................................    $14,020        $   588      4.20%       $10,497       $   647    6.17%
Federal Funds Sold ................................      5,728             92      1.61%         6,789           266    3.92%
Loans (3), (7) ....................................     36,970          2,613      7.07%        23,618         2,009    8.51%
Interest Bearing Balances .........................          -              -         -%            69             5    7.25%
                                                       -------        -------                  -------       -------
       Total interest earning assets ..............     56,718          3,293      5.81%        40,973         2,927    7.14%
Cash and due from banks ...........................      1,467                                   1,251
Allowance for loan losses .........................       (470)                                  (294)
Premises and equipment ............................      3,239                                   2,473
Other assets ......................................        509                                     375
                                                       -------                                 -------
       Total assets ...............................    $61,463                                 $44,778
                                                       =======                                 =======

Liabilities and shareholders' equity
Interest bearing liabilities
       Interest bearing transaction accounts ......    $ 6,945        $  100      1.44%        $ 6,021       $  163    2.71%
       Savings ....................................     11,394           217      1.90%          6,676          229    3.43%
       Time deposits $100,000 and over ............      9,478           324      3.42%          5,740          334    5.81%
       Other time deposits ........................     13,693           474      3.46%          9,806          544    5.55%
                                                       -------        ------                   -------       ------
         Total interest bearing deposits ..........     41,510         1,115      2.69%         28,243        1,270    4.50%
Federal Funds purchased and
    customer repurchase agreements ................      5,367            98      1.83%          3,801          152    4.00%
                                                       -------        ------                   -------       ------
Total interest bearing liabilities ................     46,877         1,213      2.59%         32,044        1,422    4.44%
Noninterest bearing demand deposits ...............      6,707                                   4,894
Other liabilities .................................        151                                     184
Shareholders' equity ..............................      7,728                                   7,656
                                                       -------                                 -------
       Total liabilities and shareholders' equity .    $61,463                                 $44,778
                                                       =======                                 =======
Interest rate spread (4) ..........................                              3.22%                                2.70%
Net interest income and net yield on earning
assets(5) .........................................                   $2,080     3.67%                        $1,505  3.67%
Interest free funds supporting earning assets (6) .    $ 9,841                                  $8,929
</TABLE>

(1)  Average balances calculated based on a daily basis.
(2)  Calculated  based on the number of days in the year that each type of asset
     or liability was in existence.
(3)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis.
(4)  Total  interest  bearing  assets  yield  less the  total  interest  bearing
     liabilities rate.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets less total interest bearing liabilities.
(7)  Interest  income on loans  includes  loan fee  income  as well as  interest
     income. The amount of loan fees included is not considered material.


                                       12
<PAGE>

Rate/Volume Analysis of Net Interest Income

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

<TABLE>
<CAPTION>

                                                                                            Year Ended December 31,
                                                                                             2002 compared to 2001
                                                                                          Increase (Decrease) Due to
                                                                                          --------------------------
                                                                                            (Dollars in Thousands)
                                                                                                              Volume/
                                                                             Volume            Rate            Rate          Change
                                                                             ------            ----            ----          ------

Interest earned on:
<S>                                                                         <C>             <C>             <C>             <C>
     Securities ....................................................        $   217         $  (207)        $   (69)        $   (59)

     Federal Funds sold ............................................            (42)           (156)             24            (174)

     Loans .........................................................          1,136            (340)           (192)            604
     Interest bearing balances .....................................             (5)             (5)              5              (5)
                                                                            -------         -------         -------         -------

          Total interest income ....................................          1,306            (708)           (232)            366

Interest paid on:
     Deposits ......................................................            597            (512)           (240)           (155)
     Federal Funds purchased & customer repurchase
         agreements ................................................             63             (83)            (34)            (54)
                                                                            -------         -------         -------         -------

          Total interest expense ...................................            660            (595)           (274)           (209)
                                                                            -------         -------         -------         -------

Change in Net Interest Income ......................................        $   646         $  (113)        $    42         $   575
                                                                            =======         =======         =======         =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                           2001 compared to 2000
                                                                                        Increase (Decrease) Due to
                                                                                        --------------------------
                                                                                          (Dollars in Thousands)
                                                                                                              Volume/
                                                                                Volume          Rate            Rate          Change
                                                                                ------          ----            ----          ------
Interest earned on:

<S>                                                                            <C>            <C>             <C>             <C>
     Securities ......................................................         $  120         $  (29)         $   (6)         $   85

     Federal Funds sold ..............................................            185            (89)            (69)             27

     Loans ...........................................................            992           (129)           (103)            760
          Interest bearing balances ..................................              1              -               -               1
                                                                               ------         ------          ------          ------
Total interest income ................................................          1,298           (247)           (178)            873

Interest paid on:
     Deposits ........................................................            700            (60)            (61)            579
     Federal Funds purchased & customer repurchase
         agreements ..................................................             43            (25)             (8)             10
                                                                               ------         ------          ------          ------
          Total interest expense .....................................            743            (85)            (69)            589
                                                                               ------         ------          ------          ------

Change in Net Interest Income ........................................         $  555         $ (162)         $ (109)         $  284
                                                                               ======         ======          ======          ======
</TABLE>


                                       13
<PAGE>

Interest Rate Sensitivity

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

         On a cumulative  basis,  rate sensitive  assets exceeded rate sensitive
liabilities,  resulting  in an asset  sensitive  position  at the end of 2002 of
$10.1  million,  for a cumulative  gap ratio of 1.20.  The gap is positive  when
interest sensitive assets exceed interest sensitive liabilities, as was the case
at the end of 2002 with  respect to the one-year  time  horizon.  When  interest
sensitive  liabilities exceed interest sensitive assets for a specific repricing
"horizon",  a  negative  interest  sensitivity  gap  results.  For a bank with a
positive gap,  rising interest rates would be expected to have a positive effect
on net interest  income and falling rates would be expected to have the opposite
effect.

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts of fixed rate loans are  reflected at the loans' final  maturity
dates.  Variable  rate loans are  reflected at the earlier of their  contractual
maturity  date or the date at which  the  loan  may be  repriced  contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's  repricing  date for  variable  rate  instruments  or the  ultimate
maturity  date for fixed  rate  instruments.  Overnight  federal  funds sold are
reflected in the earliest  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest  repricing  interval due to  contractual  arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits,  principally  certificates  of deposit,  are  reflected at their
contractual  maturity  dates.  Federal funds  purchased and customer  repurchase
agreements is presented in the 1-3 month repricing  interval because their rates
are adjustable at their contractual maturity dates.




                                       14
<PAGE>

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                  December 31, 2002
                                                                                  -----------------
                                                                1-3      3-12       1-3       3-5      5-15     > 15
                                                  Immediate   Months    Months     Years     Years    Years     Years       Total
                                                  ---------   ------    ------     -----     -----    -----     -----       -----
                                                                                (Dollars in Thousands)
Interest earning assets
<S>                                                 <C>      <C>        <C>       <C>      <C>       <C>       <C>         <C>
    Securities (1) .........................         1,190   3,415      4,983     5,675     3,541        -          -      18,804
    Federal funds sold .....................         1,005       -          -         -         -        -          -       1,005
    Loans (2) ..............................        19,410   4,587      4,286     3,979     8,376      842        220      41,700
                                                    ------   -----      -----     -----    ------    -----     ------      ------
        Total interest earning assets ......        21,605   8,002      9,269     9,654    11,917      842        220      61,509
                                                    ------   -----      -----     -----    ------    -----     ------      ------

Interest bearing deposits
    Interest bearing transaction accounts ..         7,859       -          -         -         -        -          -       7,859
    MMDA's & Savings .......................        11,584       -          -         -         -        -          -      11,584
    Time deposits $100M and over ...........             -   2,594      5,303       949     1,723        -          -      10,569
    Other time deposits ....................             -   2,748      9,237     1,940     2,501        -          -      16,426
    Federal funds purchased and customer
      repurchase agreements ................         3,983       -      1,000         -         -        -          -       4,983
                                                    ------   -----      -----     -----    ------    -----     ------      ------
         Total interest bearing liabilities.        23,426   5,342     15,540     2,889     4,224        -          -      51,421
                                                    ------   -----      -----     -----    ------    -----     ------      ------

Interest sensitivity gap ...................       (1,821)   2,660    (6,271)     6,765     7,693      842        220      10,088
Cumulative interest sensitivity gap ........       (1,821)     839    (5,432)     1,333     9,026    9,868     10,088
Gap ratio ..................................           .92    1.50        .60      3.34      2.82        -          -        1.20
Cumulative gap ratio .......................           .92    1.03        .88      1.03      1.18     1.19       1.20
</TABLE>
(1)  Securities with call features have been included in the period in which the
     security becomes callable.
(2)  There were no nonaccruing loans or unamortized  deferred loan fees, both of
     which would normally be subtracted from loans for purposes of this table.



<TABLE>
<CAPTION>
                                                                                  December 31, 2001
                                                                                  -----------------
                                                                1-3      3-12       1-3       3-5      5-15      > 15
                                                  Immediate   Months    Months     Years     Years    Years     Years       Total
                                                  ---------   ------    ------     -----     -----    -----     -----       -----
                                                                               (Dollars in Thousands)
Interest earning assets
<S>                                                   <C>      <C>        <C>      <C>        <C>      <C>        <C>        <C>
    Securities ...................................     4,867   1,376        942     5,623         -        -          -      12,808
    Federal funds sold ...........................       970       -          -         -         -        -          -         970
    Loans (1) ....................................    12,950   3,019      5,863     5,425     2,590    1,623          3      31,473
                                                      ------   -----      -----    ------     -----    -----      -----      ------
        Total interest earning assets ............    18,787   4,395      6,805    11,048     2,590    1,623          3      45,251
                                                      ------   -----      -----    ------     -----    -----      -----      ------

Interest bearing deposits
    Interest bearing transaction accounts ........     3,406       -          -     3,406         -        -          -       6,812
    MMDA's & Savings .............................     3,520       -          -     5,423         -        -          -       8,943
    Time deposits $100M and over .................         -   1,505      5,250         -       479        -          -       7,234
    Other time deposits ..........................         -   3,572      6,607       499       184        -          -      10,862
    Federal funds purchased and
    securities sold under agreements to
      repurchase .................................         -   3,293          -         -         -        -          -       3,293
                                                      ------   -----     ------    ------     -----    -----      -----      ------
         Total interest bearing liabilities ......     6,926   8,370     11,857     9,328       663        -          -      37,144
                                                      ------   -----     ------    ------     -----    -----      -----      ------

Interest sensitivity gap .........................    11,861  (3,975)    (5,052)    1,720     1,927    1,623          3       8,107
Cumulative interest sensitivity gap ..............    11,861   7,886      2,834     4,554     6,481    8,104      8,107
Gap ratio ........................................      2.71     .53        .57      1.18      3.91        -          -        1.22
Cumulative gap ratio .............................      2.71    1.52       1.10      1.12      1.17     1.22       1.22
</TABLE>

(1)  There were no nonaccruing loans or unamortized  deferred loan fees, both of
     which would normally be subtracted from loans for purposes of this table.

                                       15
<PAGE>

Provision for Loan Losses

         The  provision  for  loan  losses  is  charged  to  earnings  based  on
management's  continuing review and evaluation of the loan portfolio and general
economic conditions. The provision for 2002 was $182,842 as compared to $180,500
in 2001 and $102,000 in 2000.  The amount of the  provision  was  primarily  the
result of increases in the loan portfolio.

         See "Impaired  Loans" and  "Allowance for Loan Losses" for a discussion
of the  factors  management  considers  in its  review  of the  adequacy  of the
allowance and provision for loan losses.

Other Income

         Other income,  which  consists  primarily of mortgage loan  origination
fees,  service charges on deposit accounts,  and other fee income,  increased by
$281,000  to  $472,000  in 2002 from  $191,000  in 2001 and $73,000 for the year
ended  December 31, 2000. The increases are primarily the result of increases in
deposit accounts and growth in the mortgage loan origination department.

Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits,  net occupancy,  and data processing totaled $2.1 million for the year
ended  December 31, 2002 as compared to $1.7 million for the year ended December
31, 2001.  Total other  expenses for the year ended  December 31, 2000 were $1.1
million. Salaries and employee benefits for 2002 increased by $311,000 or 37% to
$1.2 million from $850,000 for the year ended  December 31, 2001.  This increase
was due  primarily to the hiring of  additional  staff to support the opening of
the new branch  office.  Net  occupancy  expense  increased by $40,000 or 15% to
$316,000  for the year ended  December  31,  2002.  This  increase was largely a
result of the opening of the branch  location in August  2002.  Data  processing
expense  increased by $30,000 or 29% to $133,000 for the year ended December 31,
2002 from  $103,000 for 2001.  The increase is primarily the result of increases
in banking  transactions  due to the Bank's growing customer base. The Company's
efficiency  ratio,  which is measured as noninterest  expense as a percentage of
the sum of net interest  income plus other  income,  improved to 81% from 98% as
the Company's noninterest expense was spread over a larger customer base.


Income Taxes

         For 2002 the Company  recorded  income tax  expense of $61,000.  As the
Company  becomes  profitable  and uses its net  operating  loss carry  forwards,
income  taxes are moving  towards  the  statutory  rates.  During the year ended
December 31, 2001,  the Bank recorded a tax benefit of $7,000  compared to a tax
provision of $34,000 for the year ended December 31, 2000. The Bank accounts for
income taxes under SFAS No. 109, "Accounting for Income Taxes." Certain items of
income and expense  (principally  provision for loan losses,  depreciation,  and
pre-opening  expenses)  are  included  in one  reporting  period  for  financial
accounting  purposes and another for income tax purposes.  Refer to the notes to
the Company's  consolidated  financial statements contained elsewhere herein for
more information.

Investment Securities

         As of  December  31,  2002 and 2001,  the Bank's  investment  portfolio
comprised approximately 28.2% and 25.5%, respectively,  of its total assets. The
following table  summarizes the carrying  amounts of securities held by the Bank
at  December  31,  2002 and 2001.  Available-for-sale  securities  are stated at
estimated  fair value.  Held-for-investment  securities  are stated at amortized
cost.  Federal  Reserve stock has no quoted market value,  but has  historically
been redeemed at par value, and is therefore carried at cost.



                                       16
<PAGE>


                   Investment Securities Portfolio Composition
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                   2002                        2001
                                                                                                   ----                        ----
Available for sale:
<S>                                                                                               <C>                        <C>
   U.S. Government Agencies ..................................................                    $10,336                    $12,807
   FNMA Mortgage-backed security .............................................                      1,033                          -
   Corporate bonds ...........................................................                      1,521                          -
                                                                                                  -------                    -------
      Total available for sale ...............................................                     12,890                     12,807

Held to maturity
   U.S. Government Agencies ..................................................                      5,231                          -
   Corporate bonds ...........................................................                        503                          -
                                                                                                  -------                    -------
     Total held to maturity ..................................................                      5,734                          -

Federal Reserve Bank Stock ...................................................                        180                        180
                                                                                                  -------                    -------

Total ........................................................................                    $18,804                    $12,987
                                                                                                  =======                    =======
</TABLE>

         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2002 and 2001.  Securities  are
presented at their carrying value.

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                              December 31, 2002                 December 31, 2001
                                                                              -----------------                 -----------------
                                                                         Amount               Yield          Amount          Yield
                                                                         ------               -----          ------          -----
                                                                                              (Dollars in thousands)
Available for sale securities:
U.S. Government Agencies
<S>                                                                     <C>                   <C>           <C>                <C>
     Within one year .......................................            $ 3,591               3.41%         $ 2,748            6.74%
     After one through five years ..........................              5,735               3.37%           9,070            4.41%
     After ten years .......................................              1,010               2.01%             989            4.01%
FNMA Mortgage-backed security (1) ..........................              1,033               5.33%               -               -%
Corporate bonds
     Within one year .......................................              1,302               4.24%               -               -%
     After one through five years ..........................                219               6.98%               -               -%

Held to maturity securities:
U.S. Government Agencies
     After one through five years ..........................              5,231               4.68%               -               -%
Corporate bonds
     Within one year .......................................                503               4.03%               -               -%

Other securities
     No stated maturity ....................................                180               6.00%             180            6.00%
                                                                        -------                             -------
     Total .................................................            $18,804               3.89%         $12,987            4.88%
                                                                        =======                             =======
</TABLE>

(1)  The FNMA Mortgage-backed  security matures within 10 years on an amortizing
     basis.

         Management  assigns securities upon purchase into one of the categories
(trading,  available-for-sale  and held-to-maturity)  designated by Statement of


                                       17
<PAGE>

Financial  Accounting  Standards  ("SFAS") No. 115 based on intent,  taking into
consideration  other factors including  expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements.  The  Bank  has  not  historically  held  securities  for  trading
purposes.

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries which management believes
pose a material risk to the Bank, and there are no foreign loans.

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

                           Loan Portfolio Composition
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             ------------
                                                                                  2002                            2001
                                                                                  ----                            ----
                                                                                            % of                               % of
                                                                     Amount                 Loans         Amount               Loans
                                                                     ------                 -----         ------               -----
<S>                                                                <C>                      <C>          <C>                   <C>
Commercial and industrial ................................         $  8,395                 20.1%        $ 11,923              37.9%
Real Estate - construction ...............................            8,473                 20.3            1,697               5.4
Real Estate - mortgage
       Farmland ..........................................                -                    -                -                 -
       1-4 family residential ............................            9,543                 22.9            9,126              29.0
       Nonfarm, nonresidential ...........................           12,482                 29.9            4,626              14.7
       Multifamily residential ...........................              908                  2.2              902               2.9
 Consumer installment ....................................            1,899                  4.6            3,199              10.1
                                                                   --------                -----         --------         ---------
        Total Loans ......................................           41,700                100.0%          31,473             100.0%
         Less allowance for loan losses ..................             (553)                                 (384)
                                                                   --------                             ---------
            Net Loans ....................................         $ 41,147                             $  31,089
                                                                   ========                             =========
</TABLE>

Maturity Distribution of Loans

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

                         Maturity Distribution on Loans
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                                  December 31, 2002
                                                                                                  -----------------
                                                                              1 Year           1-5           5 Years
                                                                             or Less          Years          or More           Total
                                                                             -------          -----          -------           -----
<S>                                                                          <C>             <C>             <C>             <C>
Commercial and industrial ..........................................         $ 6,399         $ 1,897         $   100         $ 8,395
Real Estate-construction ...........................................           5,748           2,591             133           8,472
Real Estate-mortgage ...............................................           6,538          15,234           1,161          22,934
Consumer installment ...............................................           1,294             605               -           1,899
                                                                             -------         -------         -------         -------
      Total ........................................................         $19,979         $20,327         $ 1,394         $41,700
                                                                             -------         -------         -------         -------

Predetermined rate, maturity greater than one year .................         $     -         $12,390         $ 1,201         $13,591
                                                                             -------         -------         -------         -------

Variable rate or maturity within one year ..........................         $19,979         $ 7,937         $   193         $28,109
                                                                             =======         =======         =======         =======
</TABLE>


                                       18
<PAGE>

Impaired Loans

         A loan will be considered to be impaired when, in management's judgment
based on  current  information  and  events,  it is  probable  that  the  loan's
principal or interest will not be  collectible  in accordance  with the terms of
the original loan agreement.  Impaired loans, when not material, will be carried
in the balance sheet at a value not to exceed their  observable  market price or
the fair value of the  collateral if the repayment of the loan is expected to be
provided  solely  by the  underlying  collateral.  The  carrying  values  of any
material  impaired loans will be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is the
contractual  interest rate adjusted for any deferred loan fees or costs, premium
or discount existing at the inception or acquisition of the loan.

         Loans  which  management  identifies  as  impaired  generally  will  be
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more delinquent as to principal or interest payments. At December
31,  2002 and 2001,  the Bank had no  nonaccrual  loans or loans 90 days or more
past due.

         Generally,  the accrual of interest  will be  discontinued  on impaired
loans when  principal or interest  becomes 90 days past due, and any  previously
accrued  interest on such loans will be reversed  against  current  income.  Any
subsequent  interest  income will be  recognized  on a cash basis when  received
unless  collectibility of a significant amount of principal is in serious doubt.
In such cases, collections are credited first to the remaining principal balance
on a cost  recovery  basis.  An  impaired  loan will not be  returned to accrual
status  unless   principal  and  interest  are  current  and  the  borrower  has
demonstrated the ability to continue making payments as agreed.

Potential Problem Loans

         Management  identifies and maintains a list of potential problem loans.
These are loans that are not included in  nonaccrual  status,  or loans that are
past due 90 days or more and  still  accruing  interest.  A loan is added to the
potential  problem  list when  management  becomes  aware of  information  about
possible  credit  problems of borrowers  that causes doubts as to the ability of
such borrowers to comply with the current loan repayment terms.  These loans are
designated  as such in order to be monitored  more closely than other credits in
the Bank's portfolio.  There were approximately  $252,000 of loans determined by
management to be potential  problem loans at December 31, 2002. This amount does
not represent management's estimate of potential losses since a large portion of
such loans is secured by various types of collateral.

The following  table  presents  information  about types of collateral  securing
potential problem loans as of December 31, 2002:

                                                       December 31, 2002
                                                       -----------------
                                                                      Percent of
                                                       Amount            Total
                                                       ------            -----
         Real Estate Mortgage .....................   $149,744            59.4%
         Equipment and vehicles ...................    102,518            40.6
                                                      --------           -----
                                                      $252,262           100.0%
                                                      ========           =====

Real Estate Owned

         The  Bank  had  no  real  estate  owned   pursuant  to  foreclosure  or
in-substance  foreclosure  at December  31, 2002 or 2001.  Real estate  owned is
initially  recorded at the lower of net loan principal  balance or its estimated
fair market value less  estimated  selling  costs.  The estimated  fair value is
determined by appraisal at the time of acquisition.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating expense.  Losses on loans will be charged against the allowance in the
period in which management determines that it is more likely than not such loans


                                       19
<PAGE>

have become  uncollectible.  Recoveries of previously  charged off loans will be
credited  to the  allowance.  The  table,  "Summary  of Loan  Loss  Experience",
summarizes loan balances at the end of each period indicated,  averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category and additions to the allowance  which have been charged to expense.  In
reviewing  the  adequacy  of the  allowance  for loan  losses  at each year end,
management will take into  consideration the historical loan losses  experienced
by the bank,  current economic  conditions  affecting the borrowers'  ability to
repay, the volume of loans, and the trends in delinquent,  nonaccruing,  and any
potential  problem loans, and the quality of collateral  securing  nonperforming
and problem  loans.  Management  considers  the  allowance for loan losses to be
adequate to cover its estimate of loan losses  inherent in the loan portfolio as
of December 31, 2002.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio,  as well as
considering  other  off-balance-sheet  credit risks such as loan commitments and
standby  letters of credit.  Also,  the  calculation  provides for  management's
assessment of trends in national and local economic conditions that might affect
the general quality of the loan portfolio.


                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                         Year Ended December 31,
                                                                                                         -----------------------
                                                                                                       2002                   2001
                                                                                                       ----                   ----
                                                                                                         (Dollars in thousands)
<S>                                                                                                   <C>                    <C>
Total loans outstanding at end of period,
      net of deferred net loan fees ...................................................               $41,700                $31,473
                                                                                                                             -------
Average amount of loans outstanding ...................................................               $36,970                $23,618
                                                                                                      -------                -------

Balance of allowance for loan losses-beginning ........................................               $   384                $   207
Loans charged off
      Commercial and industrial .......................................................               $    13                $     -
                                                                                                      -------                -------
      Consumer installment ............................................................                     1                $     3
      Total charge offs ...............................................................               $    14                $     3
                                                                                                      -------                -------
Recoveries of loans previously charged-off
      Commercial and industrial .......................................................               $     -                $     -
                                                                                                      -------                -------
      Consumer installment ............................................................               $     -                $     -
                                                                                                      -------                -------
       Total recoveries ...............................................................               $     -                $     -
                                                                                                      -------                -------
Net charge-offs (recoveries) ..........................................................               $    14                $     3
                                                                                                      -------                -------

Additions to allowance charged to expense .............................................               $   183                $   180
                                                                                                      -------                -------
Additions to allowance charged to expense
Balance of allowance for loan losses-ending ...........................................               $   553                $   384
                                                                                                      =======                =======

Ratios
      Net charge-offs to average loans outstanding ....................................                  0.04%               0.01 %
      Net charge-offs to loans at end of period .......................................                  0.03%               0.01 %
      Allowance for loan losses to average loans ......................................                  1.50%               1.63 %
      Allowance for loan losses to loans at end of period .............................                  1.33%               1.22 %
      Net charge-offs to allowance for loan losses ....................................                  2.53%               0.78 %
      Net charge-offs to provision for loan losses ....................................                  7.65%               1.67 %
</TABLE>



                                       20
<PAGE>

The following  table presents the allocation of the allowance for loan losses at
the end of the years ended December 31, 2002 and 2001, compared with the percent
of loans in the  applicable  categories  to total loans.  The allowance for loan
losses is not  restricted  to specific  categories  of loans and is available to
absorb losses in all categories.

                     Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                        -----------------------
                                                                               2002                                  2001
                                                                               ----                                  ----
                                                                                        % of                                   % of
                                                                     Amount             Loans            Amount                Loans
                                                                     ------             -----            ------                -----
                                                                                        (Dollars in thousands)
<S>                                                                   <C>                <C>              <C>                  <C>
Commercial and industrial ..............................              $111               20.1%            $146                 38.0%
Real Estate - construction .............................               113               20.4%              19                  5.0%
Real Estate - mortgage .................................               304               55.0%             181                 47.1%
Consumer installment ...................................                25                4.5%              38                  9.9%
                                                                      ----                ---             ----                  ---
      Total ............................................              $553                100%            $384                  100%
                                                                      ====                ===             ====                  ===
</TABLE>


Deposits

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

                                Average Deposits

<TABLE>
<CAPTION>
                                                                                       Years ended December 31,
                                                                                       ------------------------
                                                                               2002                                 2001
                                                                               ----                                 ----
                                                                    Amount              Rate              Amount               Rate
                                                                    ------              ----              ------               ----
                                                                                 (Dollars in thousands)

<S>                                                               <C>                   <C>              <C>                  <C>
Noninterest bearing demand .............................          $ 6,707                  -%            $ 4,894                 -%
Interest bearing transaction accounts ..................            6,945               1.44%              6,021              2.71%
Savings and money market ...............................           11,394               1.90%              6,676              3.43%
Time deposits $100,000 and over ........................            9,478               3.42%              5,740              5.81%
Other time .............................................           13,693               3.46%              9,806              5.55%
                                                                  -------                             ----------
      Total ............................................          $48,217                             $   33,137
                                                                  =======                             ==========
</TABLE>

         As of December 31, 2002, the Bank held  $10,568,675 in time deposits of
$100,000  or more with  $2,592,734  maturing  within  three  months,  $2,254,703
maturing  over three  through six months,  $3,050,150  maturing over six through
twelve months, and $2,671,088  maturing over twelve months. The vast majority of
time deposits  $100,000 and over are acquired from  customers  within the Bank's
service  area in the  ordinary  course of  business.  The Bank does not purchase
brokered  deposits.  While most of the large time  deposits  are  acquired  from
customers  with standing  relationships  with the Bank, it is a common  industry
practice not to consider these types of deposits as core deposits  because their
retention  can be  expected  to be  heavily  influenced  by rates  offered,  and
therefore such deposits may have the  characteristics of shorter-term  purchased
funds. Time deposits $100,000 and over involve the maintenance of an appropriate
matching of maturity distribution and a diversification of sources to achieve an
appropriate level of liquidity.

RETURN ON EQUITY AND ASSETS

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend  payout ratio  (dividends  declared per share divided by net income per


                                       21
<PAGE>

share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for the years ended December 31, 2002 and 2001.

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

Return on assets ...................             .40%               (.31%)
Return on equity ...................            3.20%              (1.80%)
Dividend payout ratio ..............            0.00%               0.00%
Equity to assets ratio .............           12.57%              17.10%

         The return on assets and equity  improved in 2002 due largely to growth
in the Company's customer base and to growth in the mortgage loan department. In
2001 the negative return was largely  attributed to occupancy  related  expenses
and staffing expenditures  associated with the moving of the Bank's headquarters
from temporary to permanent facilities.

         During  2003,  the Bank's plan of  operation  is to seek to attract new
deposit and loan customers,  especially in the newly  established  Berea branch.
Deposit  accounts will be sought from  individuals  and businesses in the Easley
and Berea,  South Carolina markets.  The Bank intends to offer competitive rates
for such  accounts and may seek new accounts by offering  rates  slightly  above
those  prevailing  in the  market.  The Bank  intends to seek loan  business  by
offering competitive rates and terms to credit worthy customers. Management will
emphasize  personal  service and  accessibility  as reasons for  customers to do
business with the Bank.  Personal  contacts by management as well as advertising
and  competitive  prices and services  are  expected to be the Bank's  principal
marketing tools.

CUSTOMER REPURCHASE AGREEMENTS

         Customer  repurchase  agreements  totaled  $4,982,721 and $3,292,960 at
December  31,  2002  and  2001,  respectively.   These  accounts  are  generally
commercial sweep accounts and retail repurchase  agreements,  and have increased
as the Bank's  commercial  customer base has grown. U. S. Government  securities
with an amortized cost of $6,432,662  and  $4,737,928  (fair value of $7,630,957
and  $5,317,303)  are used as  collateral  for these sweep  accounts  and retail
repurchase agreements at December 31, 2002 and 2001, respectively.

LIQUIDITY

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner.  Some liquidity is ensured by maintaining assets that may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less time deposits  greater than $100,000)  provide a relatively  stable funding
base,  and were equal to 64.70% of total  assets at  December  31,  2002.  Asset
liquidity is provided from several sources, including amounts due from banks and
federal  funds  sold,  and funds  from  maturing  loans.  The Bank had over $2.6
million in cash and liquid  assets at December 31, 2002.  The Bank also has $2.1
million  available  through a line of credit with other  banks as an  additional
source  of  liquidity  funding.  Management  believes  that the  Bank's  overall
liquidity  sources are  adequate  to meet its  operating  needs in the  ordinary
course of its  business.  Accordingly,  the  Company  does not expect to have to
raise additional funds in 2003.

OFF-BALANCE SHEET RISK

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These  commitments are legally binding  agreements to lend money to customers of
the Bank at  predetermined  interest  rates for a specified  period of time.  At
December  31, 2002,  the Bank had issued  commitments  to extend  credit of $9.0
million through various types of lending arrangements. Of these commitments, 58%
or $5.2 million  expire  within one year and 42% or $3.8 million in  commitments
expire  in one  year or  more.  Past  experience  indicates  that  many of these
commitments  to extend credit will expire unused and it is unlikely that a large
portion would be used in a short period of time.


                                       22
<PAGE>

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby letters of credit which are assurances to a third party that it will not
suffer a loss if the Bank's customer fails to meet its contractual obligation to
the third party.  Standby  letters of credit totaled  approximately  $233,000 at
December 31, 2002. Past experience  indicates that many of these standby letters
of credit will expire unused. However,  through its various sources of liquidity
discussed above, the Bank believes that it will have the necessary  resources to
meet these obligations should the need arise.


         Neither the Company nor its subsidiary is involved in other off-balance
sheet  contractual  relationships,  unconsolidated  related  entities  that have
off-balance sheet  arrangements,  or transactions that could result in liquidity
needs or other commitments or significantly impact earnings. The Company did not
maintain any  obligations  under  noncancelable  operating  lease  agreements at
December  31, 2002.  The Company is in the final year of a  three-year  contract
with a data processing  service.  The annual costs are  approximately  $125,000.
Refer to notes 9 and 13 to the Company's  consolidated  financial statements for
discussions on commitments and contingencies and financial  instruments with off
balance sheet risk.

CAPITAL RESOURCES

         At December 31, 2002,  shareholders'  equity increased from the balance
at December 31, 2001 by approximately  $245,000.  Total shareholders'  equity at
December 31, 2002 was $7,860,137 compared to $7,614,963 as of December 31, 2001.
The  increase  is a result of net  income  of  $247,285  partially  offset by an
unrealized  loss on  investment  securities  and cash paid in lieu of fractional
shares as a result of a stock dividend paid in 2002.

         The Company made capital  expenditures  for bank premises and furniture
and equipment in 2002 totaling  approximately  $1.0 million.  It expects to make
additional such expenditures in 2003 of approximately $50,000. Such expenditures
were made or are expected to be made from cash on hand.

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

<TABLE>
<CAPTION>
                                                                                                           To be well capitalized
                                                                                          For capital      under prompt corrective
                                                                                       adequacy purposes      action provisions
                                                                                       -----------------      -----------------
                                                                     Actual                 Minimum                 Minimum
                                                                     ------                 -------                 -------
                                                             Amount        Ratio      Amount       Ratio      Amount          Ratio
                                                             ------        -----      ------       -----      ------          -----
                                                                                     (dollars in thousands)
As of December 31, 2002
<S>                                                         <C>            <C>        <C>            <C>       <C>             <C>
   Total Capital (to risk weighted
        assets) ....................................        $7,385         15.0%      $3,938         8.0%      $4,923          10.0%
   Tier 1 Capital (to risk weighted
        assets) ....................................         6,832         13.9        1,969         4.0        2,954           6.0
   Tier 1 Capital (to average assets) ..............         6,832          9.8        2,799         4.0        3,498           5.0

As of December 31, 2001
   Total Capital (to risk weighted
        assets) ....................................        $5,975         17.2%      $2,782         8.0%      $3,479          10.0%
   Tier 1 Capital (to risk weighted
        assets) ....................................         5,590         16.1        1,391         4.0        2,087           6.0
   Tier 1 Capital (to average assets) ..............         5,590         11.1        2,018         4.0        2,522           5.0
</TABLE>



                                       23
<PAGE>

INFLATION

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

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



                                       24
<PAGE>

Item 7.  Financial Statements.









               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina


           We have  audited  the  accompanying  consolidated  balance  sheets of
Cornerstone  Bancorp and Subsidiary  (the "Company") as of December 31, 2002 and
2001 and the related consolidated statements of operations, shareholders' equity
and  comprehensive  income  (loss),  and cash flows for each of the years in the
three year period ended December 31, 2002 and 2001 and 2000. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

           In our opinion,  the consolidated  financial  statements  referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Cornerstone Bancorp and Subsidiary at December 31, 2002 and 2001 and
the  results  of their  operations  and cash  flows for each of the years in the
three year period ended December 31, 2002 and 2001 and 2000, in conformity  with
accounting principles generally accepted in the United States of America.




                                                    /s/ Elliott Davis, LLC


January 27, 2003
Greenville, South Carolina





                                       25
<PAGE>



                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                               December 31,
                                                                                                               ------------
                                                                                                        2002                 2001
                                                                                                        ----                 ----
                                                          ASSETS

<S>                                                                                                <C>                 <C>
CASH AND DUE FROM BANKS ....................................................................       $  1,604,208        $  2,649,950

FEDERAL FUNDS SOLD .........................................................................          1,005,000             970,000

INVESTMENT SECURITIES ......................................................................         18,804,514          12,987,333

LOANS, NET .................................................................................         41,146,730          31,088,547

PROPERTY AND EQUIPMENT, NET ................................................................          3,595,724           2,761,261

OTHER ASSETS ...............................................................................            517,190             492,971
                                                                                                   ------------        ------------
         Total assets ......................................................................       $ 66,673,366        $ 50,950,062
                                                                                                   ============        ============

                                           LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
     Deposits
         Noninterest bearing ...............................................................       $  7,269,138        $  6,058,740
         Interest bearing ..................................................................         46,438,384          33,850,944
                                                                                                   ------------        ------------
         Total deposits ....................................................................         53,707,522          39,909,684
     Customer repurchase agreements ........................................................          4,982,721           3,292,960
     Other liabilities .....................................................................            122,986             132,455
                                                                                                   ------------        ------------

         Total liabilities .................................................................         58,813,229          43,335,099

COMMITMENTS AND CONTINGENCIES - Notes 9 and 13

SHAREHOLDERS' EQUITY
     Preferred stock, 10,000 shares authorized, no shares issued ...........................                  -                   -
     Common stock, no par value, 20,000,000 shares authorized,
         879,994 and 800,000 shares issued at December 31, 2002
            and 2001, respectively .........................................................          7,984,925           7,985,000
     Retained deficit ......................................................................           (205,734)           (453,019)
     Accumulated other comprehensive income ................................................             80,946              82,982
                                                                                                   ------------        ------------

         Total shareholders' equity ........................................................          7,860,137           7,614,963
                                                                                                   ------------        ------------
         Total liabilities and shareholders' equity ........................................       $ 66,673,366        $ 50,950,062
                                                                                                   ============        ============
</TABLE>





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




                                       26
<PAGE>


                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                          For the years ended December 31,
                                                                                          --------------------------------
                                                                                   2002                2001                  2000
                                                                                   ----                ----                  ----
INTEREST INCOME
<S>                                                                           <C>                  <C>                   <C>
     Loans and fees on loans .......................................          $ 2,612,517          $ 2,009,424           $ 1,248,908
     Investment securities .........................................              680,773              918,040               803,955
     Escrow and interest bearing accounts ..........................                    -                    -                 2,096
                                                                              -----------          -----------           -----------

         Total interest income .....................................            3,293,290            2,927,464             2,054,959

INTEREST EXPENSE
     Deposits and repurchase agreements ............................            1,212,673            1,422,855               833,915
                                                                              -----------          -----------           -----------

         Net interest income .......................................            2,080,617            1,504,609             1,221,044

PROVISION FOR POSSIBLE LOAN LOSSES .................................              182,842              180,500               105,000
                                                                              -----------          -----------           -----------

         Net interest income after provision for
            loan losses ............................................            1,897,775            1,324,109             1,119,044

NONINTEREST INCOME
     Mortgage loan origination fees ................................              257,955               47,278                     -
     Service fees on deposit accounts ..............................              179,378               68,818                     -
     Other .........................................................               34,675               74,693                 8,000
                                                                              -----------          -----------           -----------

        Total noninterest income ...................................              472,008              190,789                 8,000

                                                                              -----------          -----------           -----------
NONINTEREST EXPENSES
     Salaries and benefits .........................................            1,161,063              849,796               566,222
     Advertising ...................................................               27,992               51,459                34,005
     Supplies ......................................................               80,146               83,253                32,886
     Data processing ...............................................              132,636              102,779                76,558
     Occupancy and equipment .......................................              315,658              275,292               141,344
     Professional fees .............................................               65,659               67,212                55,982
     Directors fees ................................................               37,750               33,500                13,800
     Other operating ...............................................              241,094              195,985               153,247
                                                                              -----------          -----------           -----------

         Total noninterest expenses ................................            2,061,998            1,659,276             1,074,044
                                                                              -----------          -----------           -----------

         Income (loss) before income taxes .........................              307,785             (144,378)              118,074

INCOME TAX PROVISION (BENEFIT) .....................................               60,500               (6,785)               33,657
                                                                              -----------          -----------           -----------
         Net income (loss) .........................................          $   247,285          $  (137,593)          $    84,417
                                                                              -----------          -----------           -----------
BASIC NET INCOME (LOSS) PER COMMON SHARE ...........................          $       .28          $      (.15)          $      0.10
                                                                              ===========          ===========           ===========

DILUTED NET INCOME (LOSS) PER
     COMMON SHARE ..................................................          $       .28          $      (.15)          $      0.09
                                                                              ===========          ===========           ===========

BASIC WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING .....................................              879,994              879,994               879,994
                                                                              ===========          ===========           ===========

DILUTED WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING .....................................              888,659              879,994               888,793
                                                                              ===========          ===========           ===========
</TABLE>


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


                                       27
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                   Common stock                              other         Total
                                                                   ------------              Retained    comprehensive shareholders'
                                                                Shares        Amount          deficit    income (loss)     equity
                                                                ------        ------          -------    -------------     ------
<S>                                                             <C>        <C>            <C>            <C>            <C>
BALANCE, DECEMBER 31, 1999 ..............................       800,000    $ 7,985,000    $  (399,843)   $    (8,663)   $ 7,576,494
   Net income ...........................................             -              -         84,417              -         84,417
   Other comprehensive income, net of taxes
     Unrealized gain on investment securities ...........             -              -              -         30,972         30,972
                                                                                                                        -----------
   Comprehensive income .................................             -              -              -              -        115,389
                                                            -----------    -----------    -----------    -----------    -----------

BALANCE, DECEMBER 31, 2000 ..............................       800,000      7,985,000       (315,426)        22,309      7,691,883
                                                                                                                        -----------
   Net loss .............................................             -              -       (137,593)             -       (137,593)
   Other comprehensive income, net of income taxes:
     Unrealized gain on investment securities ...........             -              -              -         60,673         60,673
                                                                                                                        -----------
   Comprehensive loss ...................................             -              -              -              -        (76,920)
                                                            -----------    -----------    -----------    -----------    -----------

BALANCE, DECEMBER 31, 2001 ..............................       800,000      7,985,000       (453,019)        82,982      7,614,963
   Net income ...........................................                                     247,285                       247,285
   Other comprehensive income, net of income taxes:
     Unrealized loss on investment securities ...........                                                     (2,036)        (2,036)
                                                                                                                        -----------
   Comprehensive income .................................                                                                   245,249
                                                            -----------    -----------    -----------    -----------    -----------
Stock dividend (10%) ....................................        79,994              -              -              -
Cash in lieu of fractional shares on stock dividend .....                          (75)             -              -            (75)
                                                            -----------    -----------    -----------    -----------    -----------

BALANCE, DECEMBER 31, 2002 ..............................       879,994    $ 7,984,925    $  (205,734)   $    80,946    $ 7,860,137
                                                            ===========    ===========    ===========    ===========    ===========
</TABLE>






















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


                                       28
<PAGE>


                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                            For the years ended December 31,
                                                                                            --------------------------------
                                                                                       2002              2001               2000
                                                                                       ----              ----               ----
OPERATING ACTIVITIES
<S>                                                                              <C>                <C>                <C>
     Net income (loss) ....................................................      $    247,285       $   (137,593)      $     84,417
     Adjustments to reconcile net income (loss) to net cash
        provided by (used for) operating activities
        Depreciation and net amortization .................................           244,632            151,035             71,150
        Deferred income tax provision (benefit) ...........................                 -             (6,785)            33,657
        Provision for possible loan losses ................................           182,842            180,500            102,000
        Increase in other assets ..........................................           (23,171)          (111,583)          (160,984)
        Increase (decrease) in other liabilities ..........................            (9,469)            12,014            108,855
                                                                                 ------------       ------------       ------------

           Net cash provided by  operating activities .....................           642,119             87,588            239,095
                                                                                 ------------       ------------       ------------

INVESTING ACTIVITIES
     Decrease (increase) in federal funds sold ............................           (35,000)         2,360,000         (1,420,001)
     Proceeds from maturities and principal paydowns of
     investment securities ................................................        10,043,430          6,616,892          4,801,644
     Purchase of investment securities ....................................       (15,937,498)        (9,491,242)        (5,395,732)
     Increase in loans, net ...............................................       (10,241,025)       (13,038,277)       (11,701,539)
     Purchase of property and equipment ...................................        (1,005,292)          (626,541)        (1,485,205)
                                                                                 ------------       ------------       ------------

           Net cash used for investing activities .........................       (17,175,385)       (14,179,168)       (15,200,833)
                                                                                 ------------       ------------       ------------

FINANCING ACTIVITIES
     Net increase in deposits .............................................        13,797,838         15,118,823         14,869,524
     Net increase in securities sold under
        customer repurchase agreements ....................................         1,689,761            513,706            489,976
     Cash in lieu of fractional shares ....................................               (75)                 -                  -
                                                                                 ------------       ------------       ------------

           Net cash provided by financing activities ......................        15,487,524         15,632,529         15,359,500
                                                                                 ------------       ------------       ------------

           Net increase (decrease) in cash and cash equivalents ...........        (1,045,742)         1,540,949            397,762

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD ..............................         2,649,950          1,109,001            711,239
                                                                                 ------------       ------------       ------------

CASH AND DUE FROM BANKS, END OF PERIOD ....................................      $  1,604,208       $  2,649,950       $  1,109,001
                                                                                 ============       ============       ============

CASH PAID FOR
     Interest .............................................................      $  1,251,165       $  1,424,848       $    755,024
                                                                                 ============       ============       ============

     Income taxes .........................................................      $      2,740       $     47,951       $          -
                                                                                 ============       ============       ============
</TABLE>

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




                                       29
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

           Cornerstone Bancorp,  (the "Company") was incorporated under the laws
of the State of South  Carolina  for the purpose of  operating as a bank holding
company for  Cornerstone  National  Bank (the "Bank").  The Company  offered its
common stock for sale to the public with an initial public offering price of $10
per share and  raised  approximately  $8  million in  capital,  net of  offering
expenses.  The Company obtained  regulatory  approval to operate a national bank
and  opened  the  Bank  for  business  on  September  15,  1999,  with  a  total
capitalization  of $6 million.  The Bank opened a branch location in Greenville,
South Carolina in 2002. The Bank provides full  commercial  banking  services to
customers and is subject to  regulation  by the Office of the  Controller of the
Currency (OCC) and the Federal  Deposit  Insurance  Corporation.  The Company is
subject to the regulation of the Federal Reserve Board.

   Basis of presentation
     The consolidated  financial  statements include the accounts of the Company
     and its  wholly-owned  subsidiary,  the Bank.  The Company  operates as one
     business segment.  All significant  intercompany  balances and transactions
     have been  eliminated.  The  accounting and reporting  policies  conform to
     accounting  principles  generally  accepted in the United States of America
     and to general  practices  in the banking  industry.  The Company  uses the
     accrual basis of accounting.

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

   Concentrations of credit risk
     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various personal and commercial purposes. The Bank has a
     diversified loan portfolio and the borrowers'  ability to repay their loans
     is  not  dependent  upon  any  specific  economic  sector.   The  Bank  has
     concentrations of credit in services, construction,  manufacturing,  retail
     trade,  and health  care  industries,  which by category  comprise  over 25
     percent of Tier 1 Capital adjusted for the allowance for loan losses.

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

     1.   Available  for sale  securities:  These  are  securities  that are not
          classified as either held to maturity or as trading securities.  These
          securities  are reported at fair market  value.  Unrealized  gains and
          losses are reported,  net of income taxes,  as separate  components of
          shareholders' equity (accumulated other comprehensive income).

     2.   Held to maturity securities:  These are investment securities that the
          Company  has the  ability  and  intent to hold until  maturity.  These
          securities are stated at cost,  adjusted for  amortization of premiums
          and the accretion of  discounts.  The Company had $5.7 million of held
          to maturity securities at December 31, 2002.

                                                                     (Continued)


                                       30
<PAGE>

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

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

     The  Bank,  as a member  institution,  is  required  to own  certain  stock
     investments in the Federal Reserve Bank of Richmond. The stock is generally
     pledged  against any  borrowings  from that  institution.  No ready  market
     exists for the stock and it has no quoted market value. However, redemption
     of this stock has historically been at par value.

     Gains or losses on dispositions  of investment  securities are based on the
     differences  between the net proceeds and the adjusted  carrying  amount of
     the securities sold, using the specific identification method.

   Loans, interest and fee income on loans
     Loans are stated at the principal balance  outstanding.  Unearned discount,
     unamortized  loan fees and the  allowance  for  possible  loan  losses  are
     deducted  from  total  loans  in the  balance  sheet.  Interest  income  is
     recognized  over  the  term  of the  loan  based  on the  principal  amount
     outstanding.  Points on real  estate  loans are  taken  into  income to the
     extent they  represent the direct cost of initiating a loan.  The amount in
     excess of direct costs is deferred and amortized  over the expected life of
     the loan.

     Loans are generally placed on non-accrual status when principal or interest
     becomes  ninety days past due, or when payment in full is not  anticipated.
     When a loan is placed  on  non-accrual  status,  interest  accrued  but not
     received is generally  reversed against interest income.  If collectibility
     is in  doubt,  cash  receipts  on  non-accrual  loans are not  recorded  as
     interest income, but are used to reduce principal.

     Non-performing  assets include real estate acquired through  foreclosure or
     deed taken in lieu of foreclosure,  and loans on non-accrual status.  Loans
     are placed on non-accrual  status when, in the opinion of  management,  the
     collection of additional  interest is questionable.  Thereafter no interest
     is taken  into  income  unless  received  in cash or until such time as the
     borrower demonstrates the ability to pay principal and interest.

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

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

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

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

                                                                     (Continued)


                                       31
<PAGE>

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

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

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

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

    Net income (loss) per common share
     Basic net income  (loss) per common  share is  computed on the basis of the
     weighted  average number of common shares  outstanding  in accordance  with
     SFAS No. 128,  "Earnings per Share".  The treasury  stock method is used to
     compute  the effect of stock  options  on the  weighted  average  number of
     common shares outstanding for the diluted method. The Company declared a 10
     percent stock dividend to  shareholders of record as of April 30, 2002. All
     per share amounts have been restated to reflect this transaction.

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

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







                                                                     (Continued)


                                       32
<PAGE>

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

      The  following  methods  and  assumptions  were  used  by the  Company  in
      estimating fair values of financial instruments as disclosed herein:

          Cash and due from  banks - The  carrying  amounts of cash and due from
          banks (cash on hand and due from banks) approximate their fair value.

          Federal  funds  sold - The  carrying  amounts  of  federal  funds sold
          approximate their fair value.

          Investment  securities  - Fair  values for federal  agency  investment
          securities are based on quoted market prices.  The carrying  amount of
          Federal Reserve Bank stock approximates its fair value.

          Loans - For variable rate loans that reprice  frequently and for loans
          that mature within one year, fair values are based on carrying values.
          Fair values for all other loans are estimated  using  discounted  cash
          flow analyses,  with interest rates  currently being offered for loans
          with similar terms to borrowers of similar credit quality. Fair values
          for impaired loans are estimated  using  discounted cash flow analyses
          or underlying collateral values, where applicable.

          Deposits - The fair  values  disclosed  for demand  deposits  are,  by
          definition,  equal to their carrying amounts.  The carrying amounts of
          variable  rate,   fixed-term  money  market  accounts  and  short-term
          certificates of deposit approximate their fair values at the reporting
          date. Fair values for long-term fixed-rate certificates of deposit are
          estimated  using a  discounted  cash  flow  calculation  that  applies
          interest rates  currently  being offered on certificates to a schedule
          of aggregated expected monthly maturities.

         Securities sold under  repurchase  agreements - The carrying amounts of
          securities sold under  repurchase  agreements  approximate  their fair
          value.

          Off balance  sheet  instruments  - Fair  values of off  balance  sheet
          lending  commitments are based on fees currently charged to enter into
          similar  agreements,  taking into account the  remaining  terms of the
          agreements and the counterparties' credit standing.

   Recently issued accounting standards

      In 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
      148    "Accounting   for    Stock-Based    Compensation--Transition    and
      Disclosure--an amendment of FASB Statement No. 123". This Statement amends
      SFAS  No.  123,  Accounting  for  Stock-Based  Compensation,   to  provide
      alternative methods of transition for a voluntary change to the fair value
      based method of  accounting  for  stock-based  employee  compensation.  In
      addition,  this Statement amends the disclosure  requirements of Statement
      123 to require prominent  disclosures in both annual and interim financial
      statements  about  the  method  of  accounting  for  stock-based  employee
      compensation  and the effect of the method used on reported  results.  The
      adoption of the provisions of SFAS 148 are not expected to have a material
      impact on the Company.

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





                                                                     (Continued)



                                       33
<PAGE>

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

   Risks and Uncertainties
      In  the  normal  course  of  its  business  the  Company   encounters  two
      significant types of risks: economic and regulatory.  There are three main
      components of economic  risk:  interest rate risk,  credit risk and market
      risk.  The Company is subject to interest rate risk to the degree that its
      interest-bearing  liabilities mature or reprice at different speeds, or on
      different bases, than its interest-earning assets. Credit risk is the risk
      of default on the Company's loan  portfolio  that results from  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.


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

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


NOTE 3 - FEDERAL FUNDS SOLD

           When the Bank's cash reserves  (Note 2) are in excess of the required
amount,  it may lend excess to other banks on a daily basis.  As of December 31,
2002  and  2001  federal  funds  sold  amounted  to  $1,005,000   and  $970,000,
respectively.


NOTE 4 - INVESTMENT SECURITIES


           Investment securities are comprised of securities available for sale,
securities  held to maturity  and other  securities.  A summary of the  carrying
values of investment securities as of December 31, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                      2002                    2001
                                                                                                      ----                    ----
<S>                                                                                              <C>                     <C>
Investment securities available for sale, at fair value ............................             $12,890,356             $12,807,333

Investment securities held to maturity, at amortized cost ..........................               5,734,158                       -

Federal reserve stock, at book value ...............................................                 180,000                 180,000

                                                                                                 -----------             -----------
                   Investment securities ...........................................             $18,804,514             $12,987,333
                                                                                                 ===========             ===========
</TABLE>

                                                                     (Continued)


                                       34
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, (continued)

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

<TABLE>
<CAPTION>
                                                                                         December 31, 2002
                                                                                         -----------------
                                                                                          Gross unrealized
                                                                    Amortized             ----------------                  Fair
                                                                       cost             Gains           Losses              value
                                                                       ----             -----           ------              -----
<S>                                                                <C>               <C>               <C>               <C>
Federal agencies ...........................................       $10,223,713       $   112,595       $         -       $10,336,308
Mortgage-backed securities .................................         1,028,836             4,357                 -         1,033,193
Corporate bonds ............................................         1,515,161             6,724             1,030         1,520,855
                                                                   -----------       -----------       -----------       -----------
           Total investment securities available
             for sale ......................................       $12,767,710       $   123,676       $     1,030       $12,890,356
                                                                   ===========       ===========       ===========       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         December 31, 2001
                                                                                         -----------------
                                                                                          Gross unrealized
                                                                    Amortized             ----------------                  Fair
                                                                       cost             Gains           Losses              value
                                                                       ----             -----           ------              -----
<S>                                                                <C>               <C>               <C>               <C>

Federal agencies .......................                           $12,861,602       $   131,079       $     5,348       $12,987,333
                                                                   ===========       ===========       ===========       ===========
</TABLE>


           The amortized  cost and fair value of investment  securities  held to
maturity as of December 31, 2002 are  summarized in the table below.  There were
no investment securities held to maturity as of December 31, 2001.

<TABLE>
<CAPTION>
                                                                                         December 31, 2002
                                                                                         -----------------
                                                                                          Gross unrealized
                                                                    Amortized             ----------------                  Fair
                                                                       cost             Gains           Losses              value
                                                                       ----             -----           ------              -----
<S>                                                                <C>               <C>               <C>               <C>
Federal agencies .......................................           $5,231,214        $  272,782        $      -           $5,503,996
Corporate bonds ........................................              502,944             6,478               -              509,422
                                                                   ----------        ----------        --------           ----------
           Total investment securities .................           $5,734,158        $  279,260        $      -           $6,013,418
                                                                   ==========        ==========        ========           ==========
</TABLE>

           The Bank,  as a member  institution,  is required to own stock in the
Federal  Reserve Bank. No ready market exists for the stock and it has no quoted
market  value.  However,  redemption of the stock has  historically  been at par
value.

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

                                                           December 31, 2002
                                                           -----------------
                                                      Amortized           Fair
                                                         Cost             Value
                                                         ----             -----
Within one year ................................     $ 5,348,139     $ 5,402,073
Due after one through five years ...............      11,130,877      11,458,313
Due in over ten years ..........................       2,022,852       2,043,389
Federal Reserve Bank stock (no maturity) .......         180,000         180,000
                                                     -----------     -----------

    Total investment securities ................     $18,681,868     $19,083,775
                                                     ===========     ===========

           At December  31,  2002 and 2001,  securities  with a market  value of
$10,563,862 and $6,655,525,  respectively,  were pledged to collateralize public
deposits, sweep accounts, and repurchase agreements.


                                       35
<PAGE>

NOTE 5 - LOANS

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


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

Commercial .....................................     $ 8,395,171     $11,922,442
Real estate - construction .....................       8,472,508       1,697,155
Real estate - mortgage .........................      22,933,566      14,654,300
Consumer .......................................       1,898,857       3,198,970
                                                     -----------     -----------

Loans, gross ...................................      41,700,102      31,472,867

Less allowance for possible loan losses ........         553,372         384,320

                                                     -----------     -----------
Loans, net .....................................     $41,146,730     $31,088,547
                                                     ===========     ===========


           At December 31, 2002 and 2001 there were no  nonaccruing  or impaired
loans. During the years ended December 31, 2002 and 2001, there were $13,790 and
$ 3,180 of loans  charged-off,  respectively,  and no recoveries.  There were no
loans charged-off in the year ended December 31, 2000.


NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                             December 31,
                                                             ------------
                                                       2002               2001
                                                       ----               ----
Land and improvements ........................       $1,066,952       $1,033,527
Bank premises ................................        2,063,345        1,338,323
Furniture, equipment and software ............          823,246          549,452
Vehicles .....................................           50,129           50,129
Construction in progress .....................                -           32,310
                                                     ----------       ----------
                                                      4,003,672        3,003,741
Accumulated depreciation .....................          407,948          242,480
                                                     ----------       ----------

    Total property and equipment .............       $3,595,724       $2,761,261
                                                     ==========       ==========

         Construction   in   progress  at  December   31,  2001   consisted   of
architectural  drawings  for a branch  location in Berea,  South  Carolina.  The
Company  completed  construction  of the branch and  opened it for  business  in
August 2002.

         Depreciation  expense for the periods ended December 31, 2002, 2001 and
2000 amounted to $170,829,  $151,035 and $71,150  respectively.  Depreciation is
charged  to  operations  over the  estimated  useful  lives of the  assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:
<TABLE>
<CAPTION>

        Type of Asset                                 Life in Years                         Depreciation Method
--------------------------------            -------------------------------------          ---------------------------
<S>                                                         <C>                            <C>
      Software                                              3                              Straight-line
      Furniture, equipment and software                     5 to 7                         Straight-line
      Improvements                                          5 to 40                        Straight-line
      Vehicles                                              5                              Straight-line
</TABLE>


                                       36
<PAGE>

NOTE 7 - DEPOSITS

         The following is a detail of the deposit accounts as of:

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

Noninterest bearing ........................       $ 7,269,138       $ 6,058,740
Interest bearing:
     NOW accounts ..........................         7,859,404         6,811,894
     Money market accounts .................         8,652,450         7,943,109
     Savings ...............................         2,931,777         1,000,191
     Time, less than $100,000 ..............        17,045,294        10,861,969
     Time, $100,000 and over ...............         9,949,459         7,233,781
                                                   -----------       -----------

     Total deposits ........................       $53,707,522       $39,909,684
                                                   ===========       ===========

         Interest expense on time deposits greater than $100,000 was $324,001 in
2002, $366,797 in 2001 and $179,667 in 2000.

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

         2003                                     $19,882,608
         2004                                       2,338,895
         2005                                         549,557
         2006                                         369,385
         2007                                       3,854,308
                                                  -----------
                                                  $26,994,753
                                                  ===========


NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS


         Securities sold under repurchase agreements consist of the following:

                                                             December 31,
                                                             ------------
                                                       2002              2001
                                                       ----              ----
Sweep accounts .............................        $3,982,721        $2,292,960
Retail repurchase agreements ...............         1,000,000         1,000,000
                                                    ----------        ----------
                                                    $4,982,721        $3,292,960
                                                    ==========        ==========


         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  These  agreements  are generally  overnight or mature in one year or
less. U. S.  Government  securities  with an amortized  cost of  $6,432,662  and
$4,737,928  (fair value of $7,630,957 and $5,317,303) are used as collateral for
the sweep  accounts and  repurchase  agreements,  at December 31, 2002 and 2001,
respectively.



                                       37
<PAGE>

NOTE 9 - COMMITMENTS AND CONTINGENCIES

         The Bank may  become  party to  litigation  and  claims  arising in the
normal  course of  business.  As of December 31,  2002,  there is no  litigation
pending.


         The Company has  approximately two years remaining on its contract with
a data processing service. Monthly costs are approximately $10,500.

         Refer to Note 13  concerning  financial  instruments  with off  balance
sheet risk.


NOTE 10 - UNUSED LINES OF CREDIT

         At December 31,  2002,  the Bank had unused lines of credit to purchase
federal funds totaling  $2,050,000 from unrelated  banks.  These lines of credit
are available on a one to fourteen-day  basis for general corporate  purposes of
the Bank.  The lenders  have  reserved  the right to withdraw the lines at their
option.


NOTE 11 - INCOME TAXES

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

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

<S>                                                   <C>           <C>          <C>           <C>          <C>           <C>
Tax expense (benefit) at statutory rate ...........   $ 104,647           34%    $ (49,089)          34%    $  40,145           34%
Increase (decrease) in taxes resulting from:
     Valuation allowance adjustment ...............     (45,891)         (15)       42,304          (29)       (6,488)          (5)
     Other, Net ...................................       1,744            1             -            -             -            -
                                                      ---------    ---------     ---------    ---------     ---------    ---------
Income tax provision (benefit) ....................   $  60,500           20%    $  (6,785)           5%    $  33,657           29%
                                                      =========    =========     =========    =========     =========    =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                      2002                    2001
                                                                                                      ----                    ----

Deferred tax asset (liability):

<S>                                                                                                <C>                    <C>
        Allowance for loan losses ....................................................             $ 212,234              $ 147,250
        Unrealized net gains on securities available for sale ........................               (41,700)               (42,748)
        Depreciation .................................................................              (107,153)               (57,283)
        Other ........................................................................                (3,774)                     -
        Net operating loss carryforward ..............................................                     -                 57,231
                                                                                                   ---------              ---------

               Net deferred tax assets ...............................................                59,607                104,450
               Less valuation allowance ..............................................                41,387                 87,278
                                                                                                   ---------              ---------

               Deferred tax asset ....................................................             $  18,220              $  17,172
                                                                                                   =========              =========
</TABLE>

         The   deferred   tax  assets  are  included  in  other  assets  in  the
consolidated balance sheets.

                                                                     (Continued)


                                       38
<PAGE>

NOTE 11 - INCOME TAXES, Continued

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

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

<S>                                                                             <C>                   <C>                   <C>
Income taxes currently payable ....................................             $ 87,239              $      -              $      -

Deferred income tax provision (benefit) ...........................              (26,739)               (6,785)               33,657
                                                                                --------              --------              --------

        Income tax provision (benefit) ............................             $ 60,500              $ (6,785)             $ 33,657
                                                                                ========              ========              ========
</TABLE>


NOTE 12 - RELATED PARTY TRANSACTIONS

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

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

<TABLE>
<CAPTION>
                                                                                            For the periods ended
                                                                                                December 31,
                                                                                                ------------
                                                                             2002                    2001                     2000
                                                                             ----                    ----                     ----
<S>                                                                     <C>                      <C>                      <C>
Balance, beginning of period ............................               $1,896,689               $1,540,130               $1,838,334
New loans ...............................................                  880,647                1,115,409                  782,900
Less loan payments ......................................                1,315,654                  758,850                1,081,104
                                                                        ----------               ----------               ----------
Balance, end of period ..................................               $1,461,682               $1,896,689               $1,540,130
                                                                        ==========               ==========               ==========
</TABLE>


           Deposits  by  directors,   executive  officers,   and  their  related
interests, at December 31, 2002 and 2001 approximated $1,516,941 and $2,480,101,
respectively.


NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

         The Bank's  exposure to credit loss in the event of  nonperformance  by
the other party to the financial instrument for commitments to extend credit and
standby  letters of credit is  represented by the  contractual  amounts of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on balance sheet instruments.

                                                                     (Continued)

                                       39
<PAGE>

NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK, Continued

         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation  of any  material  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may  require  the  payment of a fee. At December  31, 2002 and 2001,
unfunded   commitments  to  extend  credit  were   $8,985,000  and   $6,469,735,
respectively,  and  outstanding  letters of credit were  $233,000 and  $495,519,
respectively.  At December  31,  2002,  the  unfunded  commitments  consisted of
$7,511,531  at variable  rates and  $1,473,715  at fixed  rates with  $5,178,232
expiring within one year. The Bank evaluates each customer's  credit  worthiness
on a case-by-case basis. The amount of collateral obtained,  if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of  the  borrower.  Collateral  varies  but  may  include  accounts  receivable,
inventory,  property,  plant and  equipment,  commercial  and  residential  real
estate.

NOTE 14 - EMPLOYEE BENEFIT PLAN

         On September  27, 1999,  the Company  adopted a Simple IRA Plan for the
benefit of all eligible  employees.  The Bank contributes up to three percent of
the employee's  compensation.  Employer  contributions made to the Plan in 2002,
2001 and 2000 amounted to $25,142, $21,023, and $13,739, respectively.

NOTE 15 - STOCK OPTION PLAN

         During 1999, the Board of Directors adopted a stock option plan for the
benefit of the directors. The Board granted 40,000 options at an option price of
$10 per share  (adjusted to 44,000 options at an option price of $9.09 per share
by the stock  dividend  discussed  in Note 16). All options vest 33 percent each
year for three  years  and  expire 10 years  from the grant  date.  The Bank has
adopted the  disclosure-only  provisions  of Statement  of Financial  Accounting
Standards No. 123, "Accounting for Stock-Based  Compensation".  Accordingly,  no
compensation   cost  has  been   recognized  for  the  stock  option  plan.  Had
compensation  cost been determined based on the fair value at the grant date for
the above stock option awards  consistent  with the  provisions of SFAS 123, the
Bank's net income  (loss) and net income (loss) per common share would have been
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                                            For the periods ended
                                                                                                  December 31,
                                                                                                  ------------
                                                                                2002                  2001                   2000
                                                                                ----                  ----                   ----
Net income (loss)
<S>                                                                         <C>                   <C>                    <C>
As reported .....................................................           $   247,285           $  (137,593)           $   84,417
Effect of compensation expense ..................................                     -               (17,200)              (17,200)
                                                                            -----------           -----------            ----------
Pro forma .......................................................               247,285              (154,793)               67,217
                                                                            ===========           ===========            ==========
Basic net income (loss) per common share
As reported .....................................................                   .28                  (.15)                  .10
Pro forma .......................................................                   .28                  (.18)                  .08
Diluted net income (loss) per common share
As reported .....................................................                   .28                  (.15)                  .09
Pro forma .......................................................                   .28                  (.18)                  .07
</TABLE>

         The fair value of the option  grant is  estimated  on the date of grant
using the  Black-Scholes  option  pricing  model.  The risk free  interest  rate
assumed was 5.89 percent and the assumed  dividend  rate was zero.  The expected
option life was 3 years. As a result,  the pro forma amounts were fully expensed
as of December 31, 2001. As a result of the stock dividend described in Note 16,
all per share amounts have been restated.




                                                                     (Continued)



                                       40
<PAGE>

NOTE 15 - STOCK OPTION PLAN, Continued

         A summary of the plan is presented below:


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

<S>                                                     <C>           <C>          <C>          <C>          <C>          <C>
Outstanding at beginning of period .............        40,000        $   9.09     44,000       $   9.09     44,000       $     9.09
Granted ........................................             -               -          -              -          -                -
Effect of stock dividend .......................         4,000            9.09          -           9.09          -                -
Exercised ......................................             -               -          -              -          -                -
Forfeited or expired ...........................        (1,467)              -          -              -          -                -
                                                        ------                    -------                   -------       ----------

Outstanding at end of period ...................        42,533            9.09     44,000           9.09     44,000             9.09
                                                        ======                    =======                   =======       ==========

Options exercisable at end of period ...........        42,533            9.09     29,334           9.09          -           14,666
Shares available for grant .....................         1,467                       None                      None             None
</TABLE>

As described in Note 16 below,  the Company's  Board of Directors  declared a 10
percent stock to  shareholders  of record on April 30, 2002. The Company's stock
option   agreements   provide  for  stock  dividends  and  other  similar  stock
transactions to affect the options granted under the agreements.  The agreements
also provide for the  aggregate  consideration  to be paid upon  exercise of the
options to remain  unchanged  following a stock dividend.  Therefore,  the above
table reflects a weighted  average exercise price of $9.09 per share rather than
the $10.00 original exercise price.

NOTE 16 - DIVIDENDS

         There are no current  plans to initiate  payment of cash  dividends and
future  dividend  policy  will  depend  on  the  Company's   earnings,   capital
requirements,  financial  condition and other factors considered relevant by the
Company's Board of Directors. Federal banking regulations restrict the amount of
dividends  that the Bank can pay to the Company.  At December 31, 2002, the Bank
had no retained  earnings from which to pay  dividends.  The Company's  Board of
Directors  declared a 10 percent  stock  dividend to  shareholders  of record on
April 30, 2002. The total number of common shares outstanding as of December 31,
2002 is 879,994.

NOTE 17 - REGULATORY MATTERS

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

                                       41
<PAGE>


NOTE 17 - REGULATORY MATTERS, (Continued)

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

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


<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                             For capital     under prompt corrective
                                                                                          adequacy purposes    action provisions
                                                                                          -----------------    -----------------
                                                                         Actual                Minimum                Minimum
                                                                         ------                -------                -------
                                                                  Amount       Ratio     Amount       Ratio     Amount        Ratio
                                                                  ------       -----     ------       -----     ------        -----
                                                                                       (dollars in thousands)
As of December 31, 2002
<S>                                                              <C>           <C>       <C>           <C>      <C>            <C>
   Total Capital (to risk weighted assets) ...............       $7,385        15.0%     $3,938        8.0%     $4,923         10.0%
   Tier 1 Capital (to risk weighted assets) ..............        6,832        13.9       1,969        4.0       2,954          6.0
   Tier 1 Capital (to average assets) ....................        6,832         9.8       2,799        4.0       3,498          5.0

As of December 31, 2001
   Total Capital (to risk weighted  assets) ..............       $5,975        17.2%     $2,782        8.0%     $3,479         10.0%
   Tier 1 Capital (to risk weighted assets) ..............        5,590        16.1       1,391        4.0       2,087          6.0
   Tier 1 Capital (to average assets) ....................        5,590        11.1       2,018        4.0       2,522          5.0
</TABLE>



                                       42
<PAGE>

NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

           The estimated fair values of the Company's financial instruments were
as follows:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                                2002                               2001
                                                                                ----                               ----
                                                                      Carrying            Fair           Carrying           Fair
                                                                       Amount             Value           Amount            Value
                                                                       ------             -----           ------            -----
FINANCIAL ASSETS
<S>                                                                <C>               <C>               <C>               <C>
     Cash and due from banks ...............................       $ 1,604,208       $ 1,604,208       $ 2,649,950       $ 2,649,950
     Federal funds sold ....................................         1,005,000         1,005,000           970,000           970,000
     Investment securities .................................        18,804,514        19,083,775        12,987,333        12,987,333
     Loans .................................................        41,146,730        41,774,351        31,472,867        31,516,556
FINANCIAL LIABILITIES
     Deposits ..............................................        53,707,522        54,074,096        39,909,684        40,189,945
     Securities sold under repurchase agreements ...........         4,982,721         4,982,721         3,292,960         3,292,960
OFF BALANCE SHEET INSTRUMENTS
     Commitments to extend credit ..........................         8,985,246         8,985,246         6,469,735         6,469,735
     Standby letters of credit .............................           232,554           232,554           495,519           495,519
</TABLE>

NOTE 19 - PARENT COMPANY INFORMATION

         Following is condensed  financial  information of  Cornerstone  Bancorp
(parent company only):


                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                    2002                    2001
                                                                                                    ----                    ----
ASSETS
<S>                                                                                            <C>                        <C>
     Cash and interest bearing deposits ......................................                 $  907,559                 $1,902,899
     Investment in subsidiary ................................................                  6,912,836                  5,672,900
     Other assets ............................................................                     40,000                     40,000
                                                                                               ----------                 ----------

                                                                                               $7,860,395                 $7,615,799
                                                                                               ==========                 ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ........................................................                 $      258                 $      836
     Shareholders' equity ....................................................                  7,860,137                  7,614,963
                                                                                               ----------                 ----------

                                                                                               $7,860,395                 $7,615,799
                                                                                               ==========                 ==========
</TABLE>









                                                                     (Continued)


                                       43
<PAGE>

NOTE 19 - PARENT COMPANY INFORMATION, Continued

                       CONDENSED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                            For the year ended December 31,
                                                                                            -------------------------------
                                                                                         2002             2001               2000
                                                                                         ----             ----               ----
INCOME
<S>                                                                                  <C>               <C>                <C>
   Interest ................................................................         $  35,877         $  71,725          $   2,096

EXPENSES
   Sundry ..................................................................            30,564            32,813             35,257
                                                                                     ---------         ---------          ---------

   Income (loss) before equity in undistributed  net income ................             5,313            38,912            (33,161)
       (loss) of bank subsidiary
EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF
   SUBSIDIARY ..............................................................           241,972          (176,505)           117,578
                                                                                     ---------         ---------          ---------
      Net income (loss) ....................................................         $ 247,285         $(137,593)         $  84,417
                                                                                     =========         =========          =========
</TABLE>



                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             For the year ended December 31,
                                                                                             -------------------------------
                                                                                         2002             2001               2000
                                                                                         ----             ----               ----
OPERATING ACTIVITIES
<S>                                                                                 <C>               <C>               <C>
    Net income (loss) ........................................................      $   247,285       $  (137,593)      $    84,417
       Adjustments to reconcile net income (loss) to net
       cash provided by (used for) operating activities
       Equity  in undistributed net (income) loss of  subsidiary .............         (241,972)          176,505          (117,578)
       Increase in other assets ..............................................                -           (35,472)           (4,528)
       Increase (decrease) in accrued expenses ...............................             (578)           (1,064)            1,900
                                                                                    -----------       -----------       -----------

          Net cash provided by (used for) operating activities ...............            4,735             2,376           (35,789)
                                                                                    -----------       -----------       -----------

INVESTING ACTIVITIES
    Investment in bank subsidiary ............................................       (1,000,000)                -                 -
    Purchase of certificate of deposit .......................................                -                 -          (100,000)
    Proceeds from maturity of certificate of deposit .........................                -           100,000                 -
                                                                                    -----------       -----------       -----------

          Net cash provided by (used for) investing activities ...............       (1,000,000)          100,000          (100,000)
                                                                                    -----------       -----------       -----------
FINANCING ACTIVITIES
          Cash paid in lieu of fractional shares .............................              (75)                -                 -
                                                                                    -----------       -----------       -----------

          Net increase (decrease) in cash ....................................         (995,340)          102,376          (135,789)

CASH, BEGINNING OF YEAR ......................................................        1,902,899         1,800,523         1,936,312
                                                                                    -----------       -----------       -----------

CASH, END OF YEAR ............................................................      $   907,559       $ 1,902,899       $ 1,800,523
                                                                                    ===========       ===========       ===========
</TABLE>



                                       44
<PAGE>



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

         Not Applicable.

                                    PART III

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

Directors

                  The table shows, as to each director, his 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
----                           ---                  --------------------                    --------------

Members of the Board of  Directors  whose terms will  continue  until the Annual
Meeting of  Shareholders  of the Company in 2003 (also nominees for the Board of
Directors  for  terms  of  office  to  continue  until  the  Annual  Meeting  of
Shareholders of the Company in 2006) are:

<S>                            <C>   <C>                                                         <C>
Joe E. Hooper                  64    President, Pride Mechanical & Fabrication Company,          1999
                                     Inc.
                                                                                                 1999
Robert R. Spearman             63    Surveyor/Retired
                                                                                                 1999
John M. Warren, Jr., M.D.      52    Physician
                                                                                                 1999
George I. Wike, Jr.            58    Investor

Members of the Board of  Directors  whose terms will  continue  until the Annual
Meeting of Shareholders of the Company in 2005 are:

Ben L. Garvin                  58    President of Cornerstone National Bank, Since
                                     2001; Senior Vice President Central Carolina Bank,          2001
                                     1983 - 2001
                                                                                                 1999
J. Bruce Gaston                46    Certified Public Accountant
                                                                                                 1999
S. Ervin Hendricks, Jr.        60    President, Nu-Life Environmental, Inc., Easley, SC

Members of the Board of  Directors  whose terms will  continue  until the Annual
Meeting of Shareholders of the Company in 2004 are:

J. Rodger Anthony              57    President and Chief Executive Officer of the                1999
                                     Company, since 1999; Chief Executive Officer,
                                     First National Bank of Pickens County, Easley, SC,
                                     1996 to 1998

Walter L. Brooks               75    President, G&B Enterprises, Liberty, SC (egg                1999
                                     production)

T. Edward Childress, III       57    Registered Pharmacist and Long-term care facility           1999
                                     owner
</TABLE>


                                       45
<PAGE>


Executive Officers

         The names and positions with the Company of each  executive  officer of
the Company are as follows:

J. Rodger Anthony          President and Chief Executive Officer

Jennifer M. Champagne               Chief Financial Officer

         The age and  business  experience  of Mr.  Anthony  are set forth above
under  "-Directors."  Mrs.  Champagne (age 35) is a Certified Public Accountant,
and joined the Company in October 2002 as its Chief Financial Officer.  Prior to
joining the  Company,  Mrs.  Champagne  worked as a Senior  Manager with Elliott
Davis,  LLC from  August  2000 to October  2002.  Prior to her  employment  with
Elliott  Davis,  Mrs.  Champagne  worked as Senior Vice President of Finance for
HomeGold,  Inc. from March 1998 to June 2000.  Neither the  principal  executive
officers  nor any  directors  are related by blood,  marriage or adoption in the
degree of first cousin or closer.

Item 10. Executive Compensation.

         The following table sets forth the  remuneration  paid during the years
ended  December 31, 2002,  2001 and 2000 to the Chief  Executive  Officer of the
Company and the President of the Bank. No other principal officer of the Company
or the Bank was paid remuneration in excess of $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                   Number of
                                                                                   Securities
                                                  Annual Compensation (1)          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             2002      $125,000       $ 4,228             -            $3,750
Chief Executive Officer                      2001      $115,000       $ 3,779             -            $3,563
                                             2000      $105,000       $     -             -            $3,150

Ben L. Garvin                                2002      $105,000       $ 3,552             -            $3,150
President, Cornerstone National Bank (3)     2001      $100,000       $     -             -            $2,319
</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 and Mr. Garvin.
(3)  Mr. Garvin became President of the Bank in March 2001.

                            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 become  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 16 to the Consolidated  Financial Statements
of the Company,  the Company's Board of Directors declared a 10 percent stock to
shareholders of record on 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, 2002, each of the organizing  directors held options
to purchase 4,400 shares with an exercise price of $9.09 per share.


                                       46
<PAGE>


          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, 2002. No options
were granted to or exercised by Mr.  Anthony  during the year ended December 31,
2002.  Mr.  Garvin does not have any stock options and is omitted from the table
below.

<TABLE>
<CAPTION>
                                                          Number of Securities                Value of Unexercised
                                                         Underlying Unexercised                   In-the-Money
                                                            Options 12/31/02                   Options 12/31/02(1)
                        Shares Acquired    Value            ----------------                   -------------------
Name                      on Exercise     Realized     Exercisable    Unexercisable      Exercisable       Unexercisable
                          -----------     --------     -----------    -------------      -----------       -------------

<S>                           <C>            <C>          <C>             <C>              <C>                   <C>
J. Rodger Anthony              -             $-           4,400             -              $15,004               $-
</TABLE>

---------------
(1) Based on  exercise  prices of $9.09  per  share and  assuming  that the fair
market value of the  Company's  common stock on December 31, 2002 was $12.50 per
share.

Compensation of Directors

         Directors  are paid $250 per  meeting  for  service as  directors.  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 Company and the Bank paid total director fees of $37,750 in 2002. 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,  2003,  for all  directors  and  executive
officers of the  Company  named in the  Summary  Compensation  Table 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)                  Common Stock
                                                   ----------------------                ------------------
<S>                                                        <C>                                   <C>
J. Rodger Anthony                                           37,400                                4.25
Walter L. Brooks (2)                                        11,880                                1.35
T. Edward Childress, III                                    87,175                                9.91
    101 McAlister Lake Drive
    Easley, South Carolina 29642
Ben L. Garvin                                               16,104                                1.83
J. Bruce Gaston                                             20,900                                2.38
S. Ervin Hendricks, Jr.                                     35,750                                4.06
Joe E. Hooper                                               42,900                                4.88
Robert R. Spearman                                           7,700                                0.88
John M. Warren, Jr., M.D.                                   15,400                                1.75
George I. Wike, Jr.                                         86,900                                9.88
    28 Mandarin Circle
    Taylors, SC
All directors and executive                                _______                               _____
officers as a group (11 persons)                           362,109                               41.15
</TABLE>
--------------------
(1)  Includes for each director,  except Mr. Garvin,  4,400 vested stock options
     that are currently exercisable.
(2)  Includes  5,500  shares  owned by a  partnership  in which Mr.  Brooks is a
     partner.

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



                                       47
<PAGE>

                      Equity Compensation Plan Information

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

<TABLE>
<CAPTION>
                                                                                      Number of securities
                                                                                    remaining available for
                            Number of securities                                     future issuance under
                             to be issued upon            Weighted-average            equity compensation
                                exercise of               exercise price of             plans (excluding
                            outstanding options,        Outstanding options,        securities reflected in
Plan Category               warrants and rights          warrants and rights              column (a))
-------------               -------------------          -------------------              -----------
                                    (a)                          (b)                          (c)

<S>                                <C>                          <C>                          <C>
Equity compensation
plans approved by
security holders                     -                            -                            -

Equity compensation
plans not approved by
security holders                   42,553                       $9.09                        1,467
                                   ------                       -----                        -----

Total                              42,553                       $9.09                        1,467
                                   ======                       =====                        =====
</TABLE>

         The equity  securities  shown in the table are stock options granted to
directors.  Information  about the  options is set forth in Item 10 above  under
"Organizer's Stock Options."

Item 12. Certain Relationships and Related Transactions.

         Extensions  of  Credit.  The  Company,  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 Company
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, 2002 was $1.5 million. During 2002, $881,000 of new loans were made
and repayments totaled $1.3 million.

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

         Real Estate.  During 1999, the Company  purchased the land for its main
office from one of its directors, Mr. Hendicks, at a cost of $450,000, which was
less than the appraised  value.  For a portion of 1999,  the Company also leased
temporary office space from Mr. Hendricks. Total rental payments were $4,500.

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

(a)      Description of Exhibits.

Exhibit No.                Description

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
10.1                      Form of Option Agreements (2)
21                        Subsidiaries of Registrant (2)
-------------------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form SB-2 (No.
     333-79543).
(2)  Incorporated  by  reference  to Annual  Report on Form  10-KSB for the year
     ended December 31, 1999.

                                       48
<PAGE>

(b)      Reports on Form 8-K.

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

Item 14. Controls and Procedures.

(a) Based on their evaluation of the issuer's disclosure controls and procedures
(as defined in 17 C.F.R.  Sections  240.13a-14(c)  and  15d-14(c))  as of a date
within 90 days prior to the filing of this annual  report,  the  issuer's  chief
executive  officer and chief financial  officer concluded that the effectiveness
of such controls and procedures was adequate.

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




                                       49
<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 27, 2003                  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  27, 2003
J. Rodger Anthony

s/Walter L. Brooks
--------------------------               Director                                           March  27, 2003
Walter L. Brooks

s/T. Edward Childress, III
--------------------------               Director                                           March  27, 2003
T. Edward Childress, III

s/Gen L. Garvin
--------------------------               Director                                           March  27, 2003
Ben L. Garvin

s/J. Bruce Gaston
--------------------------               Director                                           March  27, 2003
J. Bruce Gaston

s/S. Ervin Hendricks, Jr.
--------------------------               Director                                           March  27, 2003
S. Ervin Hendricks, Jr.

s/Joe E. Hooper
--------------------------               Director                                           March  27, 2003
Joe E. Hooper

s/Robert R. Spearman
--------------------------               Director                                           March  27, 2003
Robert R. Spearman

s/John M. Warren, Jr., M.D.
--------------------------               Director                                           March  27, 2003
John M. Warren, Jr., M.D.

s/George I. Wike, Jr.
--------------------------               Director                                           March  27, 2003
George I. Wike, Jr.
</TABLE>



<PAGE>


                                 CERTIFICATIONS

I, J. Rodger Anthony, certify that:

     1)   I have  reviewed  this  annual  report on Form  10-KSB of  Cornerstone
          Bancorp;

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

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

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


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


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


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

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


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


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

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


Date: March  27, 2003

s/J. Rodger Anthony
-----------------------
J. Rodger Anthony
Chief Executive Officer


                                       50
<PAGE>



                                 CERTIFICATIONS

I, Jennifer M. Champagne, certify that:

     1.   I have  reviewed  this  annual  report on Form  10-KSB of  Cornerstone
          Bancorp;

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

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

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

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

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

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

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

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

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

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


Date: March 27, 2003

s/Jennifer M. Champagne
-----------------------
Jennifer M. Champagne
Chief Financial Officer


                                       51
<PAGE>


      SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
          TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

         The Registrant  will furnish an annual report and proxy material to its
security  holders  after the  filing of this  report and  furnish  copies to the
Commission when they are sent to security holders.


                                  EXHIBIT INDEX

Exhibit No.                  Description                                   Page

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
10.1                      Form of Option Agreements (2)
21                        Subsidiaries of Registrant (2)

     (1)  Incorporated by reference to Registration  Statement on Form SB-2 (No.
          333-79543).
     (2)  Incorporated by reference to Annual Report on Form 10-KSB for the year
          ended December 31, 1999.


                                       52