**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-K**





**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




(Mark
      One)




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





For
      the
      fiscal year ended December 31, 2007




OR





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





For
      the
      transition period from____________ to
      ____________





**Commission
      File Number 000-49757**










**FIRST
      RELIANCE BANCSHARES, INC.**


*(Exact
      Name of Registrant as Specified in its Charter)*




**South
                Carolina**
            **80-0030931***(State
                of
                Incorporation)*
            *(I.R.S.
                Employer Identification No.)***2170
                W. Palmetto Street, Florence,
                South Carolina**
            **29501***(Address
                of Principal Executive
                Offices)*
            *(Zip
                Code)*




**(843)
      656-5000**


*(Registrant’s
      telephone number, including area code)*





Securities
      Registered Pursuant to Section 12(b) of the Act:


**None**





Securities
      Registered Pursuant to Section 12(g) of the Act:


**Common
      Stock, $0.01 Par Value**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
oNo x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes
oNo x





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the Registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes x No
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (229.405 of this chapter) is not contained herein, and will
      not
      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-K
      or any amendment to this Form 10-K. o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “accelerated filer,” “large accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer oAccelerated filer
o Non-accelerated filer o Smaller
      reporting
      company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
oNo x





The
      aggregate market value of the registrant’s outstanding common stock held by
      nonaffiliates of the registrant as of June 30, 2007, was approximately $41.7
      million, based on the registrant’s  closing
      sales price of $14.00 as reported on the Over-the Counter Bulletin  Board
      on
      June 29, 2007 . There
      were 3,513,174 shares of the registrant’s common stock outstanding as of March
      14, 2008.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Document
            
            Parts
                Into Which IncorporatedAnnual
                Report to Shareholders for the Year Ended December 31,
                2007
            
            Part
                IIProxy
                Statement for the Annual Meeting of Shareholders to be held June
                19,
                2008
            
            Part
                III








**TABLE
      OF CONTENTS**


**PART
                  I**
              
              **1****ITEM
                  1. BUSINESS**
              
              **1****ITEM
                  1A. RISK FACTORS**
              
              **14****ITEM
                  1B. UNRESOLVED STAFF COMMENTS**
              
              **18****ITEM
                  2. PROPERTIES**
              
              **18****ITEM
                  3. LEGAL PROCEEDINGS**
              
              **19****ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
              
              **19****PART
                  II**
              
              **20****ITEM
                  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                  ISSUER PURCHASES OF EQUITY SECURITIES**
              
              **20****ITEM
                  6. SELECTED FINANCIAL DATA**
              
              **20****ITEM
                  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS
                  OF OPERATIONS**
              
              **20****ITEM
                  7A. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET
                  RISK**
              
              **20****ITEM
                  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
              
              **20****ITEM
                  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE**
              
              **21****ITEM
                  9A(T). CONTROLS AND PROCEDURES**
              
              **21****ITEM
                  9B. OTHER INFORMATION**
              
              **22****PART
                  III**
              
              **22****ITEM
                  10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
                  GOVERNANCE**
              
              **22****ITEM
                  11. EXECUTIVE COMPENSATION**
              
              **22****ITEM
                  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND
                  RELATED STOCKHOLDER MATTERS**
              
              **23****ITEM
                  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE**
              
              **23****ITEM
                  14.****PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES**
              
              **24****PART
                  IV**
              
              **24****ITEM
                  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
              
              **24**







**PART
      I**





**ITEM
      1.**  **BUSINESS**





**Special
      Cautionary Notice Regarding Forward-Looking Statements**





This
      Report contains statements that constitute forward-looking statements within
      the
      meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange
      Act of 1934. Various matters discussed in this document and in documents
      incorporated by reference herein, including matters discussed under the caption
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” may constitute forward-looking statements for purposes of the
      Securities Act and the Securities Exchange Act. These forward-looking statements
      are based on many assumptions and estimates and are not guarantees of future
      performance, and may involve known and unknown risks, uncertainties and other
      factors which may cause the actual results, performance or achievements of
      First
      Reliance Bancshares, Inc. (the “Company”) or its wholly owned subsidiary, First
      Reliance Bank (the “Bank”), to be materially different from future results,
      performance or achievements expressed or implied by such forward-looking
      statements. The words “expect,” “anticipate,” “intend,’ “plan,” “believe,”
“seek,’ “estimate,” and similar expressions are intended to identify such
      forward-looking statements. The Company’s and the Bank’s actual results may
      differ materially from the results anticipated in these forward-looking
      statements due to a variety of factors, including, without limitation:




·
            significant
                increases in competitive pressure in the banking and financial services
                industries;




·
            changes
                in the interest rate environment that could reduce anticipated or
                actual
                margins;




·
            changes
                in political conditions or the legislative or regulatory environment;




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




·
            changes
                occurring in business conditions and
                inflation;




·
            changes
                in technology;




·
            changes
                in monetary and tax policies;




·
            the
                level of allowance for loan loss;




·
            the
                rate of delinquencies and amounts of
                charge-offs;




·
            the
                rates of loan growth;




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




·
            changes
                in the securities markets; and




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





All
      written or oral forward-looking statements attributable to the Company are
      expressly qualified in their entirety by these cautionary statements.





**General**





The
      Company was incorporated under the laws of the State of South Carolina on April
      12, 2001 to be the holding company for First Reliance Bank (the “Bank”), and
      acquired all of the shares of the Bank on April 1, 2002 in a statutory share
      exchange. The Bank, a South Carolina banking corporation, is the Company’s only
      subsidiary, and the Company conducts no business other than through its
      ownership of the Bank. The Company has no indirect subsidiaries or special
      purpose entities. The Bank commenced operations in August 1999 and currently
      operates out of its main office, 4 branch offices, and three loan production
      offices. The Bank serves the Florence, Lexington, Charleston, Greenville, Myrtle
      Beach, and Rock Hill areas in South Carolina as an independent,
      community-oriented commercial bank emphasizing high-quality, responsive and
      personalized service. The Bank provides a broad range of consumer and commercial
      banking services, concentrating on individuals and small and medium-sized
      businesses desiring a high level of personalized services. The Bank continues
      to
      focus on its Easy To Do Business With(TM) standard of banking by offering
      products and services including: Totally FREE Checking, Totally FREE Business
      Checking, FREE Coin Machines, a 5 Way Mortgage Service Promise, a Nationwide
      NO
      FEE ATM Network, and 8-8 Extended Hours in their Florence, Lexington, and Mt.
      Pleasant locations.




1




**Marketing
      Focus**





The
      Bank
      advertises aggressively, using popular forms of media and direct mail, to target
      market segments and emphasizes the Bank’s substantial local ownership, community
      bank nature, locally oriented operations and ability to provide prompt,
      knowledgeable and personalized service.





**Location
      and Service Area**





The
      executive or main office facilities of the Company and the Bank are located
      at
      2170 W. Palmetto Street, Florence, South Carolina 29501. The Bank also has
      branches located at 411 Second Loop Road, Florence, South Carolina,
      709 North Lake Drive, Lexington, South Carolina, 800 South Shelmore Blvd.,
      Mount Pleasant, South Carolina and 51 Cumberland Street, Suite 101, Charleston,
      South Carolina. **** The
      Bank’s primary market areas are the cities of Florence, Lexington, Charleston,
      Myrtle Beach, Rock Hill, Greenville and the surrounding areas.





According
      to the South Carolina Department of Commerce, in 2000, Florence County had
      an
      estimated population of 125,761. Florence County, which covers approximately
      805
      square miles, is located in the eastern portion of South Carolina and is
      bordered by Darlington, Marlboro, Dillon, Williamsburg, Marion, Clarendon,
      Sumter and Lee Counties. Florence County has a number of large employers,
      including, Wellman, Inc., Honda, Nan Ya Plastics, ESAB, McLeod Regional Medical
      Center, and Carolinas Medical Center. The principal components of the economy
      of
      Florence County are the wholesale and retail trade sector, the manufacturing
      sector, the services sector and the financial, insurance and real estate sector.





First
      Reliance Bank opened a branch office at 709 North Lake Drive, Lexington, South
      Carolina in 2004.  Lexington County had an estimated population in 2003 of
      226,528.  The primary market area is the City of Lexington and the
      surrounding areas of Lexington County, South Carolina.  Lexington County is
      centrally located in the Midlands of South Carolina just outside the capital
      city in Columbia and is bordered by Richland, Newberry, Saluda, Aiken,
      Orangeburg and Calhoun Counties.  Lexington County has a number of large
      employers, including, Westinghouse Electric Corporation, Michelin North America,
      Winnsboro Assembly Opera, Amick Farms, Inc., and Bose Corporation. 
Lexington County is a major transportation crossroads for the Midlands with
      I-26, I-77 and I-20 bordering or running through the county.  The Columbia
      Metropolitan Airport is located in Lexington County, just 10 miles from the
      town
      of Lexington, and is the Southeastern hub for United Parcel Service.  The
      principal components of the economy of Lexington County are the wholesale and
      retail trade sector, the manufacturing sector, the government sector, the
      services sector and the financial, insurance and real estate
      sector.





First
      Reliance Bank opened a branch office in Mount Pleasant, South Carolina as well
      a
      branch office in Charleston, South Carolina in 2005. Charleston County has
      a
      population of 309,969 and the Metro Area has a population of 549,033 according
      to the 2000 census. Charleston is located on the central and southern east
      coast
      surrounded by Berkley and Dorchester counties. Major employers in the area
      include US Navy, Medical University of South Carolina, and the Charleston Air
      Force Base.





First
      Reliance Bank opened a loan production office in Greenville, SC. Greenville
      has
      a population of 407,383 according to the 2000 census. Greenville is the most
      populated region in South Carolina and is home to Michelin, BMW, General
      Electric, Robert Bosch, Lockheed Martin, and Bowater.





First
      Reliance Bank opened a loan production office in Myrtle Beach, South Carolina.
      Myrtle Beach is located in Horry County which had an estimated population of
      210,757 in 2004. Myrtle Beach’s largest manufacturing employers are AVX
      Corporation, Sun Publishing Company, and Precision Southeast, Inc.




2




First
      Reliance Bank opened a loan production office in Rock Hill, SC. Rock Hill is
      the
      largest city in York County, SC, and a satellite city of Charlotte, NC.
      According to 2006 estimates the population was 61,620 making it the fourth
      largest city in South Carolina. The city is included in the
      Charlotte-Gastonia-Concord metropolitan statistical which has a population
      of
      1,521,278 according to the 2005 estimate by the U.S. Census Bureau.





**Banking
      Services**





The
      Bank
      strives to provide its customers with the breadth of products and services
      comparable to those offered by large regional banks, while maintaining the
      quick
      response and personal service of a locally owned and managed bank. In addition
      to offering a full range of deposit services and commercial and personal loans,
      the Bank offers investment services and products such as mortgage loan
      origination, wholesale mortgage services and title insurance
      services.





The
      Bank
      continues to focus on its Easy To Do Business With(TM) standard of banking
      by
      continuously introducing new innovative products and services all with the
      goal
      of providing our customers a convenient and first class banking experience.
      To
      allow our customers immediate access to their deposits, the Bank introduced
      Same
      Day Banking in 2007, extending the cutoff time for transactions until 8:00pm
      Monday through Friday. The Bank also added Easy Link Remote Deposit Capture
      to
      its suite of convenient products and services, making it quick and easy for
      our
      business customers to make their deposits from their place of business. In
      addition, the Bank announced that we will now remain open on six traditional
      bank holidays in 2008.





First
      Reliance, has been recognized for its success including being named to The
      Top
      25 Fastest Growing Companies(TM) in South Carolina four times. For the past
      two
      consecutive years, we have been named One of the Best Places to Work in
      SC(TM).





The
      Bank
      seeks to promote continuous long-term relationships. Because management of
      the
      Bank is located in Florence, Lexington, Charleston, Greenville, Rock Hill,
      and
      Myrtle Beach, South Carolina, all credit and related decisions are made locally,
      which facilitates prompt responses by persons familiar with the borrower’s local
      business environment.





***Deposit
      Services*** *.* The Bank
      offers a full range of deposit services that are typically available in most
      banks and savings and loan associations, including checking accounts, NOW
      accounts, savings accounts 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 Bank’s principal
      market area at rates competitive to those offered by other banks in the area.
      In
      addition, the Bank offers certain retirement account services, such as
      Individual Retirement Accounts. The Bank also offers free courier service for
      business accounts. All deposit accounts are insured by the FDIC up to the
      maximum amount allowed by law. The Bank solicits these accounts from
      individuals, businesses, associations and organizations and governmental
      authorities.




***Loan
      Products*** *.* The Bank offers a full range of commercial and consumer loans, as well as real
      estate , construction and acquisition loans.  Commercial loans are extended
      primarily to small and middle market customers.  Such loans include both
      secured and unsecured loans for working capital needs (including loans secured
      by inventory and accounts receivable), business expansion (including acquisition
      of real estate and improvements), asset acquisition and agricultural
      purposes. Commercial term loans generally will not exceed a five-year
      maturity and may be based on a ten or fifteen-year amortization.  The
      extensions of term loans are based upon (1) the ability and stability of current
      management; (2) earnings and trends in cash flow; (3) earnings projections
      based
      on reasonable assumptions; (4) the financial strength of the industry and the
      business itself; and (5) the value and marketability of the collateral.  In
      considering loans for accounts receivable and inventory, the Bank generally
      uses
      a declining scale for advances based on an aging of the accounts receivable
      or
      the quality and utility of the inventory.  With respect to loans for the
      acquisition of equipment and other assets, the terms depend on the economic
      life
      of the respective assets.




3




As
      of
      December 31, 2007, the classification of the commercial loans of the Bank and
      the respective percentage of the Bank’s total loan portfolio of each are as
      follows:


Description
              
              Total
                    Outstanding
                  as
                    of
                  December
                    31, 2007
              
              Percentage
                      of
                    Total
                    Loan
                      PortfolioLoans
                  to finance agricultural production and
                  other farm loans
              
              $
              -
              
              
              -
              %Commercial
                  and industrial loans
              
              $
              67,772
              
              
              14
              %




Commercial
      loans involve significant risk because there is generally a small market
      available for an asset held as collateral that needs to be liquidated.
      Commercial loans for working capital needs are typically difficult to monitor.





As
      of
      December 31, 2007, the classification of the consumer loans of the Bank and
      the
      respective percentage of the Bank’s total loan portfolio of each are as
      follows:


Total
                  Outstanding
              
              Percentage
                  ofDescription
              
              as
                  of December 31, 2007
              
              Total
                  Loan PortfolioIndividuals
                  (household, personal, single pay,
                  installment and other)
              
              $
              10,362
              
              
              2
              %Individuals
                  (household, family, personalcredit
                cards and overdraft protection)
              
              $
              1,035
              
              
              1
              %All
                  other consumer loans
              
              $
              7,774
              
              
              1
              %







The
      risks
      associated with consumer lending are largely related to economic conditions
      and
      increase during economic downturns. Other major risk factors relating to
      consumer loans include high debt to income ratios and poor loan-to-value ratios.
      All of the consumer loans set forth above require a debt service income ratio
      of
      no greater than 36% based on gross income.





The
      Bank’s lending activities are subject to a variety of lending limits imposed by
      federal law. Under South Carolina law, loans by the Bank to a single customer
      may not exceed 10% of the Bank’s unimpaired capital, except that by two-thirds
      vote of the directors of the Bank such limit may be increased to 15% of the
      Bank’s unimpaired capital. The Bank’s Board of Directors has approved that
      increase in its lending limit. Based on the Bank’s unimpaired capital as of
      December 31, 2007, the Bank’s lending limit to a single customer is
      approximately $8.0 million. Even with the increase, the size of the loans that
      the Bank is able to offer to potential customers is less than the size of the
      loans that the Bank’s competitors with larger lending limits are able to offer.
      This limit affects the ability of the Bank to seek relationships with the area’s
      larger businesses. However, the Bank may request other banks to participate
      in
      loans to customers when requested loan amounts exceed the Bank’s legal lending
      limit.





***Mortgage
      Loan Division*** .
      The
      Bank has established a mortgage loan division through which it has broadened
      the
      range of services that it offers to its customers. The mortgage loan division
      originates secured real estate loans to purchase existing or to construct new
      homes and to refinance existing mortgages. The following are the types of real
      estate loans originated by the Bank and the general loan-to-value limits set
      by
      the Bank with respect to each type.




·
                  
                  Raw
                      Land
                  65%·
                  
                  Land
                      Development
                  75%·
                  
                  Commercial,
                      multifamily and other nonresidential construction
                  80%·
                  
                  One
                      to four family residential construction
                  85%·
                  
                  Improved
                      property
                  85%·
                  
                  Owner
                      occupied, one to four family and home equity
                  90%
                      (or less)·
                  
                  Commercial
                      property
                  80%
                      (or less)


As
      of
      December 31, 2007, the classification of the mortgage loans of the Bank and
      the
      respective percentage of the Bank’s total loan portfolio of each are as
      follows:




4




Description
                
                Total
                    Amountas
                    of December 31, 2007
                
                Percentage
                    ofTotal
                    Loan PortfolioSecured
                    by non-farm, non-residential properties
                
                $
                189,265
                
                
                39
                %Construction
                    and land development
                
                $
                65,432
                
                
                13
                %Farmland
                    (including farm residential and other improvements)
                
                $
                6,727
                
                
                1
                %Revolving,
                    open end loans secured by1-4 family extended under line of
                    credit
                
                $
                39,504
                
                
                8
                %All
                    other loans secured by 1-4 family residential (1stlien)
                
                $
                85,861
                
                
                18
                %All
                    other loans secured by 1-4 family residential (junior
                    lien)
                
                $
                4,611
                
                
                1
                %Secured
                    by multi-family (5 or more) residential properties - condos and
                    apartments
                
                $
                9,823
                
                
                2
                %




Of
      the
      loan types listed above, commercial real estate loans are generally more risky
      because they are the most difficult to liquidate. Construction loans also
      involve risks due to weather delays and cost overruns.





The
      Bank
      generates additional fee income by selling most of its mortgage loans in the
      secondary market and cross-selling other products and services to its mortgage
      customers. In 2007, the Bank sold mortgage loans in a total amount of
      approximately $ 146,067,873 or
      56% of
      the total number of mortgage loans originated by the Bank.





The
      Bank
      does not originate or hold subprime residential mortgage loans which were
      originally intended for sale on the secondary mortgage market.





All
      FHA,
      VA and State Housing loans sold by the Bank involve the right to recourse.
      The
      FHA and VA loans are subject to recourse if the loan shows 60 days or more
      past
      due in the first 4 months or goes in to foreclosure within the first 12 months.
      The State Housing loans are subject to recourse if the loan becomes delinquent
      prior to purchase by State Housing or if final documentation is not delivered
      within 90 days of purchase. All investors have a right to require the Bank
      to
      repurchase a loan in the event the loan involved fraud. In 2007, of the 980
      loans sold by the Bank, 19 were FHA or VA loans and 43 were State Housing loans.
      Such loans represented .46% of the dollar volume or 6.3% of the total number
      of
      loans sold by the Bank in 2007.





In
      addition, an increase in interest rates may decrease the demand for consumer
      and
      commercial credit, including real estate loans. Net fees from residential
      mortgage originations were $1.8 million, or 4.23%, of our gross revenue in
      2007.
      We expect to originate more real estate loans in 2008 with the addition of
      more
      mortgage originators. Accordingly, a period of rising interest rates could
      negatively affect our residential mortgage origination business.





***Other
      Banking Services*** *.* First
      Reliance Bank focuses heavily on personal customer service and offers a full
      range of financial services. Personal products include Totally FREE Checking,
      and savings accounts, money market accounts, CDs and IRAs, and personal mortgage
      loans, while business products include Totally FREE Business checking and
      savings accounts, commercial lending services, money market accounts, and
      business deposit courier service. In September 2004, the Company began offering
      Wholesale Mortgage Services and Title Insurance Services. In December 2004,
      the
      Company began offering business customers a courier service. The Company also
      provides Internet banking, electronic bill paying services, free ATMs, free
      coin
      machines at all branches, and an overdraft privilege to its customers. The
      Company’s stock is traded on the OTC Bulletin Board under the symbol “FSRL”.
      Information about the Company is available on our website at http://firstreliance.com .




5




2007
      was
      a year of growth and expansion. Focusing on our Easy To Do Business With ****** standard
      of banking, we introduced new innovative products and increased our locations,
      all with the goal of providing our customers a convenient and first class
      banking experience.”





Much
      of
      our loan and deposit growth can be attributed to these new innovative and
      competitive products. To allow our customers immediate access to their deposits,
      we introduced Same Day Banking, extending the cutoff time for transactions
      until
      8pm Monday through Friday. We also added Remote Deposit Capture to our suite
      of
      convenient products and services, making it quick and easy for our business
      customers to make their deposits from their place of business. In addition,
      we
      announced that we will now remain open on 6 traditional bank holidays in 2008.





In
      line
      with our Easy to Do Business With ****** standard,
      our 2007 expansion efforts included a new regional headquarters in Lexington,
      a
      full service branch in Mount Pleasant, and loan production offices in Rock
      Hill,
      Greenville, and Myrtle Beach. Our expansion efforts proved successful as we
      have
      seen a record number of new accounts and a strong growth in services per
      household.





We
      believe that the quality of our work environment has a direct impact on our
      customers’ experience. Providing a great place to work, allows us to recruit and
      retain high performing associates. For the past two consecutive years, we have
      been named One of the Best Places to Work in SC. A positive and high quality
      work environment along with our Easy to Do Business With ****** standard
      of banking has earned us a customer satisfaction rating of 94.7%.





First
      Reliance’s strong balance sheet growth led it to be recognized as one of South
      Carolina’s Top 25 Fastest Growing CompaniesTM by Elliott Davis, LLC, in
      association with the SC Chamber of Commerce. The most recent award is the fourth
      time First Reliance has received this distinction, and it is the only SC bank
      to
      receive this honor this many times.





***Investments*** .
      In
      addition to its loan operations, the Bank makes other investments primarily
      in
      obligations of the United States or obligations guaranteed as to principal
      and
      interest by the United States and other taxable securities. The Bank also
      invests in certificates of deposits in other financial institutions. The amount
      invested in such time deposits, as viewed on an institution by institution
      basis, does not exceed $100,000. Therefore, the amounts invested in certificates
      of deposit are fully insured by the FDIC. No investment held by the Bank exceeds
      any applicable limitation imposed by law or regulation. Our Finance Committee
      reviews the investment portfolio on an ongoing basis to ascertain investment
      profitability and to verify compliance with the Bank’s investment
      policies.





***Other
      Services*** *.* In
      addition to its banking services, the Bank offers securities brokerage services
      and life insurance products to its customers through a financial services
      division of the Bank. The Bank obtained an insurance agency license under South
      Carolina law to sell life insurance and has relationships with brokers and
      carriers. The Bank’s financial services division uses professional money
      managers who diversify a client’s portfolio into several different asset
      classes. Some of the products offered are mutual funds, annuities, stocks,
      bonds, insurance, IRAs and 401(k) rollovers.





**Competition**





The
      Bank
      faces strong competition for deposits, loans and other financial services from
      numerous other banks, thrifts, credit unions, other financial institutions
      and
      other entities that provide financial services, some of which are not subject
      to
      the same degree of regulation as the Bank. Because South Carolina law permits
      statewide branching by banks and savings and loan associations, many financial
      institutions in the state have branch networks. In addition, subject to certain
      conditions, South Carolina law permits interstate banking. Reflecting this
      opportunity provided by law plus the growth prospects of the Charleston,
      Florence and Lexington markets, all of the five largest (in terms of local
      deposits) commercial banks in our market are branches of or affiliated with
      regional or super-regional banks.




6




As
      of
      June 30, 2006, 30 banks and five savings institutions operated 236 offices
      within Charleston, Florence and Lexington Counties. All of these institutions
      aggressively compete for business in the Bank’s market area. Some of these
      competitors have been in business for many years have established customer
      bases, are larger than the Bank, have substantially higher lending limits than
      the Bank has and are able to offer certain services, including trust and
      international banking services, that the Bank is able to offer only through
      correspondents, if at all.





The
      Bank
      currently conducts business principally through its five branches in Charleston,
      Florence and Lexington Counties, South Carolina. Based upon data available
      on
      the FDIC website as of June 30, 2007, the Bank’s total deposits ranked
      8 th among
      financial institutions in our market area, representing approximately 3.6%
      of
      the total deposits in our market area. The table below shows our deposit market
      share in the counties we serve according to data from the FDIC website as of
      June 30, 2007.




**Market**
            
            **Number of**
              **Branches**
            
            **Our Market**
              **Deposits**
            
            **Total**
              **Market**
              **Deposits**
            
            **Ranking**
            
            **Market Share**
              **Percentage**
              **(%)****(Dollar
                amounts in millions)****South
                Carolina**Charleston
                County
            
            
            2
            
            $
            68
            
            $
            7,108
            
            
            14
            
            
            1.0
            %Florence
                County
            
            
            2
            
            
            273
            
            
            2,097
            
            
            3
            
            
            13.0Lexington
                County
            
            
            1
            
            
            84
            
            
            2,582
            
            
            7
            
            
            3.3**First
                Reliance Bank**
            
            
            5
            
            $
            426
            
            $
            11,787
            
            
            8
            
            
            3.6
            %




The
      Bank
      competes based on providing its customers with high-quality, prompt and
      knowledgeable personalized service at competitive rates, which is a combination
      that the Bank believes customers generally find lacking at larger institutions.
      The Bank offers a wide variety of financial products and services at fees that
      it believes are competitive with other financial institutions.





**Employees**





On
      December 31, 2007, the Bank had 141 full-time employees and 23 part-time
      employees. The executive officers of the Company are the only officers of the
      Company, but they receive no compensation from the Company. The Company has
      no
      employees.





**Supervision
      and Regulation**





Both
      the
      Company and the Bank are subject to extensive state and federal banking
      regulations that impose restrictions on and provide for general regulatory
      oversight of their operations. These laws generally are intended to protect
      depositors and not shareholders. Legislation and regulations authorized by
      legislation influence, among other things:




·
            how,
                when and where we may expand
                geographically;




·
            into
                what product or service market we may
                enter;




·
            how
                we must manage our assets; and




·
            under
                what circumstances money may or must flow between the parent bank
                holding
                company and the subsidiary bank.





Set
      forth
      below is an explanation of the major pieces of legislation affecting our
      industry and how that legislation affects our actions. The following summary
      is
      qualified by reference to the statutory and regulatory provisions discussed.
      Changes in applicable laws or regulations may have a material effect on our
      business and prospects, and legislative changes and the policies of various
      regulatory authorities may significantly affect our operations. We cannot
      predict the effect that fiscal or monetary policies, or new federal or state
      legislation may have on our business and earnings in the future.




7




**First
      Reliance Bancshares, Inc.**





Since
      the
      Company owns all of the capital stock of the Bank, it is a bank holding company
      under the federal Bank Holding Company Act of 1956. As a result, the Company
      is
      primarily subject to the supervision, examination, and reporting requirements
      of
      the Bank Holding Company Act and the regulations of the Federal
      Reserve.





***Acquisitions
      of Banks*** *.* **** The
      Bank
      Holding Company Act requires every bank holding company to obtain the Federal
      Reserve’s prior approval before:




·
            acquiring
                direct or indirect ownership or control of any voting shares of any
                bank
                if, after the acquisition, the bank holding company will directly
                or
                indirectly own or control more than 5% of the bank’s voting
                shares;




·
            acquiring
                all or substantially all of the assets of any bank;
                or




·
            merging
                or consolidating with any other bank holding
                company.





Additionally,
      the Bank Holding Company Act provides that the Federal Reserve may not approve
      any of these transactions if it would result in or tend to create a monopoly
      or,
      substantially lessen competition or otherwise function as a restraint of trade,
      unless the anti-competitive effects of the proposed transaction are clearly
      outweighed by the public interest in meeting the convenience and needs of the
      community to be served. The Federal Reserve is also required to consider the
      financial and managerial resources and future prospects of the bank holding
      companies and banks concerned and the convenience and needs of the community
      to
      be served. The Federal Reserve’s consideration of financial resources generally
      focuses on capital adequacy, which is discussed below.





Under
      the
      Bank Holding Company Act, if adequately capitalized and adequately managed,
      the
      Company or any other bank holding company located in South Carolina may purchase
      a bank located outside of South Carolina. Conversely, an adequately capitalized
      and adequately managed bank holding company located outside of South Carolina
      may purchase a bank located inside South Carolina. In each case, however,
      restrictions may be placed on the acquisition of a bank that has only been
      in
      existence for a limited amount of time or will result in specified
      concentrations of deposits. For example, South Carolina law prohibits a bank
      holding company from acquiring control of a financial institution until the
      target financial institution has been incorporated for five years. As a result,
      no bank holding company may acquire control of the Company until after the
      fifth
      anniversary date of the Bank’s incorporation. Because the Bank has not been
      incorporated for more than five years, this limitation does apply to the Bank
      and the Company.





Additionally,
      In July 1994, South Carolina enacted legislation which effectively provided
      that, after June 30, 1996, out-of-state bank holding companies may acquire
      other
      banks or bank holding companies in South Carolina, subject to certain
      conditions. Accordingly, effective July 1, 1996, South Carolina law was amended
      to permit interstate branching but not de novo branching by an out-of-state
      bank. The Company believes that the foregoing legislation has increased takeover
      activity of South Carolina financial institutions by out-of-state financial
      institutions.




8




***Change
      in Bank Control*** *.* Subject
      to various exceptions, the Bank Holding Company Act and the Change in Bank
      Control Act, together with related regulations, require Federal Reserve approval
      prior to any person or company acquiring “control” of a bank holding company.
      Control is conclusively presumed to exist if an individual or company acquires
      25% or more of any class of voting securities of the bank holding company.
      Control is rebuttably presumed to exist if a person or company acquires 10%
      or
      more, but less than 25%, of any class of voting securities and either:




·
            the
                bank holding company has registered securities under Section 12 of
                the Securities Exchange Act of 1934;
                or




·
            no
                other person owns a greater percentage of that class of voting securities
                immediately after the transaction.





Our
      common stock is registered under Section 12 of the Securities Exchange Act
      of
      1934. The regulations provide a procedure for challenging any rebuttable
      presumption of control.





***Permitted
      Activities*** . **** The
      Bank
      Holding Company Act has generally prohibited a bank holding company from
      engaging in activities other than banking or managing or controlling banks
      or
      other permissible subsidiaries and from acquiring or retaining direct or
      indirect control of any company engaged in any activities other than those
      determined by the Federal Reserve to be closely related to banking or managing
      or controlling banks as to be a proper incident thereto.  Provisions of the
      Gramm-Leach-Bliley Act have expanded the permissible activities of a bank
      holding company that qualifies as a financial holding company.  Under the
      regulations implementing the Gramm-Leach-Bliley Act, a financial holding company
      may engage in additional activities that are financial in nature or incidental
      or complementary to financial activity. Those activities include, among other
      activities, certain insurance and securities activities.





To
      qualify to become a financial holding company, the Bank and any other depository
      institution subsidiary of the Company must be well capitalized and well managed
      and must have a Community Reinvestment Act rating of at least “satisfactory.”
Additionally, the Company must file an election with the Federal Reserve to
      become a financial holding company and must provide the Federal Reserve with
      30
      days’ written notice prior to engaging in a permitted financial activity. While
      the Company meets the qualification standards applicable to financial holding
      companies, the Company has not elected to become a financial holding company
      at
      this time.





***Support
      of Subsidiary Institutions.*** Under
      Federal Reserve policy, the Company is expected to act as a source of financial
      strength for the Bank and to commit resources to support the Bank. This support
      may be required at times when, without this Federal Reserve policy, the Company
      might not be inclined to provide it. In addition, any capital loans made by
      the
      Company to the Bank will be repaid only after its deposits and various other
      obligations are repaid in full. In the unlikely event of the Company’s
      bankruptcy, any commitment by it to a federal bank regulatory agency to maintain
      the capital of the Bank will be assumed by the bankruptcy trustee and entitled
      to a priority of payment.





***South
      Carolina Law*** *.* As ** a
      bank
      holding company with its principal offices in South Carolina, the Company is
      subject to limitations on sale or merger and to regulation by the South Carolina
      State Board of Financial Institutions (the “State Board”). The Company must
      receive the approval of the State Board prior to acquiring control of a bank
      or
      bank holding company or all or substantially all of the assets of a bank or
      a
      bank holding company. The Company also must file with the State Board periodic
      reports with respect to its financial condition, operations and management,
      and
      the intercompany relationships between the Company and its
      subsidiaries.





**First
      Reliance Bank**





The
      Bank
      is a state chartered bank insured by the FDIC and not a member of the Federal
      Reserve. As such, the Bank is subject to supervision and regulation by the
      FDIC
      and the State Board. Supervision, regulation and examination of banks by
      regulatory agencies are intended primarily for the protection of depositors
      rather than stockholders of the banks.




9


***South
      Carolina Law*** .
      Commercial banks chartered in South Carolina have only those powers granted
      by
      law or the regulations of the State Board. State law sets specific requirements
      for bank capital and regulates deposits in and loans and investments by banks,
      including the amounts, types and, in some cases, rates. In addition, the State
      Board regulates, among other activities, the payment of dividends, the opening
      of branches, loans to officers and directors, record keeping and the use of
      automated teller machines. The State Board periodically examines state banks
      to
      determine their compliance with the law and regulations, and state banks must
      make periodic reports of their condition to the State Board.





***Prompt
      Corrective Action*** *.* The
      Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a
      system of prompt corrective action to resolve the problems of undercapitalized
      financial institutions. Under this system, the federal banking regulators have
      established five capital categories (well capitalized, adequately capitalized,
      undercapitalized, significantly undercapitalized and critically
      undercapitalized) in which all institutions are placed. Federal banking
      regulators are required to take various mandatory supervisory actions and are
      authorized to take other discretionary actions with respect to institutions
      in
      the three undercapitalized categories. The severity of the action depends upon
      the capital category in which the institution is placed. Generally, subject
      to a
      narrow exception, the banking regulator must appoint a receiver or conservator
      for an institution that is critically undercapitalized. The federal banking
      agencies have specified by regulation the relevant capital level for each
      category.





***FDIC
      Insurance Assessments*** *.* The
      FDIC
      has adopted a risk-based assessment system for insured depository institutions
      that takes into account the risks attributable to different categories and
      concentrations of assets and liabilities. The system assesses higher rates
      on
      those institutions that pose greater risks to the Deposit Insurance Fund (the
      “DIF”). The FDIC places each institution in one of four risk categories using a
      two-step process based first on capital ratios (the capital group assignment)
      and then on other relevant information (the supervisory group assignment).
      Within the lower risk category, Risk Category I, rates will vary based on each
      institution’s CAMELS component ratings, certain financial ratios, and long-term
      debt issuer ratings.





Capital
      group assignments are made quarterly and an institution is assigned to one
      of
      three capital categories: (1) well capitalized; (2) adequately capitalized;
      and
      (3) undercapitalized. These three categories are substantially similar to the
      prompt corrective action categories described above, with the “undercapitalized”
category including institutions that are undercapitalized, significantly
      undercapitalized and critically undercapitalized for prompt corrective action
      purposes. The FDIC also assigns an institution to one of three supervisory
      subgroups based on a supervisory evaluation that the institution’s primary
      federal banking regulator provides to the FDIC and information that the FDIC
      determines to be relevant to the institution’s financial condition and the risk
      posed to the deposit insurance funds. Assessments range from 5 to 43 cents
      per
      $100 of deposits, depending on the institution’s capital group and supervisory
      subgroup. Institutions that are well capitalized will be charged a rate between
      5 and 7 cents per $100 of deposits.





The
      FDIC
      may terminate its insurance of deposits if it finds that the institution has
      engaged in unsafe and unsound practices, is in an unsafe or unsound condition
      to
      continue operations, or has violated any applicable law, regulation, rule,
      order, or condition imposed by the FDIC.





***Community
      Reinvestment Act*** *.* The Bank
      is subject to evaluation by the FDIC under the Community Reinvestment Act of
      1977 (“CRA”). The Bank is evaluated under guidelines established for “small
      banks.” These guidelines call for an evaluation of an institution’s performance
      in meeting the credit needs of its entire community, including low- and
      moderate-income areas, consistent with the safe and sound operation of the
      institution. The relevant factors under these “small bank” guidelines include
      the bank’s loan-to-deposit ratio within its community, the bank’s percentage of
      loans and other lending activities within its community, the bank’s record of
      lending to and engaging in other lending-related activities for borrowers of
      different income levels and businesses and farms of different sizes, the
      geographic distribution of the bank’s loans and the bank's record of acting, if
      warranted, in response to written complaints about its performance in helping
      to
      meet credit needs in its community. The FDIC takes a bank’s CRA performance into
      account in considering applications for approval of deposit insurance,
      establishment or relocation of branches and business combinations. Accordingly,
      failure to adequately meet these criteria could impose additional requirements
      and limitations on the Bank. Since our aggregate assets are not more than $250
      million, under the Gramm-Leach-Bliley Act, we are generally subject to a
      Community Reinvestment Act examination only once every 60 months if we receive
      an “outstanding” rating, once every 48 months if we receive a “satisfactory”
rating and as needed if our rating is “less than satisfactory.” **** Additionally,
      we must publicly disclose the terms of various Community Reinvestment
      Act-related agreements.




10




***Allowance
      for Loan and Lease Losses.*** The
      Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most
      significant estimates in the Bank’s financial statements and regulatory reports.
      Because of its significance, the Bank has developed a system by which it
      develops, maintains and documents a comprehensive, systematic and consistently
      applied process for determining the amounts of the ALLL and the provision for
      loan and lease losses. The Interagency Policy Statement on the Allowance for
      Loan and Lease Losses, issued on December 13, 2006, encourages all banks to
      ensure controls are in place to consistently determine the ALLL in accordance
      with GAAP, the bank’s stated policies and procedures, management’s best judgment
      and relevant supervisory guidance. Consistent with supervisory guidance, the
      Bank maintains a prudent and conservative, but not excessive, ALLL, that is
      at a
      level that is appropriate to cover estimated credit losses on individually
      evaluated loans determined to be impaired as well as estimated credit losses
      inherent in the remainder of the loan and lease portfolio. The Bank’s estimate
      of credit losses reflects consideration of all significant factors that affect
      the collectibility of the portfolio as of the evaluation date. See “Management’s
      Discussion and Analysis - Accounting and Financial Reporting Issues.”




***Commercial
      Real Estate Lending*** .
      The
      Bank’s lending operations may be subject to enhanced scrutiny by federal banking
      regulators based on its concentration of commercial real estate loans. On
      December 6, 2006, the federal banking regulators issued final guidance to remind
      financial institutions of the risk posed by commercial real estate (“CRE”)
      lending concentrations. CRE loans generally include land development,
      construction loans and loans secured by multifamily property, and nonfarm,
      nonresidential real property where the primary source of repayment is derived
      from rental income associated with the property.





***Other
      Regulations*** *.* Interest
      and other charges collected or contracted for by the Bank are subject to state
      usury laws and federal laws concerning interest rates. The Bank’s loan
      operations are also subject to federal laws applicable to credit transactions,
      such as the:




·
              
              Truth-In-Lending
                  Act, governing disclosures of credit terms to consumer borrowers;·
              
              Home
                  Mortgage Disclosure Act of 1975, requiring financial institutions
                  to
                  provide information to enable the public and public officials to
                  determine
                  whether a financial institution is fulfilling its obligation to
                  help meet
                  the housing needs of the community it serves;·
              
              Equal
                  Credit Opportunity Act, prohibiting discrimination on the basis
                  of race,
                  creed or other prohibited factors in extending credit;·
              
              Fair
                  Credit Reporting Act of 1978, as amended by the Fair and Accurate
                  Credit
                  Transactions Act, governing the use and provision of information
                  to credit
                  reporting agencies, certain identity theft protections, and certain
                  credit
                  and other disclosures;·
              
              Fair
                  Debt Collection Act, governing the manner in which consumer debts
                  may be
                  collected by collection agencies;·
              
              Soldiers’
                  and Sailors’ Civil Relief Act of 1940, as amended by the Service members
                  Civil Relief Act, governing the repayment terms of, and property
                  rights
                  underlying, secured obligations of persons currently on active
                  duty with
                  the United States military;·
              
              Talent
                  Amendment in the 2007 Defense Authorization Act, establishing a
                  36% annual
                  percentage rate ceiling, which includes a variety of charges including
                  late fees, for consumer loans to military service members and their
                  dependents; and·
              
              rules
                  and regulations of the various federal agencies charged with the
                  responsibility of implementing these federal
                  laws.






The
      Bank’s deposit operations are subject to federal laws applicable to depository
      accounts , such as the:




·
              
              Truth-in-Savings
                  Act, requiring certain disclosures for consumer deposit
                  accounts;·
              
              Right
                  to Financial Privacy Act, which imposes a duty to maintain confidentiality
                  of consumer financial records and prescribes procedures for complying
                  with
                  administrative subpoenas of financial records;·
              
              Electronic
                  Funds Transfer Act and Regulation E issued by the Federal Reserve
                  to
                  implement that act, 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; and·
              
              rules
                  and regulations of the various federal agencies charged with the
                  responsibility of implementing these federal
                  laws.




11




**Capital
      Adequacy**





The
      Company and the Bank are required to comply with the capital adequacy standards
      established by the Federal Reserve, in the case of the Company, and the FDIC,
      in
      the case of the Bank. The Federal Reserve has established a risk-based and
      a
      leverage measure of capital adequacy for bank holding companies. The Bank is
      also subject to risk-based and leverage capital requirements adopted by the
      FDIC, which are substantially similar to those adopted by the Federal Reserve
      for bank holding companies.





The
      risk-based capital standards are designed to make regulatory capital
      requirements more sensitive to differences in risk profiles among banks and
      bank
      holding companies, to account for off-balance-sheet exposure, and to minimize
      disincentives for holding liquid assets. Assets and off-balance-sheet items,
      such as letters of credit and unfunded loan commitments, are assigned to broad
      risk categories, each with appropriate risk weights. The resulting capital
      ratios represent capital as a percentage of total risk-weighted assets and
      off-balance-sheet items.





The
      minimum guideline for the ratio of total capital to risk-weighted assets is
      8%.
      Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
      Tier 1 Capital generally consists of common stock, minority interests in the
      equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
      stock, and a limited amount of qualifying cumulative perpetual preferred stock,
      less goodwill and other specified intangible assets. Tier 1 Capital must equal
      at least 4% of risk-weighted assets. Tier 2 Capital generally consists of
      subordinated debt, other preferred stock, and a limited amount of loan loss
      reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1
      Capital. At December 31, 2007, our ratio of total capital to risk-weighted
      assets was 10.29% and our ratio of Tier 1 Capital to risk-weighted assets was
      9.26%.





In
      addition, the Federal Reserve has established minimum leverage ratio guidelines
      for bank holding companies. These guidelines provide for a minimum ratio of
      Tier
      1 Capital to average assets, less goodwill and other specified intangible
      assets, of 3% for bank holding companies that meet specified criteria, including
      having the highest regulatory rating and implementing the Federal Reserve’s
      risk-based capital measure for market risk. All other bank holding companies
      generally are required to maintain a leverage ratio of at least 4%. At December
      31, 2007, our leverage ratio was 9.46%. The guidelines also provide that bank
      holding companies experiencing internal growth or making acquisitions will
      be
      expected to maintain strong capital positions substantially above the minimum
      supervisory levels without reliance on intangible assets. The Federal Reserve
      considers the leverage ratio and other indicators of capital strength in
      evaluating proposals for expansion or new activities.





Failure
      to meet capital guidelines could subject a bank or bank holding company to
      a
      variety of enforcement remedies, including issuance of a capital directive,
      the
      termination of deposit insurance by the FDIC, a prohibition on accepting
      brokered deposits, and certain other restrictions on its business. As described
      above, significant additional restrictions can be imposed on FDIC-insured
      depository institutions that fail to meet applicable capital requirements.





**Payment
      of Dividends**





The
      Company is a legal entity separate and distinct from the Bank. The principal
      sources of the Company’s cash flow, including cash flow to pay dividends to its
      shareholders, are dividends that the Bank pays to its sole shareholder, the
      Company. Statutory and regulatory limitations apply to the Bank’s payment of
      dividends to the Company as well as to the Company’s payment of dividends to its
      shareholders.




12




Under
      South Carolina law, the Bank is authorized to upstream to the Company, by way
      of
      a cash dividend, up to 100% of the Bank’s net income in any calendar year
      without obtaining the prior approval of the State Board, provided that the
      Bank
      received a composite rating of one or two at the last examination conducted
      by a
      state or federal regulatory authority. All other cash dividends require prior
      approval by the State Board. South Carolina law requires each state nonmember
      bank to maintain the same reserves against deposits as are required for a state
      member bank under the Federal Reserve Act. This requirement is not expected
      to
      limit the ability of the Bank to pay dividends on its common stock.





The
      payment of dividends by the Company and the Bank may also be affected by other
      factors, such as the requirement to maintain adequate capital above regulatory
      guidelines. If, in the opinion of the FDIC, the Bank were engaged in or about
      to
      engage in an unsafe or unsound practice, the FDIC could require, after notice
      and a hearing, that the Bank stop or refrain engaging in the practice. The
      federal banking agencies have indicated that paying dividends that deplete
      a
      depository institution’s capital base to an inadequate level would be an unsafe
      and unsound banking practice. Under the Federal Deposit Insurance Corporation
      Improvement Act of 1991, a depository institution may not pay any dividend
      if
      payment would cause it to become undercapitalized or if it already is
      undercapitalized. Moreover, the federal agencies have issued policy statements
      that provide that bank holding companies and insured banks should generally
      only
      pay dividends out of current operating earnings.





**Restrictions
      on Transactions with Affiliates**




The
      Company and the Bank are subject to the provisions of Section 23A of the Federal
      Reserve Act. Section 23A places limits on the amount of:




·
              
              a
                  bank’s loans or extensions of credit to affiliates;·
              
              a
                  bank’s investment in affiliates;·
              
              assets
                  a bank may purchase from affiliates, except for real and personal
                  property
                  exempted by the Federal Reserve;·
              
              loans
                  or extensions of credit to third parties collateralized by the
                  securities
                  or obligations of affiliates; and·
              
              a
                  bank’s guarantee, acceptance or letter of credit issued on behalf of
                  an
                  affiliate.




The
      total
      amount of the above transactions is limited in amount, as to any one affiliate,
      to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
      20% of a bank’s capital and surplus. In addition to the limitation on the amount
      of these transactions, each of the above transactions must also meet specified
      collateral requirements. The Bank must also comply with other provisions
      designed to avoid the taking of low-quality assets.





The
      Company and the Bank are also subject to the provisions of Section 23B of the
      Federal Reserve Act which, among other things, prohibit an institution from
      engaging in the above transactions with affiliates unless the transactions
      are
      on terms substantially the same, or at least as favorable to the institution
      or
      its subsidiaries, as those prevailing at the time for comparable transactions
      with nonaffiliated companies.





The
      Bank
      is also subject to restrictions on extensions of credit to its executive
      officers, directors, principal shareholders and their related interests. These
      extensions of credit (1) must be made on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time for
      comparable transactions with third parties, and (2) must not involve more
      than the normal risk of repayment or present other unfavorable
      features.





**Proposed
      Legislation and Regulatory Action**





New
      regulations and statutes are regularly proposed that contain wide-ranging
      changes to the structures, regulations and competitive relationships of
      financial institutions operating and doing business in the United States. We
      cannot predict whether or in what form any proposed regulation or statute will
      be adopted or the extent to which our business may be affected by any new
      regulation or statute.




13




**Effect
      of Governmental Monetary Policies**





Our
      earnings are affected by domestic economic conditions and the monetary and
      fiscal policies of the United States government and its agencies. The Federal
      Reserve Bank’s monetary policies have had, and are likely to continue to have,
      an important impact on the operating results of commercial banks through its
      power to implement national monetary policy in order, among other things, to
      curb inflation or combat a recession. The monetary policies of the Federal
      Reserve affect the levels of bank loans, investments and deposits through its
      control over the issuance of United States government securities, its regulation
      of the discount rate applicable to member banks and its influence over reserve
      requirements to which member banks are subject. We cannot predict the nature
      or
      impact of future changes in monetary and fiscal policies.





**Selected
      Statistical Information**





The
      selected statistical information required by Item 1 is included in the Company’s
      2007 Annual Report to Shareholders, which is Exhibit 13.1 to this Report, under
      the heading “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” and is incorporated herein by reference.




**ITEM
      1A. RISK FACTORS**





*An
      investment in our common stock involves risks. If any of the following risks
      or
      other risks, which have not been identified or which we may believe are
      immaterial or unlikely, actually occur, our business, financial condition and
      results of operations could be harmed. In such a case, the trading price of
      our
      common stock could decline, and you may lose all or part of your investment.
      The
      risks discussed below also include forward-looking statements, and our actual
      results may differ substantially from those discussed in these forward-looking
      statements.*





***We
      could suffer loan losses from a decline in credit quality.***




We
      could
      sustain losses if borrowers, guarantors and related parties fail to perform
      in
      accordance with the terms of their loans. We have adopted underwriting and
      credit monitoring procedures and credit policies, including the establishment
      and review of the allowance for credit losses, which we believe are appropriate
      to minimize this risk by assessing the likelihood of nonperformance, tracking
      loan performance and diversifying our credit portfolio. These policies and
      procedures, however, may not prevent unexpected losses that could materially
      adversely affect our results of operations.





***We
      are subject to the local economies in Charleston, Florence and Lexington
      Counties, South Carolina.***




Our
      success depends upon the growth in population, income levels, deposits and
      housing starts in our primary market areas. If the communities in which First
      Reliance Bank operate do not grow, or if prevailing economic conditions locally
      or nationally are unfavorable, our business may not succeed. Unpredictable
      economic conditions may have an adverse effect on the quality of our loan
      portfolio and our financial performance. Economic recession over a prolonged
      period or other economic problems in our market areas could have a material
      adverse impact on the quality of the loan portfolio and the demand for our
      products and services. Future adverse changes in the economies in our market
      areas may have a material adverse effect on our financial condition, results
      of
      operations or cash flows. Further, the banking industry in South Carolina is
      affected by general economic conditions such as inflation, recession,
      unemployment and other factors beyond our control. As a community bank, we
      are
      less able to spread the risk of unfavorable local economic conditions than
      larger or more regional banks. Moreover, we cannot give any assurance that
      we
      will benefit from any market growth or favorable economic conditions in our
      primary market areas if they do occur.





In
      addition to considering the financial strength and cash flow characteristics
      of
      borrowers, we often secure loans with real estate collateral. The real estate
      collateral in each case provides an alternate source of repayment in the event
      of default by the borrower and may deteriorate in value during the time the
      credit is extended. The market value of the real estate securing our loans
      as
      collateral has been adversely affected by the slowing economy and unfavorable
      changes in economic conditions in our market areas and could be further
      adversely affected in the future.




14




As
      of
      December 31, 2007, more than 80% of our loans receivable were secured
      by real estate. Any sustained period of increased payment delinquencies,
      foreclosures or losses caused by the adverse market and economic conditions,
      including the downturn in the real estate market, in our markets will adversely
      affect the value of our assets, revenues, results of operations and financial
      condition. Currently, we are experiencing such an economic downturn, and if
      it
      continues, our operations could be further adversely affected.




***Our
      business strategy includes the continuation of significant growth plans, and
      our
      financial condition and results of operations could be negatively affected
      if we
      fail to grow or fail to manage our growth effectively.***




We
      intend
      to continue pursuing a significant growth strategy for our business. Our
      prospects must be considered in light of the risks, expenses and difficulties
      frequently encountered by companies in significant growth stages of development.
      We cannot assure you we will be able to expand our market presence in our
      existing markets or successfully enter new markets or that any such expansion
      will not adversely affect our results of operations. Failure to manage our
      growth effectively could have a material adverse effect on our business, future
      prospects, financial condition or results of operations, and could adversely
      affect our ability to successfully implement our business strategy. Also, if
      our
      growth occurs more slowly than anticipated or declines, our operating results
      could be materially adversely affected.




Our
      ability to successfully grow will depend on a variety of factors including
      the
      continued availability of desirable business opportunities, the competitive
      responses from other financial institutions in our market areas and our ability
      to manage our growth. While we believe we have the management resources and
      internal systems in place to successfully manage our future growth, there can
      be
      no assurance growth opportunities will be available or growth will be
      successfully managed.





***Changes
      in the interest rate environment could reduce our profitability.***




As
      a
      financial institution, our earnings are significantly dependent upon our net
      interest income, which is the difference between the interest income that we
      earn on interest-earning assets, such as investment securities and loans, and
      the interest expense that we pay on interest-bearing liabilities, such as
      deposits and borrowings. Therefore, any change in general market interest rates,
      including changes resulting from changes in the Federal Reserve’s fiscal and
      monetary policies, affects us more than nonfinancial institutions and can have
      a
      significant effect on our net interest income and total income. Our assets
      and
      liabilities may react differently to changes in overall market rates or
      conditions because there may be mismatches between the repricing or maturity
      characteristics of the assets and liabilities. As a result, an increase or
      decrease in market interest rates could have material adverse effects on our
      net
      interest margin and results of operations.




In
      response to the dramatic deterioration of the subprime, mortgage, credit and
      liquidity markets, the Federal Reserve recently has taken action on six
      occasions to reduce interest rates by a total of 300 basis points since
      September 2007, which likely will reduce our net interest income during the
      first half of 2008 and the foreseeable future. Any reduction in our net interest
      income will negatively affect our business, financial condition, liquidity,
      operating results, cash flows and/or the price of our securities. Additionally,
      in 2008, we expect to have continued margin pressure given these interest rate
      reductions, along with elevated levels of non-performing assets.




***Our
      continued pace of growth may require us to raise additional capital in the
      future, but that capital may not be available when it is needed.***




We
      are
      required by federal and state regulatory authorities to maintain adequate levels
      of capital to support our operations. We anticipate our capital resources
      following this offering will satisfy our capital requirements for the
      foreseeable future. We may at some point, however, need to raise additional
      capital to support our continued growth.




Our
      ability to raise additional capital, if needed, will depend on conditions in
      the
      capital markets at that time, which are outside our control, and on our
      financial performance. Accordingly, we cannot assure you of our ability to
      raise
      additional capital if needed on terms acceptable to us. If we cannot raise
      additional capital when needed, our ability to further expand our operations
      through internal growth and acquisitions could be materially impaired.




15


***We
      face strong competition from larger, more established competitors.***




The
      banking business is highly competitive, and we experience strong competition
      from many other financial institutions. We compete with commercial banks, credit
      unions, savings and loan associations, mortgage banking firms, consumer finance
      companies, securities brokerage firms, insurance companies, money market funds
      and other financial institutions, which operate in our primary market areas
      and
      elsewhere.




We
      compete with these institutions both in attracting deposits and in making loans.
      In addition, we have to attract our customer base from other existing financial
      institutions and from new residents. Many of our competitors are
      well-established and much larger financial institutions. While we believe we
      can
      and do successfully compete with these other financial institutions in our
      markets, we may face a competitive disadvantage as a result of our smaller
      size
      and lack of geographic diversification.




Although
      we compete by concentrating our marketing efforts in our primary market area
      with local advertisements, personal contacts and greater flexibility in working
      with local customers, we can give no assurance that this strategy will be
      successful.





***We
      face risks with respect to future expansion and acquisitions or mergers.***




We
      continually seek to acquire other financial institutions or parts of those
      institutions and may continue to engage in de novo branch expansion in the
      future. Acquisitions and mergers involve a number of risks, including:




·
            the
                time and costs associated with identifying and evaluating potential
                acquisitions and merger partners may negatively affect our business;




·
            the
                estimates and judgments used to evaluate credit, operations, management
                and market risks with respect to the target institution may not be
                accurate;




·
            the
                time and costs of evaluating new markets, hiring experienced local
                management and opening new offices and the time lags between these
                activities and the generation of sufficient assets and deposits to
                support
                the costs of the expansion may negatively affect our business;




·
            we
                may not be able to finance an acquisition without diluting our existing
                shareholders;




·
            the
                diversion of our management’s attention to the negotiation of a
                transaction may detract from their business productivity;




·
            we
                may enter into new markets where we lack experience;




·
            we
                may introduce new products and services into our business with which
                we
                have no prior experience; and




·
            we
                may incur an impairment of goodwill associated with an acquisition
                and
                experience adverse short-term effects on our results of operations.




In
      addition, no assurance can be given that we will be able to integrate our
      operations after an acquisition without encountering difficulties including,
      without limitation, the loss of key employees and customers, the disruption
      of
      our respective ongoing businesses or possible inconsistencies in standards,
      controls, procedures and policies. Successful integration of our operations
      with
      another entity’s will depend primarily on our ability to consolidate operations,
      systems and procedures and to eliminate redundancies and costs. If we have
      difficulties with the integration, we might not achieve the economic benefits
      we
      expect to result from any particular acquisition or merger. In addition, we
      may
      experience greater than expected costs or difficulties relating to such
      integration.




***Hurricanes
      or other adverse weather events could negatively affect our local economies
      or
      disrupt our operations, which could have an adverse effect on our business
      or
      results of operations.***




The
      economy of South Carolina’s coastal region is affected, from time to time, by
      adverse weather events, particularly hurricanes. Our Charleston County market
      area consists primarily of coastal communities, and we cannot predict whether,
      or to what extent, damage caused by future hurricanes will affect our
      operations, our customers or the economies in our banking markets. However,
      weather events could cause a decline in loan originations, destruction or
      decline in the value of properties securing our loans, or an increase in the
      risks of delinquencies, foreclosures and loan losses. Even if a hurricane does
      not cause any physical damage in our market area, a turbulent hurricane season
      could significantly affect the market value of all coastal
      property.




16





***Our
      recent results may not be indicative of our future results.***




We
      may
      not be able to sustain our historical rate of growth or may not even be able
      to
      grow our business at all. In addition, our recent and rapid growth may distort
      some of our historical financial ratios and statistics. In the future, we may
      not have the benefit of several recently favorable factors, such as a generally
      predictable interest rate environment, a strong residential mortgage market
      or
      the ability to find suitable expansion opportunities. Various factors, such
      as
      economic conditions, regulatory and legislative considerations and competition,
      may also impede or prohibit our ability to expand our market presence. If we
      experience a significant decrease in our historical rate of growth, our results
      of operations and financial condition may be adversely affected due to a high
      percentage of our operating costs being fixed expenses.





***Lack
      of seasoning of our loan portfolio may increase the risk of credit defaults
      in
      the future.***





Due
      to
      the rapid growth of the Bank over the past several years, a large portion of
      the
      loans in our loan portfolio and our lending relationships are of relatively
      recent origin. In general, loans do not begin to show signs of credit
      deterioration or default until they have been outstanding for some period of
      time, a process we refer to as “seasoning.” As a result, a portfolio of older
      loans will usually behave more predictably than a newer loan portfolio. Because
      of the growth of our loan portfolio over the last two years, a significant
      portion of our loan portfolio is relatively new, and the current level of
      delinquencies and defaults may not be representative of the level that will
      prevail when the portfolio becomes more seasoned. If delinquencies and defaults
      increase, we may be required to increase our provision for loan losses, which
      would adversely affect our results of operations and financial
      condition.




***Our
      corporate culture has contributed to our success, and if we cannot maintain
      this
      culture as we grow, we could lose the teamwork and increased productivity
      fostered by our culture, which could harm our business.***




We
      believe that a critical contributor to our success has been our corporate
      culture, which we believe fosters teamwork and increased productivity. As our
      organization grows and we are required to implement more complex organization
      management structures, we may find it increasingly difficult to maintain the
      beneficial aspects of our corporate culture. This could negatively impact our
      future success.




***As
      a community bank, we have different lending risks than larger banks.***




We
      provide services to our local communities. Our ability to diversify our economic
      risks is limited by our own local markets and economies. We lend primarily
      to
      individuals and to small to medium-sized businesses, which may expose us to
      greater lending risks than those of banks lending to larger, better-capitalized
      businesses with longer operating histories.




We
      manage
      our credit exposure through careful monitoring of loan applicants and loan
      concentrations in particular industries, and through loan approval and review
      procedures. We have established an evaluation process designed to determine
      the
      adequacy of our allowance for loan losses. While this evaluation process uses
      historical and other objective information, the classification of loans and
      the
      establishment of loan losses is an estimate based on experience, judgment and
      expectations regarding our borrowers, the economies in which we and our
      borrowers operate, as well as the judgment of our regulators. We cannot assure
      you that our loan loss reserves will be sufficient to absorb future loan losses
      or prevent a material adverse effect on our business, profitability or financial
      condition.




17




***We
      are subject to extensive regulation that could limit or restrict our activities
      and impose financial requirements or limitations on the conduct of our business.***




As
      a bank
      holding company, we are primarily regulated by the Federal Reserve. Our
      subsidiary is primarily regulated by the State Board and the FDIC. Our
      compliance with Federal Reserve, State Board and FDIC regulations is costly
      and
      may limit our growth and restrict certain of our activities, including payment
      of dividends, mergers and acquisitions, investments, loans and interest rates
      charged, interest rates paid on deposits and locations of offices. We are also
      subject to capital requirements of our regulators.




The
      laws
      and regulations applicable to the banking industry could change at any time,
      and
      we cannot predict the effects of these changes on our business and
      profitability. Because government regulation greatly affects the business and
      financial results of all commercial banks and bank holding companies, our cost
      of compliance could adversely affect our ability to operate profitably.




The
      Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated
      by
      the Securities and Exchange Commission, have increased the scope, complexity
      and
      cost of corporate governance, reporting and disclosure practices. As a result,
      we may experience greater compliance costs.




***Changes
      in monetary policies may have an adverse effect on our business.***




Our
      results of operations are affected by credit policies of monetary authorities,
      particularly the Federal Reserve. Actions by monetary and fiscal authorities,
      including the Federal Reserve, could have an adverse effect on our deposit
      levels, loan demand or business and earnings.




***Our
      ability to pay dividends is limited and we may be unable to pay future
      dividends.***




We
      make
      no assurances that we will pay any dividends in the future. Any future
      determination relating to dividend policy will be made at the discretion of
      our
      Board of Directors and will depend on a number of factors, including our future
      earnings, capital requirements, financial condition, future prospects,
      regulatory restrictions and other factors that our Board of Directors may deem
      relevant.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      Applicable.





**ITEM
      2. PROPERTIES**





The
      executive and main offices of the Company and the Bank are located at 2170
      W.
      Palmetto Street in Florence, South Carolina. The facility at that location
      is
      owned by the Bank. The Bank also owns an adjacent lot that is used as a parking
      lot. The headquarters building is a two-story building having approximately
      12,000 square feet. The building has six inside teller stations, two teller
      stations servicing four drive-through lanes and a night depository and automated
      teller machine drive-through lane that is accessible after the Bank’s normal
      business hours.





On
      April
      26, 2000, the Bank opened a branch at 411 Second Loop Road in Florence, South
      Carolina. The Second Loop branch facility, which is owned by the Bank, is
      located on approximately one acre of land and contains approximately 3,000
      square feet.





On
      May
      15, 2002, the Bank purchased an additional facility located at 2145 Fernleaf
      Drive in Florence, South Carolina. The Fernleaf Drive site contains
      approximately 0.5 acres of land and includes a 7,500 square feet building.
      The
      facility will serve as additional space for the operational and information
      technology activities of the Bank, including data processing and auditing.
      No
      customer services will be conducted in this facility.





On
      June
      17, 2004, the Bank opened a temporary branch at 709 North Lake Drive in
      Lexington, South Carolina.  On July 1, 2008, the bank subsequently moved
      into its permanent branch facility at 801 N. Lake Drive in Lexington, South
      Carolina. The Lexington branch facility, which is owned by the Bank, is located
      on approximately two acres of land and contains approximately 13,000 square
      feet.




18





On
      March
      15, 2005, the Bank opened a branch at 51 State Street, Charleston, South
      Carolina. This property is leased. On August 8, 2005, the bank changed the
      street address of this location to 25 Cumberland Street, Charleston, South
      Carolina because of a change in the primary entrance to the branch.





On
      March
      24, 2005, the Bank leased approximately five acres at 2211 West Palmetto Street
      in Florence, South Carolina for development of a future headquarters
      location.





On
      October 3, 2005, the Bank opened a temporary branch at 800 South Shelmore Blvd.,
      Mount Pleasant, South Carolina. The land is owned by the Bank. On August 1,
      2007
      , the bank moved into its permanent branch facility at 800 South Shelmore Blvd.,
      Mount Pleasant, South Carolina. The Mount Pleasant branch facility is located
      on
      approximately one acre of land and contains approximately 6,500 square
      feet.




On
      December 15, 2005, the Bank purchased approximately 1.72 acres at 2031 Sam
      Rittenberg Blvd., Charleston, South Carolina for future branch
      expansion




On
      February 09, 2006, the Bank purchased approximately 0.75 acres at 2148 West
      Palmetto Street, Florence, South Carolina for a future training facility. On
      April 1, 2007, the Bank opened its Learning Center which contains approximately
      6,000 square feet.





On
      January 18, 2007, the Bank opened a loan production office at 1154_B Haywood
      Road, Greenville, SC. The property is leased.





On
      January 22, 2007, the Bank opened a loan production office at 1033 Bayshore
      Drive, Rock Hill, SC. This property is leased.





On
      April
      16, 2007, the Bank opened a loan production office at 1125 48 th Avenue
      North, 3 rd Floor,
      Myrtle Beach, SC. This is a temporary location that is now being leased. On
      August 17, 2007, the bank purchased property at 44 th Business
      Park, Lots 1, 2 & 3, North Myrtle Beach, SC, which will be the permanent
      location of this office.





Other
      than the Bank facilities described in the preceding paragraphs and the real
      estate-related loans funded by the Bank previously described in “Item 1.
      Business—First Reliance Bank,” the Company does not invest in real estate,
      interests in real estate, real estate mortgages, or securities of or interests
      in persons primarily engaged in real estate activities.





**ITEM
      3. LEGAL PROCEEDINGS**





None.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.


19





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
      OF EQUITY SECURITIES**





(a)  The
      response to this Item 5(a) is included in the Company’s 2007 Annual Report to
      Shareholders under the heading, “Market for First Reliance Bancshares, Inc.’s
      Common Stock; Payment of Dividends,” and is incorporated herein by reference.





(b)
            Not
                Applicable





(c)
            Not
                Applicable




**ITEM
      6.**  **SELECTED
      FINANCIAL DATA**





Pursuant
      to the revised disclosure requirements for smaller reporting companies effective
      February 4, 2008, no disclosure under this Item is required.





**ITEM
      7.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      response to this Item is included in the Company’s 2007 Annual Report to
      Shareholders under the heading “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” and is incorporated herein by
      reference.





**ITEM
      7A.**  **QUANTITATIVE
      AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK**





Pursuant
      to the revised disclosure requirements for smaller reporting companies effective
      February 4, 2008, no disclosure under this Item is required.





**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





The
      following financial statements are included in the Company’s 2007 Annual Report
      to Shareholders, and are incorporated herein by reference:




**Management’s
      Report on Internal Control Over Financial Reporting**





·
            Report
                of Independent Registered Public Accounting
                Firm





·
            Financial
                Statements:





1.
            Consolidated
                Balance Sheets dated as of December 31, 2007 and
                2006.


2.
            Consolidated
                Statements of Income for the Years Ended December 31, 2007, 2006
                and
                2005.


3.
            Consolidated
                Statements of Changes in Shareholders’ Equity and Comprehensive Income for
                the Years Ended December 31, 2007, 2006 and
                2005.


4.
            Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006, 2005
                and 2004.


5.
            Notes
                to Consolidated Financial
                Statements.




20




**ITEM
      9.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





Not Applicable





**ITEM
      9A(T).**  **CONTROLS
      AND PROCEDURES**





**Disclosure
      Controls**





As
      of the
      end of the period covered by this Annual Report on Form 10-K, our principal
      executive officer and principal financial officer have evaluated the
      effectiveness of our “disclosure controls and procedures” (“Disclosure
      Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
      designed with the objective of ensuring that information required to be
      disclosed in our reports filed under the Exchange Act, such as this Annual
      Report, is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure Controls are also designed with the objective of ensuring that such
      information is accumulated and communicated to our management, including the
      CEO
      and CFO, as appropriate to allow timely decisions regarding required disclosure.





Our
      management, including the CEO and CFO, does not expect that our Disclosure
      Controls will prevent all error and all fraud. A control system, no matter
      how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the control system are met. Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, within the company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty, and
      that
      breakdowns can occur because of simple error or mistake. The design of any
      system of controls also is based in part upon certain assumptions about the
      likelihood of future events, and there can be no assurance that any design
      will
      succeed in achieving its stated goals under all potential future conditions.





Based
      upon their controls evaluation, our CEO and CFO have concluded that our
      Disclosure Controls are effective at a reasonable assurance level.





**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act of 1934. Our internal control over financial
      reporting is a process designed to provide reasonable assurance that assets
      are
      safeguarded against loss from unauthorized use or disposition, transactions
      are
      executed in accordance with appropriate management authorization and accounting
      records are reliable for the preparation of financial statements in accordance
      with generally accepted accounting principles.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2007. Management based this assessment on criteria for effective
      internal control over financial reporting described in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission. Management’s assessment included an evaluation of
      the design of our internal control over financial reporting and testing of
      the
      operational effectiveness of its internal control over financial reporting.
      Management reviewed the results of its assessment with the Audit Committee
      of
      our Board of Directors.




21





Based
      on
      this assessment, management believes that First Reliance Bancshares, Inc.
      maintained effective internal control over financial reporting as of December
      31, 2007.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this annual report.





**Changes
      to Internal Control Over Financial Reporting**





There
      have been no changes in our internal control over financial reporting during
      our
      fourth fiscal quarter that have materially affected, or are reasonably likely
      to
      materially affect, our internal control over financial
      reporting.





**ITEM
      9B.**  **OTHER
      INFORMATION**





Not
      Applicable.





**PART
      III**





**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE**





The
      Company has adopted a Code of Ethics that applies to its principal executive,
      financial and accounting officers. The Code of Ethics has been posted to the
      Company’s website at www.firstreliance.com. A copy may also be obtained, without
      charge, upon written request addressed to First Reliance Bancshares, Inc., 2170
      W.
      Palmetto Street, , Florence, South Carolina 29501 ,
      Attention: Corporate Secretary. The request may be delivered by letter to the
      address set forth above or by fax to the attention of the Company’s Corporate
      Secretary at 843-656-3045.





The
      remaining information for this Item is included in the Company’s Proxy Statement
      for the Annual Meeting of Shareholders to be held on June 19, 2008, under
      the headings “Proposal: Election of Directors”, “Security Ownership of Certain
      Beneficial Owners and Management,” “Section 16(a) Beneficial Ownership Reporting
      Compliance” and “Corporate Governance” and are incorporated herein by
      reference.





**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





The
      responses to this Item are included in the Company’s Proxy Statement for the
      Annual Meeting of Shareholders to be held on June 19, 2008, under the
      headings “Proposal: Election of Directors - Director Compensation” and
“Executive Compensation” and are incorporated herein by reference.




22




**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





The
      following table provides information regarding compensation plans under which
      equity securities of the Company are authorized for issuance. All data is
      presented as of December 31, 2007.





Equity
                Compensation Plan TablePlan
                category
            
            (a)Number
                of securities to be issued upon exercise of
                outstanding options, warrants and rights
            
            (b)Weighted-average
                exercise price of outstanding
                options, warrants and rights
            
            (c)Number
                of securities remaining available for future
                issuance under equity compensation plans (excluding securities reflected
                in column (a))Equity
                compensation plans approved by security holders
            
            270,747
            
            8.25
            
            0Equity
                compensation plans not approved by security holders
            
            102,081
            
            14.59
            
            238,265Total
            
            372,828
            
            $9.98
            
            238,265





The
      equity compensation plans not approved by our shareholders include non-qualified
      option grants to four employees of the Company to purchase a total of 8,100
      shares of the Company’s common stock. All of the non-qualified option grants are
      fully vested as of December 31, 2007. The table below breaks down the exercise
      prices of the non-qualified options that have been granted by the
      Company.





Price
            
            
            Number
                of Options$9.32
            
            
            2,800$11.00
              $13.50
            
            
            5,000
              300





On
      January 19, 2006, the Board of Directors approved the First Reliance Bancshares,
      Inc. 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan provides that
      the Company may grant stock incentives to participants in the form of
      nonqualified stock options, dividend equivalent rights, phantom shares, stock
      appreciation rights, stock awards and performance unit awards (each a “Stock
      Incentive”). The Company reserved up to 350,000 shares of the Company’s common
      stock for issuance pursuant to awards granted under the Plan. This number of
      shares may change in the event of future stock dividends, stock splits,
      recapitalizations and similar events. If a Stock Incentive expires or terminates
      without being paid, exercised or otherwise settled, the shares subject to that
      Stock Incentive may again be available for awards under the 2006
      Plan.





The
      additional responses to this Item are included in the Company’s Proxy Statement
      for the Annual Meeting of Shareholders to be held on June 19, 2008, under
      the heading “Security Ownership of Certain Beneficial Owners and Management” and
      are incorporated herein by reference.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





The
      responses to this Item are included in the Company’s Proxy Statement for the
      Annual Meeting of Shareholders held on June 19, 2008, under the headings
“Related Party Transactions” and “Proposal: Election of Directors - Director
      Independence” and are incorporated herein by reference.




23




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      responses to this Item are included in the Company Proxy Statement for the
      Annual Meeting of Shareholders to be held on June 19, 2008, under the
      heading “Audit Committee Matters - Independent Registered Public Accounting
      Firm” and are incorporated herein by reference.





**PART
      IV**





**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**





A
      list of
      exhibits included as part of this annual report is set forth in the Exhibit
      Index that immediately precedes the exhibits and is incorporated by reference
      herein.




24





**SIGNATURES**





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


FIRST
                RELIANCE BANCSHARES, INC.By:
            /s/ F.
              R. Saunders, Jr.F.
              R. Saunders, Jr.President
                and
              ChiefExecutive
                OfficerDate:
                March 31, 2008




**POWER
      OF ATTORNEY**





**KNOW
      ALL MEN BY THESE PRESENTS** ,
      that
      each person whose signature appears on the signature page to this Report
      constitutes and appoints F. R. Saunders, Jr. and Jeffrey A. Paolucci, his or
      her
      true and lawful attorneys-in-fact and agents, with full power of substitution
      and resubstitution, for him or her and in his or her name, place, and stead,
      in
      any and all capacities, to sign any and all amendments to this Report, and
      to
      file the same, with all exhibits hereto, and other documents in connection
      herewith with the Securities and Exchange Commission, granting unto said
      attorneys-in-fact and agents, full power and authority to do and perform each
      and every act and thing requisite and necessary to be done in and about the
      premises, as fully to all intents and purposes as they might or could do in
      person, hereby ratifying and confirming all that said attorneys-in-fact and
      agents or their substitute or substitutes, may lawfully do or cause to be done
      by virtue hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





Signature
            
            Title
            
            Date/s/
                F. R. Saunders, Jr.
            
            Director,
                President and Chief Executive Officer
            
            March
                31, 2008F.
                R. Saunders, Jr.
            
            (Principal
                Executive Officer)/s/
                Paul C. Saunders
            
            Director
            
            March
                31, 2008Paul
                C. Saunders/s/
                A. Dale Porter
            
            Director
            
            March
                31, 2008A. Dale
              Porter/s/
                Leonard A. Hoogenboom
            
            Chairman
                  of the Board
            
            March
                31, 2008Leonard
                A. Hoogenboom/s/
                John M. Jebaily
            
            Director
            
            March
                31, 2008John
                M. Jebaily









Signature
            
            Title
            
            Date/s/
                Andrew G. Kampiziones
            
            Director
            
            March
                31, 2008Andrew
              G. Kampiziones/s/
                C. Dale Lusk
            
            Director
            
            March
                31, 2008C.
                Dale Lusk/s/
                J. Munford Scott
            
            Director
            
            March
                31, 2008J.
                  Munford Scott/s/
                T. Daniel Turner
            
            Director
            
            March
                31, 2008T.
                Daniel Turner/s/
                A. Joe Willis
            
            Director
            
            March
                31, 2008A.
                  Joe Willis/s/
                Jeffrey A. Paolucci
            
            Director
            
            March
                31, 2008Jeffrey
                A. Paolucci
            
            Director,
                Senior Vice President and Chief
              Financial
                Officer (Principal Financial and Accounting Officer)
            
            March
                31, 2008










**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Articles
                of Incorporation of First Reliance Bancshares, Inc.13.2
            
            Bylaws
                of First Reliance Bancshares, Inc.124.1
            
            See
                Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit
                3.2
                hereto.4.2
            
            Indenture
                between the Registrant and the Trustee.34.3
            
            Guarantee
                Agreement.34.4
            
            Amended
                and Restated Declaration.310.1*
            
            1999
                First Reliance Bank Employee Stock Option Plan.410.2*
            
            Amendment
                No. 1 to the 1999 First Reliance Bank Employee Stock Option Plan.410.3*
            
            Amendment
                No. 2 to the 1999 First Reliance Bank Employee Stock Option Plan.510.4*
            
            First
                Reliance Bancshares, Inc. 2003 Stock Incentive Plan.610.5*
            
            First
                Reliance Bancshares, Inc. 2006 Equity Incentive Plan.710.6
            
            Lease
                Agreement between SP Financial, LLC and First Reliance Bank.710.7*
            
            Employment
                Agreement with F. R. Saunders, Jr., dated November 24, 2006.810.8*
            
            Salary
                Continuation Agreement with F. R. Saunders, Jr., dated November 24,
                2006.810.9*
            
            Endorsement
                Split Dollar Agreement with F. R. Saunders, Jr., dated November 24,
                2006.810.10*
            
            Amended
                Supplemental Life Insurance Agreement with F. R. Saunders, Jr., dated
                December 28, 2007.910.11*
            
            Employment
                Agreement with Jeffrey A. Paolucci, dated November 24, 2006.810.12*
            
            Salary
                Continuation Agreement with Jeffrey A. Paolucci, dated November 24,
                2006.810.13*
            
            Endorsement
                Split Dollar Agreement with Jeffrey A. Paolucci, dated November 24,
                2006.810.14*
            
            Employment
                Agreement with Paul Saunders, dated November 24, 2006.810.15*
            
            Salary
                Continuation Agreement with Paul Saunders, dated November 24, 2006.810.16*
            
            Endorsement
                Split Dollar Agreement with Paul Saunders, dated November 24, 2006.810.17*
            
            Form
                of Director Retirement Agreement, with Schedule.810.18*
            
            Amended
                and Restated Employment Agreement with Dale Porter.810.19*
            
            Employment
                Agreement with Thomas C. Ewart, Sr.613.1
            
            First
                Reliance Bancshares, Inc. 2007 Annual Report to Shareholders. Except
                with
                respect to those portions specifically incorporated by reference
                into this
                Report, the Company’s 2007 Annual Report to Shareholders is not deemed to
                be filed as part of this Report.21.1
            
            Subsidiaries
                of First Reliance Bancshares, Inc.723.1
            
            Consent
                of Elliot Davis, LLC.24.1
            
            Power
                of Attorney (appears on the signature page to this Annual Report
                on Form
                10-K.31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule
                13a-14(a)/15(d)-14(a).31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule
                13a-14(a)/15(d)-14(a).32.1
            
            Certification
                of Chief Executive and Financial Officers pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.




* Indicates
      management contract or compensatory plan or arrangement.




1
              Incorporated
                  by reference to Quarterly Report on Form 10-QSB, for the quarter
                  ended
                  September 30, 2007.
  2
              Incorporated
                  by reference to Current Report on Form 8-K, dated April 1,
                  2002.
  3
              Incorporated
                  by reference to Current Report on Form 8-K, dated July 1,
                  2005.
  4
              Incorporated
                  by reference to Quarterly Report on Form 10-QSB, for the quarter
                  ended
                  March 31, 2002.
  5
              Incorporated
                  by reference to Quarterly Report on Form 10-QSB, for the quarter
                  ended
                  June 30, 2002.
  6
              Incorporated
                  by reference to Annual Report on Form 10-KSB for the year ended
                  December
                  31, 2003.
  7
              Incorporated
                  by reference to Annual Report on Form 10-KSB for the year ended
                  December
                  31, 2005.
  8
              Incorporated
                  by reference to Annual Report on Form 10-K for the year ended December
                  31,
                  2006.
  9
              Incorporated
                  by reference to Current Report on Form 8-K, dated December 28,
                  2007.





**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Table
        of Contents**





PageSelected
                Financial Data
            
            
            2Management’s
                Discussion and Analysis
            
            
            3-22Management's
                Annual Report on Internal Control Over Financial Reporting
            
            
            23Report
                of Independent Registered Public Accounting Firm
            
            
            24Consolidated
                Balance Sheets
            
            
            25Consolidated
                Statements of Income
            
            
            26Consolidated
                Statements of Changes in Shareholders’ Equity and Comprehensive
                Income
            
            
            27Consolidated
                Statements of Cash Flows
            
            
            28Notes
                to Consolidated Financial Statements
            
            
            29-54Corporate
                Data
            
            
            55-57







**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Selected
        Financial Data**




The
      following selected financial data is derived from the consolidated financial
      statements and other data of First Reliance Bancshares, Inc. and Subsidiary
      (the
      Company). The selected financial data should be read in conjunction with the
      consolidated financial statements of the Company, including the accompanying
      notes, included elsewhere herein.





**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003***(Dollars
                in thousands, except per share)***Income
                Statement Data:**Interest
                income
            
            $
            37,540
            
            $
            31,717
            
            $
            23,131
            
            $
            13,291
            
            $
            8,499Interest
                expense
            
            
            18,433
            
            
            14,214
            
            
            8,979
            
            
            4,061
            
            
            2,460Net
                interest income
            
            
            19,107
            
            
            17,503
            
            
            14,152
            
            
            9,230
            
            
            6,039Provision
                for loan losses
            
            
            1,643
            
            
            1,393
            
            
            1,811
            
            
            1,362
            
            
            792Net
                interest income after provision for loan losses
            
            
            17,464
            
            
            16,110
            
            
            12,341
            
            
            7,868
            
            
            5,247Noninterest
                income
            
            
            5,302
            
            
            4,591
            
            
            2,871
            
            
            2,380
            
            
            2,138Noninterest
                expense
            
            
            18,961
            
            
            16,272
            
            
            12,475
            
            
            8,338
            
            
            5,966Income
                before income taxes
            
            
            3,805
            
            
            4,429
            
            
            2,737
            
            
            1,910
            
            
            1,419Income
                tax expense
            
            
            1,245
            
            
            1,183
            
            
            789
            
            
            571
            
            
            403Net
                income
            
            **$**
            **2,560**
            
            **$**
            **3,246**
            
            **$**
            **1,948**
            
            **$**
            **1,339**
            
            **$**
            **1,016****Balance
                Sheet Data:**Assets
            
            $
            591,704
            
            $
            456,211
            
            $
            403,038
            
            $
            284,971
            
            $
            180,364Earning
                assets
            
            
            550,559
            
            
            412,687
            
            
            381,158
            
            
            271,020
            
            
            169,205Securities
                available for sale(1)
            
            
            58,580
            
            
            35,931
            
            
            37,121
            
            
            28,568
            
            
            27,689Loans(2)
            
            
            487,739
            
            
            360,123
            
            
            319,539
            
            
            239,695
            
            
            140,361Allowance
                for loan losses
            
            
            5,271
            
            
            4,002
            
            
            3,419
            
            
            2,758
            
            
            1,752Deposits
            
            
            449,498
            
            
            372,938
            
            
            334,437
            
            
            225,494
            
            
            139,415Shareholders’
                equity
            
            
            37,028
            
            
            34,093
            
            
            29,651
            
            
            27,359
            
            
            17,703**Per-Share
                Data:**Basic
                earnings
            
            $
            0.74
            
            $
            0.96
            
            $
            .60
            
            $
            0.52
            
            $
            0.48Diluted
                earnings
            
            
            0.72
            
            
            0.91
            
            
            .57
            
            
            0.48
            
            
            0.46Book
                value (period end)
            
            
            10.60
            
            
            9.95
            
            
            8.97
            
            
            8.54
            
            
            7.18**Performance
                Ratios:**Return
                on average assets
            
            
            0.52
            %
            
            0.75
            %
            
            0.54
            %
            
            0.59
            %
            
            0.70
            %Return
                on average equity
            
            
            7.16
            
            
            10.19
            
            
            6.82
            
            
            7.04
            
            
            7.07Net
                interest margin(3)
            
            
            4.20
            
            
            4.42
            
            
            4.20
            
            
            4.41
            
            
            4.53Efficiency(4)
            
            
            77.69
            
            
            73.65
            
            
            73.28
            
            
            71.82
            
            
            72.99**Capital
                and Liquidity Ratios:**Average
                equity to average assets
            
            
            7.15
            %
            
            7.39
            %
            
            7.96
            %
            
            8.43
            %
            
            9.93
            %Leverage
                (4.00% required minimum)
            
            
            10.07
            
            
            9.90
            
            
            10.02
            
            
            10.11
            
            
            10.30Risk-based
                capitalTier
                1
            
            
            9.85
            
            
            11.42
            
            
            12.02
            
            
            11.36
            
            
            12.60Total
            
            
            10.88
            
            
            12.45
            
            
            13.05
            
            
            12.52
            
            
            13.85Average
                loans to average deposits
            
            
            99.37
            
            
            96.86
            
            
            102.07
            
            
            101.16
            
            
            94.43







(1)  Securities
      available-for-sale are stated at fair value.




(2)  Loans
      are
      stated at gross amounts before allowance for loan losses and include loans
      held
      for sale.




(3)  Tax
      equivalent net interest income divided by average earning assets.




(4)  Noninterest
      expense divided by the sum of net interest income and noninterest income,
      excluding gains and losses on sales of assets.





-2-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**





**Basis
      of Presentation**





The
      following discussion should be read in conjunction with the preceding “Selected
      Financial Data” and the Company’s Consolidated Financial Statements and the
      Notes thereto and the other financial data included elsewhere herein. The
      financial information provided below has been rounded in order to simplify
      its
      presentation. However, the ratios and percentages provided below are calculated
      using the detailed financial information contained in the Consolidated Financial
      Statements, the Notes thereto and the other financial data included elsewhere
      herein.





**General**




First
      Reliance Bank (the Bank) is a state-chartered bank headquartered in Florence,
      South Carolina. The Bank opened for business on August 16, 1999. The principal
      business activity of the Bank is to provide banking services to domestic
      markets, principally in Florence County, Lexington County, Charleston County,
      and Greenville County, South Carolina. The deposits of the Bank are insured
      by
      the Federal Deposit Insurance Corporation.





On
      June
      7, 2001, the shareholders of the Bank approved a plan of corporate
      reorganization (the “Reorganization”) under which the Bank would become a wholly
      owned subsidiary of First Reliance Bancshares, Inc. (the “Company”), a South
      Carolina corporation. The Reorganization was accomplished through a statutory
      share exchange between the Bank and the Company, whereby each outstanding share
      of common stock of the Bank was exchanged for one share of common stock of
      the
      Company. The Reorganization was completed on April 1, 2002, and the Bank became
      a wholly-owned subsidiary of First Reliance Bancshares, Inc.





Organizing
      activities for the Bank began on November 23, 1998. Upon the completion of
      the
      application process with the South Carolina State Board of Financial
      Institutions for a state charter and with the Federal Deposit Insurance
      Corporation for deposit insurance, the Bank issued 723,518 shares of common
      stock at a price of $10.00 per share, resulting in capital totaling $7,173,293,
      net of selling expenses of $61,887.





The
      Bank
      began operations on August 16, 1999 at its temporary facility on West Palmetto
      Street in Florence, South Carolina. In June of 2000, the Bank moved into its
      headquarters at 2170 West Palmetto Street in Florence, South Carolina. The
      Bank
      also opened a banking office on Second Loop Road in Florence, South Carolina
      in
      April of 2001. On May 15, 2002, the Bank purchased an additional facility
      located at 2145 Fernleaf Drive in Florence, South Carolina. The Fernleaf Drive
      site contains approximately 0.5 acres of land and includes a 7,500 square feet
      building. The facility serves as additional space for operational activities
      of
      the Bank, including data processing and auditing. No customer services are
      being
      conducted in this facility.





On
      November 12, 2002, the Company commenced a stock offering whereby a minimum
      of
      125,000 shares and a maximum of 1,250,000 shares of common stock were offered
      to
      fund continued expansion through First Reliance Bank. The offering price was
      $8.00 per share. This was a best efforts offering and was conducted without
      an
      underwriter. The Company had sold 1,007,430 shares resulting in additional
      capital of $8,059,439 net of selling expenses of $162,965, at the close of
      the
      offering in May 2003. Also 10,400 stock options were exercised in 2003 for
      a
      total amount of $52,000.





During
      the second quarter of 2004, the Bank opened its third branch in Lexington,
      South
      Carolina. On March 15, 2005, the Bank opened its fourth branch in Charleston,
      South Carolina located at 51 State Street. The Bank also opened its fifth branch
      in Mount Pleasant, South Carolina located at 800 South Shelmore Blvd on October
      3, 2005. The Bank also has loan production offices in Greenville, Rock Hill,
      and
      Myrtle Beach.




-3-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**





**General** - *continued*





On
      June
      30, 2005 the Company formed First Reliance Capital Trust I (the “Trust”) for the
      purpose of issuing trust preferred securities, which enable the Company to
      obtain Tier 1 capital on a consolidated basis for regulatory purposes. On July
      1, 2005, the Company closed a private offering of $10,000,000 of floating rate
      preferred securities offered and sold by the Trust. The proceeds from such
      issuance, together with the proceeds from a related issuance of common
      securities of the Trust purchased by the Company in the amount of $310,000,
      were
      invested by the Trust in floating rate Junior Subordinated Notes issued by
      the
      Company (the “Notes”) totaling $10.3 million. The Notes are due and payable on
      November 23, 2035 and may be redeemed by the Company after five years, and
      sooner in certain specific events, including in the event that certain
      circumstances render the Notes ineligible for treatment as Tier 1 capital,
      subject to prior approval by the Federal Reserve Board, if then required. The
      Notes presently qualify as Tier 1 capital for regulatory reporting. The sole
      assets of the Trust are the Notes. The Company owns 100% of the common
      securities of the Trust. The Notes are unsecured and rank junior to all senior
      debt of the Company. For the quarter ended December 31, 2007, the floating
      rate
      preferred securities and the Notes had an annual interest rate of 5.93%. This
      interest rate is fixed until August 23, 2010, when the interest rate will adjust
      quarterly. After August 23, 2010, the interest rate will equal three-month
      LIBOR
      plus 1.83%.





On
      December 28, 2007 the Company borrowed 3,000,000, which was injected into the
      Bank as permanent capital. The debt is unsecured and has a fixed interest rate
      of 6.00%, and is due and payable on December 28, 2008.





Like
      most
      financial institutions, our profitability depends largely upon net interest
      income, which is the difference between the interest received on earning assets,
      such as loans and investment securities, and the interest paid on
      interest-bearing liabilities, principally deposits and borrowings. Our results
      of operations are also affected by our provision for loan losses; non-interest
      expenses, such as salaries, employee benefits, and occupancy expenses; and
      non-interest income, such as mortgage loan fees and service charges on deposit
      accounts.





Economic
      conditions, competition and federal monetary and fiscal policies also affect
      financial institutions. Lending activities are also influenced by regional
      and
      local economic factors, such as housing supply and demand, competition among
      lenders, customer preferences and levels of personal income and savings in
      our
      primary market area.





Our
      balanced growth continued during 2007, with increases in assets, loans,
      investment securities, deposits and shareholders’ equity. The following chart
      shows our growth in these areas from December 31, 2006 to December 31,
      2007:


**Percent****December
                  31,**
              
              **Increase***(Dollars
                  in millions)*
              
              **2007**
              
              **2006**
              
              **(Decrease)**Total
                  assets
              
              $
              591.7
              
              $
              456.2
              
              
              29.70
              %Loans
              
              
              468.1
              
              
              353.5
              
              
              32.42Investment
                  securities
              
              
              62.8
              
              
              38.4
              
              
              63.54Deposits
              
              
              449.5
              
              
              372.9
              
              
              20.54Shareholders'
                  equity
              
              
              37.0
              
              
              34.1
              
              
              8.50




The
      additional capital increased our legal lending limit, thereby allowing us to
      extend larger loans to our customers. Our loan portfolio increased $114.6
      million from December 31, 2006 to December 31, 2007. Our deposit base also
      increased in 2007 by $76.6 million from $372.9 million in 2006 to $449.5 million
      in 2007.





The
      significant increase in average earning assets had a positive impact on our
      results of operations for 2007. Average earning assets increased from $401.0
      million in 2006 to $461.1 million in 2007. Our increased volume in deposits
      also
      increased our fees from service charges and deposit accounts by approximately
      $209,845 from 2006 to 2007. Gains on sales of mortgage loans were also an
      important source of noninterest income in 2007, increasing $271,173, or 14.26%
      from $1.9 million in 2006 to $2.2 million in 2007.




-4-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**




**Results
      of Operations**





***Year
      ended December 31, 2007, compared with year ended December 31,
      2006***




Net
      interest income increased $1,604,392 or 9.17%, to $19,107,278 in 2007 from
      $17,502,886 in 2006. The increase in net interest income was due primarily
      to an
      increase in average earning assets. Average earning assets increased $60,051,000
      or 14.97%, mainly due to continued growth in the loan portfolio. The primary
      components of interest income were interest on loans, including fees, of
      $35,325,242 and interest on taxable investment securities of $892,277. Net
      interest income increased $3,350,453 or 23.67%, to $17,502,886 in 2006 from
      $14,152,433 in 2005. The increase in net interest income was due primarily
      to an
      increase in average earning assets. Average earning assets increased $59,278,000
      or 17.35%, mainly due to continued growth in the loan portfolio. The primary
      components of interest income were interest on loans, including fees, of
      $29,222,425, and interest on taxable investment securities of
      $1,029,560.





The
      Company’s net interest spread and net interest margin were 3.78% and 4.20%,
      respectively, in 2007, compared to 3.96% and 4.42%, respectively, in 2006.
      The
      decrease in net interest spread was primarily the result of an increase in
      average rates on paying liabilities which outpaced the increase in average
      rates
      on earning assets. Yields on loans, our largest category of earnings assets,
      increased in 2007. Overall yields on earning assets increased from 7.96% in
      2006
      to 8.20% in 2007. Yields on interest-bearing liabilities increased from 4.00%
      in
      2006 to 4.42% in 2007.





The
      provision for loan losses was $1,643,100 in 2007 compared to $1,392,491 in
      2006.
      The allowance for loan losses was 1.13% of total loans at December 31, 2007
      and
      2006. The Company continues to maintain the allowance for loan losses at a
      level
      management believes to be sufficient to cover known and inherent losses in
      the
      loan portfolio.





Noninterest
      income increased $711,106, or 15.49%, to $5,301,799 in 2007 from $4,590,693
      in
      2006. The increase is primarily attributable to gain on sale of mortgage loans
      and increased service charges on deposit accounts. The gain on sale of mortgage
      loans increased $271,173 or 14.26% to $2,173,140 for the year ended December
      31,
      2007 as the demand for new mortgage loans and refinancings remained strong.
      Service charges on deposit accounts increased $209,845, or 12.40% from 2006,
      to
      $1,901,758 for the year ended December 31, 2007. The increase in service charges
      on deposit accounts was attributable to an overall increase in the number of
      deposit accounts in 2007.





Noninterest
      expense increased $2,688,891, or 16.52%, to $18,961,275 in 2007 from $16,272,384
      in 2006. Noninterest expenses increased in all categories as a result of our
      continued growth. The increase is primarily attributable to increased salaries
      and benefits and other operating expenses. Salaries and employee benefits
      increased $1,173,766, or 12.37%, to $10,661,153 in 2007 from $9,487,387 in
      2006.
      A large portion of the increase in salaries was due to the addition of new
      staff
      to facilitate the new branch locations and growth of the Bank. Other operating
      expenses increased $1,178,113 from 2006 to $6,104,948 for the year ended
      December 31, 2007. This increase was due to the expected increases in overhead
      caused by the growth of the Company. The Company’s efficiency ratio was 77.69%
      in 2007, compared to 73.65% in 2006.





Net
      income was $2,559,520 in 2007, compared to $3,245,908 in 2006, and $1,947,546
      in
      2005. The decrease in net income can be attributed to net interest margin
      compression due to declining interest rate movements and our investment in
      branch expansion. Additionally, while mortgage income increased in 2007, we
      realized lower than anticipated results due to slowing economic conditions
      and
      tightening of mortgage standards within the secondary markets. In 2008, we
      anticipate limited asset growth as we focus on growing core deposit amounts
      while reducing our dependence on wholesale funding.  Additionally, we
      intend to focus on improving operational efficiencies with an emphasis on
      expense management, and leveraging our customer loyalty ratings.  Return
      on
      average assets during 2007 was .52%, compared to 0.75% in 2006 and 0.54% during
      2005, and return on average equity was 7.16% during 2007, compared to 10.19%
      during 2006.




-5-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**




**Net
      Interest Income**




***General*** *.* The
      largest component of the Company’s net income is its net interest income, which
      is the difference between the income earned on assets and interest paid on
      deposits and on borrowings used to support such assets. Net interest income
      is
      determined by the yields earned on the Company’s interest-earning assets and the
      rates paid on its interest-bearing liabilities, the relative amounts of
      interest-earning assets and interest-bearing liabilities, and the degree of
      mismatch and the maturity and repricing characteristics of its interest-earning
      assets and interest-bearing liabilities. Total interest earning assets yield
      less total interest bearing liabilities rate represents the Company’s net
      interest rate spread.





***Average
      Balances, Income and Expenses, and Rates*** *.* The
      following table sets forth, for the years indicated, certain information related
      to the Company’s average balance sheet and its average yields on assets and
      average costs of liabilities. Such yields are derived by dividing income or
      expense by the average balance of the corresponding assets or liabilities.
      Average balances have been derived from the daily balances throughout the
      periods indicated.





**Average
      Balances, Income and Expenses, and Rates**


Year
                  ended
              
              **2007**
              
              **2006**
              
              **2005**December
                31,
              
              **Average**
              
              **Income/**
              
              **Yield/**
              
              **Average**
              
              **Income/**
              
              **Yield/**
              
              **Average**
              
              **Income/**
              
              **Yield/***(Dollars
                  in thousands)*
              
              **Balance**
              
              **Expense**
              
              **Rate**
              
              **Balance**
              
              **Expense**
              
              **Rate**
              
              **Balance**
              
              **Expense**
              
              **Rate****Assets:**Earning
                  Assets:Loans(1)(2)
              
              $
              414,907
              
              $
              35,325
              
              
              8.51
              %
              $
              348,709
              
              $
              29,222
              
              
              8.38
              %
              $
              294,740
              
              $
              21,237
              
              
              7.21
              %Securities,
                  taxable(2)
              
              
              17,967
              
              
              892
              
              
              4.96
              %
              
              21,891
              
              
              1,030
              
              
              4.70
              
              
              17,491
              
              
              771
              
              
              4.41Securities,
                  tax exempt(2)
              
              
              18,204
              
              
              1,045
              
              
              5.74
              %
              
              14,820
              
              
              857
              
              
              5.78
              
              
              13,007
              
              
              742
              
              
              5.70Federal
                  funds sold
              
              
              7,479
              
              
              391
              
              
              5.23
              %
              
              13,807
              
              
              687
              
              
              4.98
              
              
              14,462
              
              
              479
              
              
              3.31Nonmarketable
                  equity securities
              
              
              2,529
              
              
              152
              
              
              6.01
              %
              
              1,807
              
              
              138
              
              
              7.64
              
              
              2,057
              
              
              91
              
              
              4.42Total
                  earning assets
              
              
              461,086
              
              
              37,805
              
              
              8.20
              %
              
              401,034
              
              
              31,934
              
              
              7.96
              
              
              341,757
              
              
              23,320
              
              
              6.82Cash
                  and due from banks
              
              
              8,586
              
              
              
              
              
              
              
              
              7,772
              
              
              
              
              
              
              
              
              5,316Premises
                  and equipment
              
              
              18,049
              
              
              
              
              
              
              
              
              11,445
              
              
              
              
              
              
              
              
              7,379Other
                  assets
              
              
              16,758
              
              
              
              
              
              
              
              
              14,757
              
              
              
              
              
              
              
              
              7,596Allowance
                  for loan losses
              
              
              (4,433
              )
              
              
              
              
              
              
              
              (3,764
              )
              
              
              
              
              
              
              
              (3,150
              )Total
                  assets
              
              **$**
              **500,046**
              
              
              
              
              
              
              
              **$**
              **431,244**
              
              
              
              
              
              
              
              **$**
              **358,898****Liabilities:**Interest-bearing
                  liabilities:Interest-bearing
                  transaction Accounts
              
              $
              36,625
              
              $
              710
              
              
              1.94
              %
              $
              27,084
              
              
              185
              
              
              0.68
              %
              $
              20,067
              
              $
              153
              
              
              0.76
              %Savings
                  deposits
              
              
              80,943
              
              
              3,184
              
              
              3.93
              %
              
              85,887
              
              
              3,243
              
              
              3.78
              
              
              68,499
              
              
              1,877
              
              
              2.74Time
                  deposits
              
              
              254,934
              
              
              12,874
              
              
              5.05
              %
              
              204,935
              
              
              9,068
              
              
              4.42
              
              
              166,541
              
              
              5,552
              
              
              3.33Note
                  payable
              
              
              8
              
              
              -
              
              
              6.00
              %
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Junior
                  subordinated debentures
              
              
              10,310
              
              
              620
              
              
              6.01
              %
              
              10,310
              
              
              618
              
              
              5.99
              
              
              4,875
              
              
              306
              
              
              6.28Other
                  borrowings
              
              
              33,921
              
              
              1,045
              
              
              3.08
              %
              
              27,154
              
              
              1,100
              
              
              4.05
              
              
              35,041
              
              
              1,090
              
              
              3.11Total
                  interest-bearing liabilities
              
              
              416,74
              
              
              18,433
              
              
              4.42
              %
              
              355,370
              
              
              14,214
              
              
              4.00
              
              
              295,023
              
              
              8,978
              
              
              3.04Demand
                  deposits
              
              
              45,038
              
              
              
              
              
              
              
              
              42,100
              
              
              
              
              
              
              
              
              33,652Accrued
                  interest and other liabilities
              
              
              2,515
              
              
              
              
              
              
              
              
              1,911
              
              
              
              
              
              
              
              
              1,666Shareholders’
                  equity
              
              
              35,752
              
              
              
              
              
              
              
              
              31,863
              
              
              
              
              
              
              
              
              28,557Total
                  liabilities and shareholders’ equity
              
              **$**
              **500,046**
              
              
              
              
              
              
              
              **$**
              **431,244**
              
              
              
              
              
              
              
              **$**
              **358,898**Net
                  interest spread
              
              
              
              
              
              
              
              
              3.78
              %
              
              
              
              
              
              
              
              3.96
              %
              
              
              
              
              
              
              
              3.78
              %Net
                  interest income
              
              
              
              
              **$**
              **19,372**
              
              
              
              
              
              
              
              **$**
              **17,720**
              
              
              
              
              
              
              
              **$**
              **14,342**Net
                  interest margin
              
              
              
              
              
              
              
              
              4.20
              %
              
              
              
              
              
              
              
              4.42
              %
              
              
              
              
              
              
              
              4.20
              %




(1)
            Nonaccrual
                loans are included in the balances. The effect of these loans is
                not
                significant to the computations. All loans and deposits are
                domestic.


(2)
            Fully
                tax-equivalent basis at 34% tax rate for non-taxable securities and
                loans.




-6-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**





**Rate/Volume
      Analysis**





***Analysis
      of Changes in Net Interest Income*** *.* Net
      interest income can also be analyzed in terms of the impact of changing rates
      and changing volume. The following table describes the extent to which changes
      in interest rates and changes in the volume of earning assets and
      interest-bearing liabilities have affected the Bank’s interest income and
      interest expense during the periods indicated. Information on changes in each
      category attributable to (i) changes due to volume (change in volume multiplied
      by prior period rate), (ii) changes due to rates (changes in rates multiplied
      by
      prior period volume) and (iii) changes in rate/volume (change in rate multiplied
      by the change in volume) is provided in the table below. Changes to both rate
      and volume (in iii above) which cannot be segregated have been allocated
      proportionately.




**2007
                  Compared to 2006****Due
                  to increase (decrease) in***(Dollars
                  in thousands)*
              
              **Volume**
              
              **Rate**
              
              **Total**Interest
                  income:Loans
              
              $
              5,642
              
              $
              461
              
              $
              6,103Securities,
                  taxable
              
              
              (191
              )
              
              53
              
              
              (138
              )Securities,
                  tax exempt
              
              
              194
              
              
              (6
              )
              
              188Federal
                  funds sold and other
              
              
              (329
              )
              
              33
              
              
              (296
              )Nonmarketable
                  equity securities
              
              
              47
              
              
              (33
              )
              
              14Total
                  interest income
              
              
              5,363
              
              
              508
              
              
              5,871Interest
                  expense:Interest-bearing
                  deposits
              
              
              84
              
              
              441
              
              
              525Savings
                  deposits
              
              
              (188
              )
              
              129
              
              
              (59
              )Time
                  deposits
              
              
              2,403
              
              
              1,403
              
              
              3,806Junior
                  subordinated debentures
              
              
              0
              
              
              2
              
              
              2Other
                  borrowings
              
              
              240
              
              
              (295
              )
              
              (55
              )Total
                  interest expense
              
              
              2,539
              
              
              1,680
              
              
              4,219Net
                  interest income
              
              **$**
              **2,824**
              
              **$**
              **(1,172**
              **)**
              **$**
              **1,652**
  **2006
                  Compared to 2005****Due
                  to increase (decrease) in***(Dollars
                  in thousands)*
              
              **Volume**
              
              **Rate**
              
              **Total**Interest
                  income:Loans
              
              $
              4,234
              
              $
              3,751
              
              $
              7,985Securities,
                  taxable
              
              
              192
              
              
              67
              
              
              259Securities,
                  tax exempt
              
              
              105
              
              
              10
              
              
              115Federal
                  funds sold and other
              
              
              (23
              )
              
              231
              
              
              208Nonmarketable
                  equity securities
              
              
              (2
              )
              
              49
              
              
              47Total
                  interest income
              
              
              4,506
              
              
              4,108
              
              
              8,614Interest
                  expense:Interest-bearing
                  deposits
              
              
              49
              
              
              (17
              )
              
              32Savings
                  deposits
              
              
              547
              
              
              819
              
              
              1,366Time
                  deposits
              
              
              1,453
              
              
              2,063
              
              
              3,516Junior
                  subordinated debentures
              
              
              327
              
              
              (15
              )
              
              312Other
                  borrowings
              
              
              (277
              )
              
              287
              
              
              10Total
                  interest expense
              
              
              2,099
              
              
              3,137
              
              
              5,236Net
                  interest income
              
              **$**
              **2,407**
              
              **$**
              **971**
              
              **$**
              **3,378**
 
 -7-
 **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
            Discussion and Analysis**
 **of
            Financial Condition and Results of
            Operations**





**Net
      Interest Income**





***Interest
      Sensitivity*** *.* The
      Company monitors and manages the pricing and maturity of its assets and
      liabilities in order to diminish the potential adverse impact that changes
      in
      interest rates could have on its net interest income. The principal monitoring
      technique employed by the Company is the measurement of the Company’s interest
      sensitivity “gap,” which is the positive or negative dollar difference between
      assets and liabilities that are subject to interest rate repricing within a
      given period of time. Interest rate sensitivity can be managed by repricing
      assets or liabilities, selling securities available-for-sale, replacing an
      asset
      or liability at maturity, or adjusting the interest rate during the life of
      an
      asset or liability. Managing the amount of assets and liabilities repricing
      in
      this same time interval helps to hedge interest sensitivity and minimize the
      impact on net interest income of rising or falling interest rates.





The
      following table sets forth the Company’s interest rate sensitivity at December
      31, 2007.





**Interest
      Sensitivity Analysis**





**After**
            
            
            
            **Greater****After
                One**
            
            **Three**
            
            
            
            **Than
                One****Through**
            
            **Through**
            
            **Within**
            
            **Year
                or****December
                31, 2007**
            
            **Within
                One**
            
            **Three**
            
            **Twelve**
            
            **One**
            
            **Non-***(Dollars
                in thousands)*
            
            **Month**
            
            **Months**
            
            **Months**
            
            **Year**
            
            **Sensitive**
            
            **Total****Assets**Interest-earning
                assetsLoans,
                including held for sale
            
            $
            279,499
            
            $
            5,547
            
            $
            23,502
            
            $
            308,548
            
            $
            179,191
            
            $
            487,739Securities,
                taxable
            
            
            513
            
            
            519
            
            
            2,218
            
            
            3,250
            
            
            24,261
            
            
            27,511Securities,
                nontaxable
            
            
            
            
            
            501
            
            
            1,618
            
            
            2,119
            
            
            28,950
            
            
            31,069Nonmarketable
                securities
            
            
            3,930
            
            
            
            
            
            
            
            
            3,930
            
            
            
            
            
            3,930Investment
                in trust
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            310
            
            
            310Total
                earning assets
            
            
            283,942
            
            
            6,567
            
            
            27,338
            
            
            317,847
            
            
            232,712
            
            
            550,559**Liabilities**Interest-bearing
                liabilities:Interest-bearing
                deposits:Demand
                deposits
            
            
            39,450
            
            
            
            
            
            
            
            
            39,450
            
            
            
            
            
            39,450Savings
                deposits
            
            
            85,819
            
            
            
            
            
            
            
            
            85,819
            
            
            
            
            
            85,819Time
                deposits
            
            
            34,047
            
            
            69,583
            
            
            167,759
            
            
            271,389
            
            
            9,296
            
            
            280,685Total
                interest-bearing deposits
            
            
            159,316
            
            
            69,583
            
            
            167,759
            
            
            396,658
            
            
            9,296
            
            
            405,954Advances
                from FederalHome
                Loan Bank
            
            
            9,000
            
            
            13,000
            
            
            16,000
            
            
            38,000
            
            
            31,000
            
            
            69,000Federal
                Funds Purchased
            
            
            13,359
            
            
            
            
            
            
            
            
            13,359
            
            
            
            
            
            13,359Note
                payable
            
            
            -
            
            
            -
            
            
            3,000
            
            
            3,000
            
            
            
            
            
            3,000Junior
                subordinated debentures
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,310
            
            
            10,310Repurchase
                agreements
            
            
            7,928
            
            
            
            
            
            
            
            
            7,928
            
            
            
            
            
            7,928Total
                interest-bearing liabilities
            
            
            189,603
            
            
            82,583
            
            
            186,759
            
            
            458,945
            
            
            50,606
            
            
            509,551Period
                gap
            
            **$**
            **94,339**
            
            **$**
            **(76,016**
            **)**
            **$**
            **(159,421**
            **)**
            **$**
            **(141,098**
            **)**
            **$**
            **182,106**Cumulative
                gap
            
            **$**
            **94,339**
            
            **$**
            **18,323**
            
            **$**
            **(141,098**
            **)**
            **$**
            **(141,098**
            **)**
            **$**
            **44,008**Ratio
                of cumulative gap to total earning assets
            
            
            17.14I
            %
            
            3.33
            %
            
            -25.63
            %
            
            -25.63
            %
            
            7.45
            %




-8-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**





**Net
      Interest Income** *-
      continued*





The
      above
      table reflects the balances of earning assets and interest-bearing liabilities
      at the earlier of their repricing or maturity dates. Federal funds sold are
      reflected at the earliest pricing interval due to the immediately available
      nature of the instruments. Securities are reflected at each instrument’s
      ultimate maturity date. Scheduled payment amounts of fixed rate amortizing
      loans
      are reflected at each scheduled payment date. Scheduled payment amounts of
      variable rate amortizing loans are reflected at each scheduled payment date
      until the loan may be repriced contractually; the unamortized balance is
      reflected at that point. Interest-bearing liabilities with no contractual
      maturity, such as demand deposits and savings deposits, are reflected in the
      earliest repricing period due to contractual arrangements which give the Company
      the opportunity to vary the rates paid on those deposits within one month or
      shorter period. However, the Company is not obligated to vary the rates paid
      on
      these deposits within any given period. Fixed rate time deposits, principally
      certificates of deposit, are reflected at their contractual maturity dates.
      Repurchase agreements mature on a daily basis and are reflected in the earliest
      pricing period. Advances from the Federal Home Loan Bank and junior subordinated
      debentures are reflected at their contractual maturity date.





The
      Company is in a liability sensitive position (or a negative gap) of $138.1
      million over the 12 month time frame. The gap is negative when interest-bearing
      liabilities exceed interest sensitive earning assets, as was the case at the
      end
      of 2007 with respect to the one-year time horizon. When interest sensitive
      earning assets exceed interest-bearing liabilities for a specific repricing
      "horizon", a positive interest sensitivity gap is the result.





A
      positive gap generally has a favorable effect on net interest income during
      periods of rising rates. A positive one year gap position occurs when the dollar
      amount of earning assets maturing or repricing within one year exceeds the
      dollar amount of interest-bearing liabilities maturing or repricing during
      that
      same period. As a result, during periods of rising interest rates, the interest
      received on earning assets will increase faster than interest paid on
      interest-bearing liabilities, thus increasing interest income. The reverse
      is
      true in periods of declining interest rates resulting generally in a decrease
      in
      net interest income.





The
      Company's Board of Directors and management review the Asset Liability
      Management with information obtained from our system which measure the interest
      rate sensitivity. The Company's asset and liability policies are to focus on
      maximizing long term profitability while managing acceptable interest rate
      risk.





However,
      the Company’s gap analysis is not a precise indicator of its interest
      sensitivity position. The analysis presents only a static view of the timing
      of
      maturities and repricing opportunities, without taking into consideration that
      changes in interest rates do not affect all assets and liabilities equally.
      For
      example, rates paid on a substantial portion of core deposits may change
      contractually within a relatively short time frame, but those rates are viewed
      by management as significantly less interest-sensitive than market-based rates
      such as those paid on non-core deposits. Net interest income may be impacted
      by
      other significant factors in a given interest rate environment, including
      changes in the volume and mix of earning assets and interest-bearing
      liabilities. The Company has positioned itself where there is minimal impact
      on
      interest income in a rising or falling rate environment.




-9-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**





**Provision
      and Allowance for Loan Losses**





***General*** *.* The
      Company has developed policies and procedures for evaluating the overall quality
      of its credit portfolio and the timely identification of potential problem
      credits. On a quarterly basis, the Company’s Board of Directors reviews and
      approves the appropriate level for the Company’s allowance for loan losses based
      upon management’s recommendations, the results of the internal monitoring and
      reporting system, and an analysis of economic conditions in its market. The
      objective of management has been to fund the allowance for loan losses at a
      level greater or equal to the Company's internal risk measurement system for
      loan risk. The Board maintained an allowance for loan losses level of 1.13%
      of
      total loans at December 31, 2007 and 2006. Management believes the allowance
      is
      adequate to meet any loan losses the Company may experience.





Additions
      to the allowance for loan losses, which are expensed as the provision for loan
      losses on the Company’s income statement, are made periodically to maintain the
      allowance at an appropriate level based on management’s analysis of the
      potential risk in the loan portfolio. Loan losses and recoveries are charged
      or
      credited directly to the allowance. The amount of the provision is a function
      of
      the level of loans outstanding, the level of nonperforming loans, historical
      loan loss experience, the amount of loan losses actually charged against the
      reserve during a given period, and current and anticipated economic
      conditions.





The
      allowance represents an amount which we believe will be adequate to absorb
      inherent losses on existing loans that may become uncollectible. Our judgment
      in
      determining the adequacy of the allowance is based on evaluations of the
      collectibility of loans, including consideration of factors such as the balance
      of impaired loans; the quality, mix and size of our overall loan portfolio;
      economic conditions that may affect the borrower's ability to repay the amount
      and quality of collateral securing the loans; our limited historical loan loss
      experience and a review of specific problem loans.





The
      Company adjusts the amount of the allowance periodically based on changing
      circumstances as a component of the provision for loan losses. We charge
      recognized losses against the allowance and add subsequent recoveries back
      to
      the allowance. We do not allocate the allowance for loan losses to specific
      categories of loans (i.e., real estate, consumer, commercial and mortgage),
      but
      evaluate the adequacy on an overall portfolio basis utilizing our credit grading
      system which we apply to each loan. We combine our estimates of the reserves
      needed for each component of the portfolio, including loans analyzed on a pool
      basis and loans analyzed individually. The allowance is divided into two
      portions: (1) an amount for specific allocations on significant individual
      credits and (2) a general reserve amount. We analyze individual loans within
      the
      portfolio and make allocations to the allowance based on each individual loan's
      specific factors and other circumstances that affect the collectibility of
      the
      credit. Significant, individual credits classified as doubtful or
      substandard/special mention within our credit grading system require both
      individual analysis and specific allocation. Loans in the substandard category
      are characterized by deterioration in quality exhibited by any number of
      well-defined weaknesses requiring corrective action such as declining or
      negative earnings trends and declining or inadequate liquidity. Loans in the
      doubtful category exhibit the same weaknesses found in the substandard loan;
      however, the weaknesses are more pronounced. However, these loans are not yet
      rated as loss because certain events may occur which could salvage the debt
      such
      as injection of capital, alternative financing or liquidation of assets. As
      of
      December 31, 2007 and 2006, the Company had no specific allocations on its
      significant credits in its calculation of the allowance for loan
      losses.





-10-





**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**





**Provision
      and Allowance for Loan Losses -** *continued*




The
      Company calculates its general reserve based on percentages tied to our credit
      grading system. Each loan is assigned one of eight loan risk ratings, based
      on
      the loan's specific characteristics. Any loan assigned an adverse ranking is
      specifically allocated a loss. For all remaining loans, the general reserve
      amount is calculated based upon a reserve percentage for each risk rating.
      The
      Company may adjust these percentages as appropriate given consideration of
      local
      economic conditions, exposure concentration that may exist in the portfolio,
      changes in trends of past due loans, problem loans and charge-offs and
      anticipated loan growth.





The
      Bank
      has developed a loan risk monitoring system that assesses the potential risk
      the
      Bank may have in its loan portfolio. This system is monitored monthly by
      management to insure that adequate provisions and loan allowances are
      maintained. In addition, various regulatory agencies review our allowance for
      loan losses through their periodic examinations, and they may require us to
      record additions to the allowance for loan losses based on their judgment about
      information available to them at the time of their examinations. Our losses
      will
      undoubtedly vary from our estimates, and it is possible that charge-offs in
      future periods will exceed the allowance for loan losses as estimated at any
      point in time. As of December 31, 2007, the Company's general reserves totaled
      $5,270,607, an increase of $1,268,726 from 2006. As of December 31, 2005, the
      Company's general reserves totaled $3,419,368, an increase of $661,143 from
      2004. The categories and concentrations of loans have been consistent between
      the past two years.





The
      following table sets forth certain information with respect to the Company’s
      allowance for loan losses and the composition of chargeoffs and recoveries
      for
      the years ended December 31, 2007, 2006, 2005, 2004 and 2003.





**Allowance
      for Loan Losses**




*(Dollars
                  in thousands)*
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Total
                  loans outstanding at end of year
              
              **$**
              **468,138**
              
              **$**
              **353,491**
              
              **$**
              **311,544**
              
              **$**
              **238,362**
              
              **$**
              **139,389**Average
                  loans outstanding
              
              **$**
              **414,907**
              
              **$**
              **348,709**
              
              **$**
              **294,740**
              
              **$**
              **182,996**
              
              **$**
              **100,051**Balance
                    of allowance for loan losses at beginning
                    of year
              
              
              4,002
              
              $
              3,419
              
              $
              2,758
              
              $
              1,752
              
              $
              1,137Loans
                  charged off:Real
                  estate - construction
              
              
              -
              
              
              17
              
              
              142
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              205
              
              
              718
              
              
              472
              
              
              166
              
              
              47Commercial
                  and industrial
              
              
              58
              
              
              170
              
              
              317
              
              
              44
              
              
              42Consumer
                  and other
              
              
              193
              
              
              151
              
              
              300
              
              
              181
              
              
              106Total
                  loan losses
              
              
              456
              
              
              1,056
              
              
              1,231
              
              
              391
              
              
              195Recoveries
                of
                previous loan losses:Real
                  estate - construction
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              36
              
              
              105
              
              
              38
              
              
              -
              
              
              -Commercial
                  and industrial
              
              
              24
              
              
              111
              
              
              12
              
              
              -
              
              
              -Consumer
                  and other
              
              
              22
              
              
              31
              
              
              31
              
              
              35
              
              
              18Total
                  recoveries
              
              
              82
              
              
              247
              
              
              81
              
              
              35
              
              
              18Net
                  charge-offs
              
              
              374
              
              
              809
              
              
              1,150
              
              
              356
              
              
              177Provision
                  for loan losses
              
              
              1,643
              
              
              1,392
              
              
              1,811
              
              
              1,362
              
              
              792Balance
                  of allowance for loan losses atend
                  of year
              
              **$**
              **5,271**
              
              **$**
              **4,002**
              
              **$**
              **3,419**
              
              **$**
              **2,758**
              
              **$**
              **1,752**Ratios:Net
                  charge-offs to average loans outstanding
              
              
              0.09
              %
              
              0.23
              %
              
              0.39
              %
              
              0.20
              %
              
              0.18
              %Net
                  charge-offs to loans at end of year
              
              
              0.08
              %
              
              0.23
              
              
              0.37
              
              
              0.15
              
              
              0.13Allowance
                  for loan losses to average loans
              
              
              1.27
              
              
              1.15
              
              
              1.16
              
              
              1.51
              
              
              1.75Allowance
                  for loan losses to loans at end of year
              
              
              1.13
              
              
              1.13
              
              
              1.10
              
              
              1.16
              
              
              1.26Net
                  charge-offs to allowance for loan losses
              
              
              7.10
              
              
              20.21
              
              
              33.64
              
              
              12.90
              
              
              10.10Net
                  charge-offs to provisions for loan losses
              
              
              22.76
              
              
              58.11
              
              
              63.50
              
              
              26.13
              
              
              22.35




-11-





**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**




**Nonperforming
      Assets**





***Nonperforming
      Assets*** *.* There
      were $1,657,607 and $670,650 loans in nonaccrual status at December 31, 2007
      and
      2006, respectively. There were $1,780,505 and $463,991 in loans ninety days
      or
      more overdue and still accruing interest at December 31, 2007 and 2006,
      respectively. There were $218,616 and $137,421 in restructured loans at December
      31, 2007 and 2006, respectively.





The
      following table shows the nonperforming assets, percentages of net charge-offs,
      and the related percentage of allowance for loan losses for the five years
      ended
      December 31, 2007. All loans over 90 days past due are on and included in loans
      on nonaccrual.




*(Dollars
                  in thousands)*
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Loans
                  over 90 days past due and still accruing
              
              $
              1,781
              
              $
              464
              
              $
              705
              
              $
              59
              
              $
              460Loans
                  on nonaccrual:Mortgage
              
              
              1,465
              
              
              637
              
              
              1,619
              
              
              1,078
              
              
              -Commercial
              
              
              114
              
              
              -
              
              
              95
              
              
              17
              
              
              -Consumer
              
              
              79
              
              
              34
              
              
              78
              
              
              91
              
              
              -Total
                  nonaccrual loans
              
              
              1,658
              
              
              671
              
              
              1,792
              
              
              1,186
              
              
              -Total
                  of nonperforming loans
              
              
              3,439
              
              
              1,135
              
              
              2,497
              
              
              1,245
              
              
              460Other
                  nonperforming assets
              
              
              197
              
              
              1,386
              
              
              346
              
              
              321
              
              
              279Total
                  nonperforming assets
              
              **$**
              **3,636**
              
              **$**
              **2,521**
              
              **$**
              **2,843**
              
              **$**
              **1,566**
              
              **$**
              **739**Percentage
                  of total assets
              
              
              0.61
              %
              
              0.55
              %
              
              0.71
              %
              
              0.55
              %
              
              0.41
              %Percentage
                  of nonperforming loans andassets
                  to gross loans
              
              
              0.78
              %
              
              0.71
              %
              
              0.91
              %
              
              0.66
              %
              
              0.53
              %Allowance
                  for loan losses to gross loans
              
              
              1.13
              %
              
              1.13
              %
              
              1.10
              %
              
              1.16
              %
              
              1.26
              %Net
                  charge-offs to average loans
              
              
              0.09
              %
              
              0.23
              %
              
              0.39
              %
              
              0.19
              %
              
              0.18
              %




Accrual
      of interest is discontinued on a loan when management believes, after
      considering economic and business conditions and collection efforts, the
      borrower’s financial condition is such that the collection of interest is
      doubtful. A delinquent loan is generally placed in nonaccrual status when it
      becomes 90 days or more past due. When a loan is placed in nonaccrual status,
      all interest which has been accrued on the loan but remains unpaid is reversed
      and deducted from current earnings as a reduction of reported interest income.
      No additional interest is accrued on the loan balance until the collection
      of
      both principal and interest becomes reasonably certain. When a problem loan
      is
      finally resolved, there may ultimately be an actual write-down or chargeoff
      of
      the principal balance of the loan which would necessitate additional charges
      to
      earnings. For all periods presented, the additional interest income, which
      would
      have been recognized into earnings if the Company’s nonaccrual loans had been
      current in accordance with their original terms, and the amount of interest
      income on such loans that was included in net income is immaterial.





***Potential
      Problem Loans*** **.** At
      December 31, 2007, the Company had classified loans totaling $3,822,735 as
      compared to $2,697,063 at December 31, 2006. Classified loans as a percentage
      of
      total loans was .82% at December 31, 2007 as compared to 0.76% at December
      31,
      2006. The loan portfolio increased 32.43% during the same period. Management
      anticipates an increased level of nonperforming assets and an increased level
      of
      charged off loans due to slowing economic conditions expected through
      2008.




-12-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**




**Noninterest
      Income and Expense**




***Noninterest
      Income*** *.*  Noninterest
      income for year ended December 31, 2007 was $5,301,799, an increase of $711,106
      from $4,590,693 in 2006. The increase is primarily attributable to increased
      service charges on deposit accounts and gain on sale of mortgage loans. Deposit
      service charges increased $209,845 or 12.40% from 2006, to $1,901,758 for the
      year ended December 31, 2007. The increase in service charges on deposit
      accounts was attributable to an overall increase in the number of deposit
      accounts in 2007. The gain on sale of mortgage loans increased $271,173 or
      14.26% to $2,173,140 in 2007, from $1,901,967 in 2006.





The
      following table sets forth the principal components of noninterest income for
      the years ended December 31, 2007, 2006 and 2005.


*(Dollars
                  in thousands)*
              
              **2007**
              
              **2006**Service
                  charges on deposit accounts
              
              $
              1,902
              
              $
              1,692Credit
                  life insurance commissions
              
              
              6
              
              
              23Gain
                  on sale of mortgage loans
              
              
              2,173
              
              
              1,902Securities
                  and insurance brokerage commissions
              
              
              149
              
              
              138Other
                  income
              
              
              1,072
              
              
              836Total
                  noninterest income
              
              **$**
              **5,302**
              ****
              **$**
              **4,591**


***Noninterest
      Expense*** *.* Noninterest
      expense increased $2,688,891 or 16.52%, to $18,961,275 for year ended December
      31, 2007 as compared to 2006. Of this total, other operating expenses increased
      $1,178,113 or 23.91%, to $6,104,948 in 2007 from $4,926,835 in 2006. Salaries
      and employee benefits increased $1,173,766 or 12.37%, to $10,661,153 in 2007
      from $9,487,387 in 2006. This increase is primarily attributable to new hire
      employee compensation as the Bank expands into different markets. Net occupancy
      and equipment expense increased $337,012 or 18.14%, to $2,195,174 in 2007
      largely due to operating costs associated with the Bank’s branch expansion
      effort in 2006.




-13-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**Management’s
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**




**Noninterest
      Income and Expense** - *continued*





The
      following table sets forth the primary components of noninterest expense for
      the
      years ended December 31, 2007 and 2006.


*(Dollars
                  in thousands)*
              
              **2007**
              
              **2006**Salaries
                  and employee benefits
              
              $
              10,661
              
              
              9,487Net
                  occupancy
              
              
              1,360
              
              
              1,131Furniture
                  and equipment
              
              
              835
              
              
              727Advertising
                  and public relations
              
              
              526
              
              
              373Office
                  supplies, stationery, and printing
              
              
              327
              
              
              275Data
                  processing and supplies
              
              
              38
              
              
              32Computer
                  and software
              
              
              459
              
              
              441Professional
                  fees and services
              
              
              555
              
              
              471Employee
                  education and conventions
              
              
              53
              
              
              65Loan
                  origination costs
              
              
              233
              
              
              208Other
              
              
              3,914
              
              
              3,062Total
                  noninterest expense
              
              **$**
              **18,961**
              
              **$**
              **16,272**Efficiency
                  ratio
              
              
              77.69
              %
              
              73.65
              %


**Earning
      Assets**





***Loans*** *.* Loans
      are
      the largest category of earning assets and typically provide higher yields
      than
      the other types of earning assets. Associated with the higher loan yields are
      the inherent credit and liquidity risks which management attempts to control
      and
      counterbalance. Loans averaged $414,907,406 in 2007 compared to $348,709,226
      in
      2006, an increase of $66,198,180 or 18.98%. At December 31, 2007, total loans
      were $468,137,690 compared to $353,491,036 at December 31, 2006, an increase
      of
      $114,646,654 or 32.43%.





The
      following table sets forth the composition of the loan portfolio by category
      at
      the dates indicated and highlights the Company’s general emphasis on all types
      of lending.





**Composition
      of Loan Portfolio**


December
                31,*(Dollars
                in thousands)*
              
              
              **2007**
              
              
              **2006**
              
              
              **2005****Amount**
              
              
              **Percent**
                **of 
                  Total**
              
              
              **Amount**
              
              
              **Percent**
                **of 
                  Total**
              
              
              **Amount**
              
              
              **Percent**
                **of 
                  Total**Commercial
                  and industrial
              
              $
              67,772
              
              
              14.48
              %
              $
              51,710
              
              
              14.63
              %
              $
              50,320
              
              
              16.15
              %Real
                estateConstruction
              
              
              65,432
              
              
              13.98
              
              
              64,118
              
              
              18.14
              
              
              52,268
              
              
              16.78Mortgage-residential
              
              
              120,198
              
              
              25.67
              
              
              91,039
              
              
              25.75
              
              
              86,716
              
              
              27.83Mortgage-nonresidential
              
              
              195,992
              
              
              41.87
              
              
              127,214
              
              
              35.99
              
              
              106,125
              
              
              34.06Consumer
              
              
              11,342
              
              
              2.42
              
              
              12,729
              
              
              3.60
              
              
              13,953
              
              
              4.48Other
              
              
              7,402
              
              
              1.58
              
              
              6,681
              
              
              1.89
              
              
              2,162
              
              
              0.70Total
                  loans
              
              
              468,138
              
              
              **100.00**
              **%**
              
              353,491
              
              
              **100.00**
              **%**
              
              311,544
              
              
              **100.00**
              **%**Allowance
                  for loan losses
              
              
              (5,271
              )
              
              
              
              
              (4,002
              )
              
              
              
              
              (3,419
              )Net
                  loans
              
              **$**
              **462,867**
              
              
              
              
              **$**
              **349,489**
              
              
              
              
              **$**
              **308,125**




-14-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**


**Earning
      Assets** *-
      continued*




**Composition
      of Loan Portfolio**-*continued*




December
                  31,
                *(Dollars
                  in thousands)*
              
              
              **2004**
              
              
              **2003****Amount**
              
              
              **Percent**
                  **of
                    Total**
              
              
              **Amount**
              
              
              **Percent**
                  **of 
                    Total**Commercial
                  and industrial
              
              $
              47,890
              
              
              20.09
              %
              $
              27,893
              
              
              20.00
              %Real
                estateConstruction
              
              
              39,023
              
              
              16.37
              
              
              18,343
              
              
              13.16Mortgage-residential
              
              
              69,921
              
              
              29.33
              
              
              42,267
              
              
              30.32Mortgage-nonresidential
              
              
              63,189
              
              
              26.51
              
              
              32,826
              
              
              23.56Consumer
              
              
              13,931
              
              
              5.84
              
              
              13,200
              
              
              9.47Other
              
              
              4,408
              
              
              1.86
              
              
              4,860
              
              
              3.49Total
                  loans
              
              
              238,362
              
              
              **100.00**
              **%**
              
              139,389
              
              
              **100.00**
              **%**Allowance
                  for loan losses
              
              
              (2,758
              )
              
              
              
              
              (1,752
              )Net
                  loans
              
              **$**
              **235,604**
              
              
              
              
              **$**
              **137,637**


In
      the
      context of this discussion, a “real estate mortgage loan” is defined as any
      loan, other than a loan for construction purposes, secured by real estate,
      regardless of the purpose of the loan. It is common practice for financial
      institutions in the Company’s market area to obtain a mortgage on real estate
      whenever possible, in addition to any other available collateral. This
      collateral is taken to reinforce the likelihood of the ultimate repayment of
      the
      loan and tends to increase management’s willingness to make real estate loans
      and, to that extent, also tends to increase the magnitude of the real estate
      loan portfolio component.





The
      largest component of the Company’s loan portfolio is real estate mortgage loans.
      At December 31, 2007, real estate mortgage loans totaled $316,189,973 and
      represented 67.54% of the total loan portfolio, compared to $218,252,208 or
      61.74%, at December 31, 2006.





Residential
      mortgage loans totaled $120,197,668 at December 31, 2007, and represented 25.67%
      of the total loan portfolio, compared to $91,038,240 at December 31, 2006 or
      25.75%. Residential real estate loans consist of first and second mortgages
      on
      single or multi-family residential dwellings. Nonresidential mortgage loans,
      which include commercial loans and other loans secured by multi-family
      properties and farmland, totaled $195,992,305 at December 31, 2007, compared
      to
      $127,213,968 at December 31, 2006. This represents an increase of $68,778,337
      or
      54.07%, from the December 31, 2006 balance. Construction loans increased
      $1,313,204, or 2.05%, from $64,118,098 at December 31, 2006 to $65,431,302
      at
      December 31, 2007. The demand for residential and commercial real estate loans
      in the Bank's market area remained strong.





Commercial
      and industrial loans increased $16,061,415 or 31.06%, to $67,771,665 at December
      31, 2007, from $51,710,250 at December 31, 2006.





The
      Company’s loan portfolio is also comprised of consumer loans. Consumer loans
      decreased $ 1,385,918, or 10.89%, to $11,342,435 at December 31, 2007, from
      $12,728,353 at December 31, 2006.





The
      Company’s loan portfolio reflects the diversity of its markets. The economies of
      the Company’s markets contains elements of medium and light manufacturing,
      higher education, regional health care, and distribution facilities. Management
      expects the area to remain stable with continued growth in the near future.
      The
      diversity of the economy creates opportunities for all types of lending. The
      Company does not engage in foreign lending.




-15-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**


**Earning
      Assets** *-
      continued*





The
      repayment of loans in the loan portfolio as they mature is also a source of
      liquidity for the Company. The following table sets forth the Company's loans
      maturing within specified intervals at December 31, 2007.





**Loan
      Maturity Schedule and Sensitivity to Changes in Interest
      Rates**




**December
                  31, 2007**
              
              
              **One
                  Year or** **Less**
              
              
              **Over
                    One Year**
                  **Through  Five
                    Years**
              
              
              **Over
                  Five** **Years**
              
              
              **Total***(Dollars
                  in thousands)*Commercial
                and industrial
              
              $
              36,988
              
              $
              28,867
              
              $
              1,917
              
              $
              67,772Real
                  estate
              
              
              142,136
              
              
              190,428
              
              
              49,058
              
              
              381,622
 Consumer
                  and other
              
              
              7,439
              
              
              10,965
              
              
              340
              
              
              18,744**$**
              **186,563**
              
              **$**
              **230,260**
              
              **$**
              **51,315**
              
              $
              **468,138**Loans
                  maturing after one year with:Fixed
                  interest rates
              
              
              
              
              
              
              
              
              
              
              $
              156,682Floating
                  interest rates
              
              
              
              
              
              
              
              
              
              
              
              124,893**$**
              **281,575**




The
      information presented in the above table is based on the contractual maturities
      of the individual loans, including loans which may be subject to renewal at
      their contractual maturity. Renewal of such loans is subject to review and
      credit approval as well as modification of terms upon maturity. Consequently,
      management believes this treatment presents fairly the maturity and repricing
      structure of the loan portfolio shown in the above table.





***Investment
      Securities*** *.* The
      investment securities portfolio is also a component of the Company’s total
      earning assets. Total securities available-for-sale averaged $36,170,565 in
      2007, compared to $36,711,400 in 2006. Investment securities also contains
      Federal Home Loan Bank stock and the stock of several unrelated financial
      institutions. These stocks are recorded at their original cost and totaled
      $3,930,400 and $2,187,600 at December 31, 2007 and 2006,
      respectively.





The
      following table sets forth the fair market value of the securities
      available-for-sale held by the Bank at December 31, 2007 and 2006.





**Fair
      Value of Securities available-for-sale**




**December
                  31,**
              
              **2007**
              
              **2006***(Dollars
                  in thousands)*Government
                  sponsored enterprises
              
              $
              -
              
              $
              4,950U.S.
                  government agencies and corporations
              
              
              193
              
              
              381Municipals
              
              
              27,067
              
              
              15,086Mortgage-backed
                  securities
              
              
              31,069
              
              
              15,202Other
                  Securities
              
              
              252
              
              
              312Total
                  securities available-for-sale
              
              **$**
              **58,580**
              ****
              **$**
              **35,931**




-16-


**FIRST
          RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
          Discussion and Analysis**
 **of
          Financial Condition and Results of
          Operations**


**Earning
      Assets** *-
      continued*





The
      following table sets forth the scheduled maturities and average yields of
      securities held at December 31, 2007.





**Investment
      Securities Maturity Distribution and Yields**


**After
                  One But**
              
              **After
                  Five But****December
                  31, 2007**
              
              **Within
                  One Year**
              
              **Within
                  Five Years**
              
              **Within
                  Ten Years**
              
              **After
                  Ten Years**
              
              **Total***(Dollars
                  in thousands)*
              
              **Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**
              
              **Amount**
              
              **Yield**U.S.
                    government agencies and corporations
              
              $
              19
              
              
              5.90
              %
              $
              174
              
              
              6.10
              %
              $
              —
              
              
              —
              
              $
              —
              
              $
              —
              
              $
              193
              
              
              6.08
              %Municipals(2)
              
              
              —
              
              
              —
              
              
              1,103
              
              
              5.37
              
              
              1,039
              
              
              6.36
              
              
              28,927
              
              
              6.22
              
              
              31,069
              
              
              6.20Total
                  securities(1)
              
              $
              19
              
              
              **5.90**
              **%**
              $
              1,277
              
              
              **5.47**
              **%**
              $
              1,039
              
              
              **6.36**
              **%**
              **$**
              **28,927**
              
              
              **6.22**
              **%**
              $
              31,262
              
              
              **6.20**
              **%**





(1)
            Excludes
                mortgage-backed securities totaling $27,066,963 with a yield of 5.27
                % and
                other and non-marketable equity securities totaling
                $251,650.


(2)
            Yields
                are based on a tax equivalent basis of
                34%.





Other
      attributes of the securities portfolio, including yields and maturities, are
      discussed above in “Net Interest Income-Interest Sensitivity
      Analysis.”





***Federal
      Funds Sold*** .
      Federal
      funds sold averaged $7,479,356 in 2007 compared to $13,806,773 in 2006. At
      December 31, 2007 and 2006, federal funds sold totaled $0 and $14,135,000.





**Deposits
      and Other Interest-Bearing Liabilities**





Average
      interest-bearing liabilities increased $61,372,246, or 17.27%, to $416,742,720
      in 2007, from $355,370,474 in 2006. The increase is primarily a result of the
      continued growth of the Company.





***Deposits*** *.* Average
      total deposits increased $57,534,327, or 15.98%, to $417,540,949 in 2007, from
      $360,006,622 in 2006. At December 31, 2007, total deposits were $449,497,715
      compared to $372,938,083 a year earlier, an increase of 20.53%.




-17-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**




**Deposits
      and Other Interest-Bearing Liabilities** *-
      continued*





The
      following table sets forth the average balance amounts and the average rates
      paid on deposits of the Company by category at December 31, 2007 and
      2006.




**Deposits**
  December
                  31,
              
              **2007**
              
              **2006****Average**
              
              
              
              **Average****Average**
              
              **Rate**
              
              **Average**
              
              **Rate***(Dollars
                  in thousands)*
              
              **Amount**
              
              **Paid**
              
              **Amount**
              
              **Paid**Demand
                  deposit accounts
              
              $
              45,038
              
              
              -
              %
              
              42,100
              
              
              -
              %NOW
                  accounts
              
              
              36,625
              
              
              1.94
              
              
              27,084
              
              
              0.68Savings
                  accounts
              
              
              80,943
              
              
              3.93
              
              
              85,887
              
              
              3.78Time
                  deposits $100,000 and over
              
              
              140,926
              
              
              4.97
              
              
              112,132
              
              
              4.23Other
                  time deposits
              
              
              114,008
              
              
              5.15
              
              
              92,803
              
              
              4.66Total
                  deposits
              
              **$**
              **417,540**
              ****
              ****
              **4.02**
              **%**
              **$**
              **360,006**
              ****
              ****
              **3.47**
              **%**





Core
      deposits, which exclude time deposits of $100,000 or more, provide a relatively
      stable funding source for the Company’s loan portfolio and other earning assets.
      The Company’s core deposits were $279,672,463 and $260,946,219 at December 31,
      2007 and 2006, respectively. Included in time deposits $100,000 and over, at
      December 31, 2007 and 2006 are brokered time deposits of $85,330,473 and
      $29,515,694, respectively.





Deposits,
      and particularly core deposits, have been the Company’s primary source of
      funding and have enabled the Company to meet successfully both its short-term
      and long-term liquidity needs. Management anticipates that such deposits will
      continue to be the Company’s primary source of funding in the future. However,
      advances from the Federal Home Loan Bank are being used as an alternative source
      of funds. The Company’s loan-to-deposit ratio was 104.15% at December 31, 2007,
      and 94.79% at December 31, 2006. The maturity distribution of the Company’s time
      deposits over $100,000 and over at December 31, 2007, is set forth in the
      following table:





**Maturities
      of Time Deposits of $100,000 or over**




**After
                  Six****After
                  Three**
              
              **Through****Within
                  Three**
              
              **Through
                  Six**
              
              **Twelve**
              
              **After
                  Twelve***(Dollars
                  in thousands)*
              
              **Months**
              
              **Months**
              
              **Months**
              
              **Months**
              
              **Total**Certificates
                  of depositof
                  $100,000 or over
              
              **$**
              **103,630**
              
              **$**
              **96,420**
              
              **$**
              **71,339**
              
              **$**
              **9,296**
              
              **$**
              **280,685**




Approximately
      36.92% of the Company’s time deposits of $100,000 or more had scheduled
      maturities within three months, and 34.34% had maturities within three to six
      months. Large certificate of deposit customers tend to be extremely sensitive
      to
      interest rate levels, making these deposits less reliable sources of funding
      for
      liquidity planning purposes than core deposits. The current interest rate
      environment has led depositors to invest in short term deposit accounts. The
      Company expects most certificates of deposits with maturities less than twelve
      months to be renewed upon maturity. However, there is the possibility that
      some
      certificates may not be renewed. Management believes that, should that occur,
      the impact would be minimal on the Company’s operations and liquidity due to the
      availability of other funding sources. The Company has an available line to
      borrow funds from the Federal Home Loan Bank up to 30% of the Bank’s total
      assets which provided additional available funds of $177,073,140 at December
      31,
      2007 and available lines to purchase federal funds with various financial
      institutions up to $37,000 000 at December 31, 2007. Management believes that
      these funds would be sufficient to meet future liquidity needs. ****




-18-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**


**Deposits
      and Other Interest-Bearing Liabilities** *-
      continued*




***Other
      Borrowings*** .
      The
      following table summarizes the Company's borrowings for the years ended December
      31, 2007, 2006, and 2005. These borrowings consist of securities sold under
      agreements to repurchase, advances from the Federal Home Loan Bank, federal
      funds purchased, a note payable and junior subordinated debentures. Securities
      sold under agreements to repurchase mature on a one to seven day basis. These
      agreements are secured by U.S. government agencies. Advances from Federal Home
      Loan Bank mature at different periods as discussed in the footnotes to the
      financial statements and are secured by the Company's one to four family
      residential mortgage loans and the Company's investment in Federal Home Loan
      Bank stock. Federal funds purchased are short-term borrowings from other
      financial institutions that mature daily.


(*Dollars
                  in thousands)*
              
              
              **Maximum**
                  **Outstandingat
                    any**
                  **Month
                    End**
              
              
              **Average**
                **Balance**
              ****
              ****
              **Weighted
                  Average**
                **Interest
                  Rate**
              ****
              ****
              **Balance**
                **December
                  31,**
              ****
              ****
              **Interest**
                    **Rate
                      at December 31****December
                  31, 2007**Securities
                    sold under
                  agreement
                    to repurchase
              
              $
              11,651
              
              $
              9,128
              
              
              4.38
              %
              $
              7,928
              
              
              4.43
              %Advances
                  from FederalHome
                  Loan Bank
              
              
              69,000
              
              
              22,985
              
              
              3.61
              
              
              69,000
              
              
              4.40Federal
                  funds purchased
              
              
              13,359
              
              
              1,809
              
              
              5.11
              
              
              13,359
              
              
              4.50Note
                  payable
              
              
              3,000
              
              
              8
              
              
              6.00
              
              
              3,000
              
              
              6.00Junior
                  subordinateddebentures
              
              
              10,310
              
              
              10,310
              
              
              6.01
              
              
              10,310
              
              
              5.93**December
                  31, 2006**Securities
                  sold underagreement
                  to repurchase
              
              $
              8,190
              
              $
              6,065
              
              
              4.27
              %
              $
              8,120
              
              
              6.02
              %Advances
                  from FederalHome
                  Loan Bank
              
              
              29,800
              
              
              21,028
              
              
              4.24
              
              
              28,500
              
              
              3.81Federal
                  funds purchased
              
              
              955
              
              
              61
              
              
              3.72
              
              
              -
              
              
              -Junior
                  subordinateddebentures
              
              
              10,310
              
              
              10,310
              
              
              5.99
              
              
              10,310
              
              
              5.93**December
                  31, 2005**Securities
                  sold underagreement
                  to repurchase
              
              $
              4,223
              
              $
              3,600
              
              
              2.54
              %
              $
              3,860
              
              
              3.88
              %Advances
                  from FederalHome
                  Loan Bank
              
              
              36,000
              
              
              31,301
              
              
              3.28
              
              
              23,500
              
              
              3.28Federal
                  funds purchased
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Junior
                  subordinateddebentures
              
              
              10,310
              
              
              4,875
              
              
              6.28
              
              
              10,310
              
              
              5.93




-19-





**Capital**




The
      Company and the Bank are subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet minimum capital
      requirements can initiate certain mandatory and possible additional
      discretionary actions by regulators that, if undertaken, could have a material
      effect on the Company’s consolidated 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 Company’s assets, liabilities, and certain off-balance-sheet
      items as calculated under regulatory accounting practices. The Company’s capital
      amounts and classifications are also subject to qualitative judgments by the
      regulators about components, risk weightings, and other factors.




-20-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**




**Capital**  *-
      continued*




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





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





The
      Company and the Bank exceeded the regulatory capital requirements at December
      31, 2007. The following table shows the Company's and the Bank's ratios at
      December 31, 2007.





**Analysis
      of Capital and Capital Ratios**


**Company**
              
              **Bank***(Dollars
                in thousands)*Tier
                1 capital
              
              $
              50,361
              
              **$**
              48,554Tier
                2 capital
              
              
              2,225
              
              
              5,271Total
                  qualifying capital
              
              **$**
              **52,586**
              
              **$**
              **53,824**Risk-adjusted
                  total assets (including
                  off-balance-sheet exposures)
              
              **$**
              **511,207**
              
              **$**
              **510,959**Risk-based
                  capital ratios:Tier
                  1 risk-based capital ratio
              
              
              9.26
              %
              
              9.50
              %Total
                  risk-based capital ratio
              
              
              10.29
              %
              
              10.53
              %Tier
                  1 leverage ratio
              
              
              9.46
              %
              
              8.85
              %




**Impact
      of Off-Balance Sheet Instruments**




The
      Company is a party to financial instruments with off-balance-sheet risk in
      the
      normal course of business to meet the financing needs of the Company’s
      customers. These financial instruments consist of commitments to extend credit
      and standby letters of credit. Commitments to extend credit are legally binding
      agreements to lend to a customer at predetermined interest rates as long as
      there is no violation of any condition established in the contract. Commitments
      generally have fixed expiration dates or other termination clauses and may
      require payment of a fee. A commitment involves, to varying degrees, elements
      of
      credit and interest rate risk in excess of the amount recognized in the balance
      sheets. The exposure to credit loss in the event of nonperformance by the other
      party to the instrument is represented by the contractual notional amount of
      the
      instrument. Since certain commitments are expected to expire without being
      drawn
      upon, the total commitment amounts do not necessarily represent future cash
      requirements. Letters of credit are conditional commitments issued to guarantee
      a customer’s performance to a third party and have essentially the same credit
      risk as other lending facilities. Standby letters of credit often expire without
      being used.





The
      Company uses the same credit underwriting procedures for commitments to extend
      credit and standby letters of credit as it does for its on-balance sheet
      instruments. The credit worthiness of each borrower is evaluated and the amount
      of collateral, if deemed necessary, is based on the credit evaluation.
      Collateral held for commitments to extend credit and standby letters of credit
      varies but may include accounts receivable, inventory, property, plant,
      equipment, and income-producing commercial properties.





The
      Company is not involved in off-balance sheet contractual relationships, other
      than those disclosed in this report, that could result in liquidity needs or
      other commitments or that could significantly impact earnings.





As
      of
      December 31, 2007, commitments to extend credit totaled $76,545,909 and its
      standby letters of credit totaled $2,721,249.




-21-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**


**Impact
      of Off-Balance Sheet Instruments**  *-
      continued*




The
      following table sets forth the length of time until maturity for unused
      commitments to extend credit and standby letters of credit at December 31,
      2007.


**Within
                  One**
              
              **After
                  One Through Three**
              
              **After
                  Three Through Twelve**
              
              **Within
                  One**
              
              **Greater
                  Than***(Dollars
                  in thousands)*
              
              **Month**
              
              **Months**
              
              **Months**
              
              **Year**
              
              **One
                  Year**
              
              **Total**Unused
                  commitments toextend
                  credit
              
              $
              8,909
              
              $
              3,941
              
              $
              27,415
              
              $
              40,265
              
              $
              36,281
              
              $
              76,546Standby
                  letters of credit
              
              
              114
              
              
              400
              
              
              542
              
              
              1,056
              
              
              1,665
              
              
              2,721Totals
              
              **$**
              **9,023**
              
              **$**
              **4,341**
              
              **$**
              **27,957**
              
              **$**
              **41,321**
              
              **$**
              **37,946**
              
              **$**
              **79,267**
  The
        Company evaluates each customer’s credit worthiness on a case-by-case basis. The
        amount of collateral obtained, if deemed necessary by the Company upon extension
        of credit, is based on its credit evaluation of the borrower. Collateral
        varies
        but may include accounts receivable, inventory, property, plant and equipment,
        and commercial and residential real estate.





**Liquidity
      Management and Capital Resources**




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
      Company's service area. Core deposits (total deposits less time deposits greater
      than $100,000) provide a relatively stable funding base, and were equal to
      47.27% of total assets at December 31, 2007. Asset liquidity is provided from
      several sources, including amounts due from banks, federal funds sold,
      securities available for sale, and funds from maturing loans. The Company had
      $7,164,650 in cash and cash equivalents and $58,580,313 in securities available
      for sale at December 31, 2007. The Company has $37,000,000 available through
      a
      line of credit with other banks as an additional source of liquidity funding.
      The Company also has a line of credit to borrow funds from the Federal Home
      Loan
      Bank up to $177,073,140 of which $108,073,140 is available at December 31,
      2007.





**Contractual
      Obligations**




The
      following table provides payments due by period for various contractual
      obligations as of December 31, 2007:


*(Dollars
                  in thousands)*
              
              **Within
                  One Year**
              
              **Over
                  One to Two Years**
              
              **Over
                  Two to Three Years**
              
              **Over
                  Three to Five Years**
              
              **After
                  Five Years**
              
              **Total**Certificate
                  accounts(1)
              
              $
              271,389
              
              $
              5,770
              
              $
              1,486
              
              $
              2,040
              
              $
              -
              
              $
              280,685Short-term
                  borrowings(2)
              
              
              10,928
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,928Long-term
                  debt(3)
              
              
              40,000
              
              
              20,000
              
              
              8,000
              
              
              1,000
              
              
              10,310
              
              
              79,310Purchases
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  lease obligations(4)
              
              
              608
              
              
              539
              
              
              518
              
              
              958
              
              
              -
              
              
              2,623Totals
              
              **$**
              **322,925**
              ****
              **$**
              **26,309**
              ****
              **$**
              **10,004**
              ****
              **$**
              **3,998**
              ****
              **$**
              **10,310**
              ****
              **$**
              **373,546**
              ****





(1)
            Certificates
                of deposit give customers rights to early withdrawal. Early withdrawals
                may be subject to penalties. The penalty amount depends on the remaining
                time to maturity at the time of early
                withdrawal.


(2)
            Short-term
                borrowings consist of securities sold under agreements to repurchase
                and a
                note payable. We expect securities repurchase agreements to be re-issued
                and, as such, do not necessarily represent an immediate need for
                cash.


(3)
            Long
                term debt consists of FHLB borrowings and junior subordinated
                debentures.


(4)
            Operating
                lease obligations include existing and future property and equipment
                non-cancelable lease commitments.




-22-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 
 **Management’s
        Discussion and Analysis**
 **of
        Financial Condition and Results of Operations**


**Liquidity
      Management and Capital Resources** - *continued*




During
      2007, the Company’s primary sources of cash were $ 76,559,631 from deposits. The
      Company’s primary uses of cash resources were to fund loans of approximately
      $114,646,654. These trends are consistent with those of a growing bank operation
      and consistent with past cash uses and sources. Management believes that the
      Company'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 2007 to meet either short or long-term
      needs.





**Impact
      of Inflation**





Unlike
      most industrial companies, the assets and liabilities of financial institutions
      such as the Company are primarily monetary in nature. Therefore, interest rates
      have a more significant effect on the Company’s performance than do the general
      rate of inflation and of goods and services. In addition, interest rates do
      not
      necessarily move in the same direction or in the same magnitude as the prices
      of
      goods and services. As discussed previously, management seeks to manage the
      relationships between interest sensitive assets and liabilities in order to
      protect against wide interest rate fluctuations, including those resulting
      from
      inflation.





**Accounting
      and Financial Reporting Issues**





The
      Company has adopted various accounting policies which govern the application
      of
      accounting principles generally accepted in the United States in the preparation
      of its financial statements. The significant accounting policies are described
      in the footnotes to the financial statements at December 31, 2007 as filed
      on
      the annual report on Form 10-K. Certain accounting policies involve significant
      judgments and assumptions by management which have a material impact on the
      carrying value of certain assets and liabilities. The Company considers these
      accounting policies to be critical accounting policies. The judgments and
      assumptions used are based on historical experience and other factors, which
      management believes to be reasonable under the circumstances. Because of the
      nature of the judgments and assumptions made, 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
      these
      significant accounting policies, the Company considers its policies regarding
      the allowance for loan losses (the Allowance) to be its most critical accounting
      policy due to the significant degree of management judgment involved in
      determining the amount of Allowance. The Company has developed policies and
      procedures for assessing the adequacy of the Allowance, recognizing that this
      process requires a number of assumptions and estimates with respect to its
      loan
      portfolio. The Company's assessments may be impacted in future periods by
      changes in economic conditions, the impact of regulatory examinations, and
      the
      discovery of information with respect to borrowers, which is not known to
      management at the time of the issuance of the consolidated financial statements.
      Refer to the discussion under Provision and Allowance for Loan Losses section
      of
      this document for a detailed description of the Company's estimation process
      and
      methodology related to the allowance for loan losses.





**Industry
      Developments**





From
      time
      to time, various bills are introduced in the United States Congress with respect
      to the regulation of financial institutions. Certain legislation, if adopted,
      could significantly change the regulation of banks and the financial services
      industry. The Company cannot predict whether any such legislation will be
      adopted or, if adopted, how it would affect the Company.




-23-




**MANAGEMENT'S
      ANNUAL REPORT ON INTERNAL CONTROL OVER****FINANCIAL
      REPORTING**





Our
      Management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as defined in *Rules
      13a-15(f) and 15d-15(f) under the Securities Exchange Act of
      1934.* Our
      internal control over financial reporting is a process designed to provide
      reasonable assurance that assets are safeguarded against loss from unauthorized
      use or disposition, transactions are executed in accordance with appropriate
      management authorization and accounting records are reliable for the preparation
      of financial statements in accordance with generally accepted accounting
      principles.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2007. Management based this assessment on criteria for effective
      internal control over financial reporting described in “ *Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission.”* Management’s
      assessment included an evaluation of the design of our internal control over
      financial reporting and testing of the operational effectiveness of its internal
      control over financial reporting. Management reviewed the results of its
      assessment with the Audit Committee of the Board of Directors. Based on this
      assessment, management believes that First Reliance Bancshares, Inc. maintained
      effective internal control over financial reporting as of December 31, 2007.





This
      annual report does not include an attestation report of the Company's
      independent registered public accounting firm regarding internal control over
      financial reporting. Management’s report was not subject to attestation by the
      Company’s independent registered public accounting firm pursuant to temporary
      rules of the Securities and Exchange Commission that permit the Company to
      provide only management’s report in this annual report.





-23-




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors


First
      Reliance Bancshares, Inc. and Subsidiary


Florence,
      South Carolina





We
      have
      audited the accompanying consolidated balance sheets of First Reliance
      Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2007 and
      2006, and the related consolidated statements of income, changes in
      shareholders’ equity and comprehensive income **,** and cash
      flows for the years then ended. 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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      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 financial position of First Reliance Bancshares,
      Inc. and subsidiary as of December 31, 2007 and 2006, and the results of their
      operations and their cash flows for the years then ended in conformity with
      U.S.
      generally accepted accounting principles.





We
      were
      not engaged to examine management's assertion about the effectiveness of First
      Reliance Bancshares, Inc.'s internal control over financial reporting as of
      December 31, 2007 included in the accompanying Management's Report on Internal
      Control Over Financial Reporting and, accordingly, we do not express an opinion
      thereon.






Elliott
      Davis, LLC


Columbia,
      South Carolina


March
      25,
      2008





-24-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Consolidated
        Balance Sheets**


**December
                  31,**
              ********
              **2007**
              ****
              **2006**
              ******Assets:**
              ****
              ****
              ****Cash
                  and cash equivalents:Cash
                  and due from banks
              
              $
              7,164,650
              
              $
              17,328,075Federal
                  funds sold
              
              
              -
              
              
              14,135,000Total
                  cash and cash equivalents
              
              
              7,164,650
              
              
              31,463,075Investment
                  securities:Securities
                  available-for-sale
              
              
              58,580,313
              
              
              35,931,271Nonmarketable
                  equity securities
              
              
              3,930,400
              
              
              2,187,600Total
                  investment securities
              
              
              62,510,713
              
              
              38,118,871Mortgage
                  loans held for sale
              
              
              19,600,850
              
              
              6,632,010Loans
                  receivable
              
              
              468,137,690
              
              
              353,491,036Less
                  allowance for loan losses
              
              
              (5,270,607
              )
              
              (4,001,881
              )Loans,
                  net
              
              
              462,867,083
              
              
              349,489,155Premises,
                  furniture and equipment, net
              
              
              22,233,746
              
              
              13,770,135Accrued
                  interest receivable
              
              
              3,092,767
              
              
              2,464,531Other
                  real estate owned
              
              
              196,950
              
              
              1,386,380Cash
                  surrender value of life insurance
              
              
              10,540,273
              
              
              10,134,036Other
                  assets
              
              
              3,497,180
              
              
              2,752,529Total
                  assets
              
              **$**
              **591,704,212**
              ****
              **$**
              **456,210,722****Liabilities:**Deposits:Noninterest-bearing
                  transaction accounts
              
              $
              43,542,528
              
              $
              42,107,434Interest-bearing
                  transaction accounts
              
              
              39,450,393
              
              
              33,243,099Savings
              
              
              85,819,481
              
              
              78,831,730Time
                  deposits $100,000 and over
              
              
              169,825,252
              
              
              111,991,864Other
                  time deposits
              
              
              110,860,061
              
              
              106,763,956Total
                  deposits
              
              
              449,497,715
              
              
              372,938,083Securities
                  sold under agreements to repurchase
              
              
              7,927,754
              
              
              8,120,014Federal
                  Funds Purchased
              
              
              13,359,000
              
              
              -Advances
                  from Federal Home Loan Bank
              
              
              69,000,000
              
              
              28,500,000Note
                  payable
              
              
              3,000,000
              
              
              -Junior
                  subordinated debentures
              
              
              10,310,000
              
              
              10,310,000Accrued
                  interest payable
              
              
              767,577
              
              
              766,276Other
                  liabilities
              
              
              814,262
              
              
              1,483,086Total
                  liabilities
              
              
              554,676,308
              
              
              422,117,459Commitments
                  and contingencies (Notes 4, and 14)**Shareholders'
                  Equity:**Common
                  stock, $0.01 par value, 20,000,000 shares authorized;3,494,646
                  and 3,424,878 shares issued and outstanding at December 31, 2007
                  and 2006,
                  respectively
              
              
              34,946
              
              
              34,249Nonvested
                  restricted stock
              
              
              (152,762
              )
              
              (66,131
              )Capital
                  surplus
              
              
              25,875,012
              
              
              25,257,814Treasury
                  stock (9,667 shares at cost at December 31, 2007
              
              
              (145,198
              )
              
              -Retained
                  earnings
              
              
              11,417,275
              
              
              8,857,755Accumulated
                  other comprehensive income (loss)
              
              
              (1,369
              )
              
              9,576Total
                  shareholders' equity
              
              
              37,027,904
              
              
              34,093,263Total
                  liabilities and shareholders' equity
              
              $
              591,704,212
              
              $
              456,210,722






The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -25-




**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**


**Consolidated
        Statements of Income**
 
 **For
                  the years ended December
                  31,****2007**
              
              **2006****Interest
                  income:**Loans,
                  including fees
              
              $
              35,325,242
              
              $
              29,222,425Investment
                  securities:Taxable
              
              
              892,277
              
              
              1,029,560Tax
                  exempt
              
              
              780,191
              
              
              639,710Federal
                  funds sold
              
              
              390,944
              
              
              687,352Other
                  interest income
              
              
              151,833
              
              
              137,538Total
              
              
              37,540,487
              
              
              31,716,585**Interest
                  expense:**Time
                  deposits $100,000 and over
              
              
              7,002,414
              
              
              4,747,647Other
                  deposits
              
              
              9,765,871
              
              
              7,748,192Other
                  interest expense
              
              
              1,664,924
              
              
              1,717,860Total
              
              
              18,433,209
              
              
              14,213,699**Net
                  interest income**
              
              
              19,107,278
              
              
              17,502,886Provision
                  for loan losses
              
              
              1,643,100
              
              
              1,392,491**Net
                  interest income after provision for loan losses**
              
              
              17,464,178
              
              
              16,110,395**Noninterest
                  income:**Service
                  charges on deposit accounts
              
              
              1,901,758
              
              
              1,691,913Gain
                  on sale of mortgage loans
              
              
              2,173,140
              
              
              1,901,967Brokerage
                  fees
              
              
              149,268
              
              
              138,340Credit
                  life insurance commissions
              
              
              6,100
              
              
              23,173Other
                  service charges, commissions, and fees
              
              
              366,172
              
              
              263,610Gain
                  on sale of investment securities
              
              
              5,996
              
              
              -Gain
                  on sale of other real estate
              
              
              29,186
              
              
              7,387Gain
                  (loss) on sale of fixed assets
              
              
              59,318
              
              
              (13
              )Other
              
              
              610,861
              
              
              564,316Total
              
              
              5,301,799
              
              
              4,590,693**Noninterest
                  expenses:**Salaries
                  and benefits
              
              
              10,661,153
              
              
              9,487,387Occupancy
              
              
              1,360,295
              
              
              1,130,705Furniture
                  and equipment related expenses
              
              
              834,879
              
              
              727,457Other
                  operating
              
              
              6,104,948
              
              
              4,926,835Total
              
              
              18,961,275
              
              
              16,272,384**Income
                  before income taxes**
              
              
              3,804,702
              
              
              4,428,704Income
                  tax expense
              
              
              1,245,182
              
              
              1,182,796**Net
                  income**
              
              **$**
              **2,559,520**
              ****
              **$**
              **3,245,908**
              ******Earnings
                  per share:**
              ****
              ****
              ****
              ****
              ****
              ****
              ****Basic
              ****
              **$**
              **0.74**
              ****
              **$**
              **0.96**Diluted
              
              **$**
              **0.72**
              ****
              **$**
              **0.91**
 The
          accompanying notes are an integral part of the consolidated financial
          statements.
  -26-
 **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Consolidated
          Statements of Changes in Shareholders’ Equity and Comprehensive
          Income**
 **For
        the years ended December 31, 2007 and 2006**
  **Common
                    Stock**
                
                **Capital**
                
                **Treasury**
                
                **Nonvested
                    Restricted**
                
                **Retained**
                
                **Accumulated
                    Other Comprehensive Income****Shares**
                
                **Amount**
                
                **Surplus**
                
                **Stock**
                
                **Stock**
                
                **Earnings**
                
                **(Loss)**
                
                **Total****Balance,
                    December 31, 2005**
                
                
                3,306,117
                
                $
                33,061
                
                $
                24,127,329
                
                $
                (9,896
                )
                $
                -
                
                $
                5,611,847
                
                $
                (111,706
                )
                $
                29,650,635Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,245,908
                
                
                
                
                
                3,245,908Other
                    comprehensive income, net of tax expense of $63,441
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                121,282
                
                
                121,282Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,367,190Sale
                    of treasury stock
                
                
                
                
                
                
                
                
                
                
                
                9,896
                
                
                
                
                
                
                
                
                
                
                
                9,896Issuance
                    of advisory board shares
                
                
                945
                
                
                9
                
                
                15,016
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,025Restricted
                    stock issuance
                
                
                6,771
                
                
                68
                
                
                99,695
                
                
                
                
                
                (66,131
                )
                
                
                
                
                
                
                
                33,632Issuance
                    of shares to 404(c) plan
                
                
                32,674
                
                
                327
                
                
                472,420
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                472,747Exercise
                    of stock options
                
                
                78,371
                
                
                784
                
                
                543,354
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                544,138**Balance,
                    December 31, 2006**
                
                
                3,424,878
                
                
                34,249
                
                
                25,257,814
                
                
                -
                
                
                (66,131
                )
                
                8,857,755
                
                
                9,576
                
                
                34,093,263Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,559,520
                
                
                
                
                
                2,559,520Other
                    comprehensive loss, net of tax benefit of $5,639
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (10,945
                )
                
                (10,945
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,548,575Purchase
                    of treasury stock
                
                
                
                
                
                
                
                
                
                
                
                (145,198
                )
                
                
                
                
                
                
                
                
                
                
                (145,198
                )Issuance
                    of advisory board shares
                
                
                1,559
                
                
                15
                
                
                16,744
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,759Restricted
                    stock issuance
                
                
                11,681
                
                
                117
                
                
                162,893
                
                
                
                
                
                (86,631
                )
                
                
                
                
                
                
                
                76,379Issuance
                    of shares to 404(c) plan
                
                
                13,383
                
                
                134
                
                
                198,246
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                198,380Exercise
                    of stock options
                
                
                43,145
                
                
                431
                
                
                239,315
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                239,746**Balance,
                    December 31, 2007**
                
                
                **3,494,646**
                
                **$**
                **34,946**
                
                **$**
                **25,875,012**
                
                **$**
                **(145,198**
                **)**
                **$**
                **(152,762**
                **)**
                **$**
                **11,417,275**
                
                **$**
                **(1,369**
                **)**
                **$**
                **37,027,904**
 
 The
            accompanying notes are an integral part of the consolidated financial
            statements.
  -27-
  **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Consolidated
            Statements of Cash Flows**
 
 **For
                    the years ended****December 31,****2007**
                
                **2006**Cash
                    flows from operating activities:Net
                    income
                
                $
                2,559,520
                
                $
                3,245,908Adjustments
                    to reconcile net income to net cashprovided
                    (used) by operating activities:Provision
                    for loan losses
                
                
                1,643,100
                
                
                1,392,491Depreciation
                    and amortization expense
                
                
                812,762
                
                
                904,367Gain
                    on sales of securities available-for-sales
                
                
                (3,496
                )
                
                -Gain
                    on non marketable securities
                
                
                (2,500
                )Gain
                    on sale of equipment
                
                
                (59,318
                )Gain
                    on sale of other real estate owned
                
                
                (29,186
                )
                
                (7,387
                )Discount
                    accretion and premium amortization
                
                
                49,316
                
                
                62,497Disbursements
                    for mortgages held for sale
                
                
                (146,067,873
                )
                
                (129,199,377
                )Proceeds
                    from sales of mortgages held for sale
                
                
                133,099,033
                
                
                130,561,970Writedown
                    of other real estate owned
                
                
                -
                
                
                169,146Deferred
                    income tax benefit
                
                
                (531,918
                )
                
                (276,141
                )Increase
                    in interest receivable
                
                
                (628,236
                )
                
                (274,789
                )Decrease
                    in interest payable
                
                
                1,301
                
                
                319,973Increase
                    in other assets and cash surrendervalue
                    of life insurance
                
                
                (876,268
                )
                
                (7,211,901
                )Increase
                    (decrease) in other liabilities
                
                
                (663,890
                )
                
                648,942Net
                    cash provided (used) by operating activities
                
                
                (10,697,653
                )
                
                335,699**Cash
                    flows from investing activities:**Purchases
                    of securities available-for-sale
                
                
                (34,969,570
                )
                
                (1,521,226
                )Maturities
                    of securities available-for-sale
                
                
                2,472,556
                
                
                2,952,409Proceeds
                    from sales of nonmarketable equity securities
                
                
                2,186,000
                
                
                711,000Proceeds
                    on sale of securities available-for-sale
                
                
                9,785,569Purchases
                    of nonmarketable equity securities
                
                
                (3,927,000
                )
                
                (1,271,500
                )Net
                    increase in loans receivable
                
                
                (115,426,100
                )
                
                (45,103,300
                )Purchases
                    of premises, furniture and equipment
                
                
                (9,043,619
                )
                
                (4,347,627
                )Proceeds
                    from disposal of premises, furniture and equipment
                
                
                84,566
                
                
                19,908Proceeds
                    from sale of other real estate owned
                
                
                1,623,689
                
                
                1,144,082Net
                    cash used by investing activities
                
                
                (147,213,209
                )
                
                (47,416,254
                )**Cash
                    flows from financing activities:**Net
                    increase in demand deposits, interest-bearingtransaction
                    accounts and savings accounts
                
                
                14,630,138
                
                
                5,859,407Net
                    increase in certificates of deposit andother
                    time deposits
                
                
                61,929,493
                
                
                32,641,778Increase
                    in advances from Federal Home Loan Bank
                
                
                40,500,000
                
                
                5,000,000Increase
                    in federal funds purchased
                
                
                13,359,000
                
                
                -Net
                    increase (decrease) in securities soldunder
                    agreements to repurchase
                
                
                (192,260
                )
                
                4,260,110Proceeds
                    from note payable
                
                
                3,000,000
                
                
                -Proceeds
                    from junior subordinated debentures
                
                
                -
                
                
                -Exercise
                    of stock options
                
                
                239,746
                
                
                544,138Advisory
                    board stock - issuance of advisory board shares
                
                
                16,759
                
                
                15,025404(c)
                    purchase - issuance of shares to 404(c)
                
                
                198,380
                
                
                472,747Restricted
                    stock
                
                
                76,379
                
                
                33,632Sale
                    (purchase) of treasury stock
                
                
                (145,198
                )
                
                9,896Net
                    cash provided by financing activities
                
                
                133,612,437
                
                
                48,836,733Net
                    increase (decrease) in cash and cash equivalents
                
                
                24,298,425
                
                
                1,756,178**Cash
                    and cash equivalents, beginning of year**
                
                
                31,463,075
                
                
                29,706,897**Cash
                    and cash equivalents, end of year**
                
                **$**
                **7,164,650**
                ****
                **$**
                **31,463,075**
                ******Cash
                    paid during the year for:**
                ****
                ****
                ****
                ****
                ****
                ****
                ****Income
                    taxes
                ****
                **$**
                **1,431,042**
                ****
                **$**
                **1,475,090**
                ****Interest
                ****
                **$**
                **18,431,908**
                ****
                **$**
                **13,893,726**
                ******Supplemental
                    noncash investing and financing activities:**
                ****
                ****
                ****
                ****
                ****
                ****
                ****Foreclosures
                    on loans
                ****
                **$**
                **405,072**
                ****
                **$**
                **2,346,671**
 The
          accompanying notes are an integral part of the consolidated financial
          statements.
 
 -28-




**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
        to Consolidated Financial Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  **Organization** - First
        Reliance Bancshares, Inc. (the Company) was incorporated to serve as a bank
        holding company for its subsidiary, First Reliance Bank (the Bank). First
        Reliance Bank was incorporated on August 9, 1999 and commenced business on
        August 16, 1999. The principal business activity of the Bank is to provide
        banking services to domestic markets, principally in Florence, Lexington,
        and
        Charleston Counties in South Carolina. The Bank is a state-chartered commercial
        Bank, and its deposits are insured by the Federal Deposit Insurance Corporation.
        The consolidated financial statements include the accounts of the parent
        company
        and its wholly-owned subsidiary after elimination of all significant
        intercompany balances and transactions. In 2005, the Company formed First
        Reliance Capital Trust I (the "Trust") for the purpose of issuing trust
        preferred securities. In accordance with current accounting guidance, the
        Trust
        is not consolidated in these financial statements.
  **Management’s
        Estimates** - The
        preparation of consolidated financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the consolidated
        financial statements and the reported amounts of revenues and expenses during
        the reporting period. Actual results could differ from those
        estimates.
  Material
        estimates that are particularly susceptible to significant change relate
        to the
        determination of the allowance for losses on loans, including valuation
        allowances for impaired loans, and the valuation of real estate acquired
        in
        connection with foreclosures or in satisfaction of loans. In connection with
        the
        determination of the allowances for losses on loans and foreclosed real estate,
        management obtains independent appraisals for significant properties. Management
        must also make estimates in determining the estimated useful lives and methods
        for depreciating premises and equipment.
 
 While
        management uses available information to recognize losses on loans and
        foreclosed real estate, future additions to the allowances may be necessary
        based on changes in local economic conditions. In addition, regulatory agencies,
        as an integral part of their examination process, periodically review the
        Company’s allowances for losses on loans and foreclosed real estate. Such
        agencies may require the Company to recognize additions to the allowances
        based
        on their judgments about information available to them at the time of their
        examinations. Because of these factors, it is reasonably possible that the
        allowances for losses on loans and foreclosed real estate may change materially
        in the near term.
 
 **Concentrations
        of Credit Risk** -
        Financial instruments, which potentially subject the Company to concentrations
        of credit risk, consist principally of loans receivable, investment securities,
        federal funds sold and amounts due from banks.
  The
        Company makes loans to individuals and small businesses for various personal
        and
        commercial purposes primarily in Florence, Lexington, Charleston and Mount
        Pleasant, South Carolina. At December 31, 2007, the majority of the total
        loan
        portfolio was to borrowers from within these areas.
  The
        Company’s loan portfolio is not concentrated in loans to any single borrower or
        a relatively small number of borrowers. Additionally, management is not aware
        of
        any concentrations of loans to groups of borrowers or industries that would
        be
        similarly affected by sector specific economic conditions.
  In
        addition to monitoring potential concentrations of loans to particular borrowers
        or groups of borrowers, industries and geographic regions, management monitors
        exposure to credit risk from concentrations of lending products and practices
        such as loans that subject borrowers to substantial payment increases (e.g.
        principal deferral periods, loans with initial interest-only periods, etc),
        and
        loans with high loan-to-value ratios. Management has determined that there
        is
        minimal concentration of credit risk associated with its lending policies
        or
        practices.
  Additionally,
        there are industry practices that could subject the Company to increased
        credit
        risk should economic conditions change over the course of a loan’s life. For
        example, the Company makes variable rate loans and fixed rate
        principal-amortizing loans with maturities prior to the loan being fully
        paid
        (i.e. balloon payment loans). These loans are underwritten and monitored
        to
        manage the associated risks. Therefore, management believes that these
        particular practices do not subject the Company to unusual credit risk.
  The
        Company’s investment portfolio consists principally of obligations of the United
        States and its agencies or its corporations. In the opinion of management,
        there
        is no concentration of credit risk in its investment portfolio. The Company
        places its deposits and correspondent accounts with and sells its federal
        funds
        to high quality institutions. Management believes credit risk associated
        with
        correspondent accounts is not significant.
  -29-
  **FIRST
          RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
          to Consolidated Financial Statements**
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
 
 **Securities
        Available-for-Sale** -
        Securities available-for-sale are carried at amortized cost and adjusted
        to
        estimated market value by recognizing the aggregate unrealized gains or losses
        in a valuation account. Aggregate market valuation adjustments are recorded
        as
        part of the comprehensive income in shareholders’ equity net of deferred income
        taxes. Reductions in market value considered by management to be other than
        temporary are reported as a realized loss and a reduction in the cost basis
        of
        the security. The adjusted cost basis of investments available-for-sale is
        determined by specific identification and is used in computing the gain or
        loss
        upon sale.
 
 **Nonmarketable
        Equity Securities** -
        Nonmarketable equity securities include the cost of the Company’s investment in
        the stock of Federal Home Loan Bank and the stock of another community bank
        holding company. The stock has no quoted market value and no ready market
        exists. Investment in the Federal Home Loan Bank is a condition of borrowing
        from the Federal Home Loan Bank, and the stock is pledged to collateralize
        such
        borrowings. At December 31, 2007, the Company’s investment in Federal Home Loan
        Bank stock was $3,930,400. Dividends received on this stock are included
        as a
        separate component of interest income.
 
 **Loans
        receivable** - Loans
        receivable are stated at their unpaid principal balance. Interest income
        is
        computed using the simple interest method and is recorded in the period
        earned.
 
 When
        serious doubt exists as to the collectibility of a loan or when a loan becomes
        contractually ninety days past due as to principal or interest, interest
        income
        is generally discontinued unless the estimated net realizable value of
        collateral exceeds the principal balance and accrued interest. When interest
        accruals are discontinued, income earned but not collected is
        reversed.
 
 Loan
        origination and commitment fees and certain direct loan origination costs
        (principally salaries and employee benefits) are deferred and amortized to
        income over the contractual life of the related loans or commitments, adjusted
        for prepayments, using the straight-line method.
 
 **Allowance
        for Loan Losses** - The
        allowance for loan losses is established as losses are estimated to have
        occurred through a provision for loan losses charged to earnings. Loan losses
        are charged against the allowance when management believes the uncollectibility
        of a loan balance is confirmed. Subsequent recoveries, if any, are credited
        to
        the allowance.
 
 The
        allowance for loan losses is evaluated on a regular basis by management and
        is
        based upon management's periodic review of the collectibility of the loans
        in
        light of historical experience, the nature and volume of the loan portfolio,
        adverse situations that may affect the borrower's ability to repay, estimated
        value of any underlying collateral and prevailing economic conditions. This
        evaluation is inherently subjective as it requires estimates that are
        susceptible to significant revision as more information becomes
        available.
 
 The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans that are classified as either doubtful, substandard
        or special mention. For such loans that are also classified as impaired,
        an
        allowance is established when the discounted cash flows (or collateral value
        or
        observable market price) of the impaired loan is lower than the carrying
        value
        of that loan. The general component covers non-classified loans and is based
        on
        historical loss experience adjusted for qualitative factors. An unallocated
        component is maintained to cover uncertainties that could affect management's
        estimate of probable losses. The unallocated component of the allowance reflects
        the margin of imprecision inherent in the underlying assumptions used in
        the
        methodologies for estimating specific and general losses in the
        portfolio.
  -30-


**FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
            to Consolidated Financial Statements**
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
  **Allowance
        for Loan Losses**  *(continued)* - A loan
        is considered impaired when, based on current information and events, it
        is
        probable that the Corporation will be unable to collect the scheduled payments
        of principal or interest when due according to the contractual terms of the
        loan
        agreement. Factors considered by management in determining impairment include
        payment status, collateral value, and the probability of collecting scheduled
        principal and interest payments when due. Loans that experience insignificant
        payment delays and payment shortfalls generally are not classified as impaired.
        Management determines the significant of payment delays and payment shortfalls
        on a case-by-case basis, taking into consideration all of the circumstances
        surrounding the loan and the borrower, including the length of the delay,
        the
        reasons for the delay, the borrower's prior payment record, and the amount
        of
        the shortfall in relation to the principal and interest owed. Impairment
        is
        measured on a loan by loan basis for commercial and construction loans by
        either
        the present value of expected future cash flows discounted at the loan's
        effective interest rate, the loan's obtainable market price, or the fair
        value
        of the collateral if the loan is collateral dependent.
 
 Large
        groups of smaller balance homogeneous loans are collectively evaluated for
        impairment. Accordingly, the Corporation does not separately identify individual
        consumer and residential loans for impairment disclosures, unless such loans
        are
        the subject of a restructuring agreement.
 
 **Residential
        Mortgages Held-For-Sale** - The
        Company’s mortgage activities are comprised of accepting residential mortgage
        loan applications, qualifying borrowers to standards established by investors,
        funding residential mortgages and selling mortgages to investors under
        pre-existing commitments. Funded residential mortgages held temporarily for
        sale
        to investors are recorded at the lower of cost or market value. Gains or
        losses
        are recognized when control over these assets has been surrendered in accordance
        with SFAS No. 140 "Accounting for Transfer and Servicing of Financial Assets
        and
        Extinguishment of Liabilities," and are included in gain on sale of mortgage
        loan in the consolidated statements of income.
 
 **Other
        Real Estate Owned** - Other
        real estate owned includes real estate acquired through foreclosure. Other
        real
        estate owned is carried at the lower of cost (principal balance at the date
        of
        foreclosure) or fair value minus estimated costs to sell. Any write-downs
        at the
        date of foreclosure are charged to the allowance for loan losses. Expenses
        to
        maintain such assets, subsequent changes in the valuation allowance, and
        gains
        and losses on disposal are included in other expenses.
 
 **Premises,
        Furniture and Equipment** -
        Premises, furniture and equipment are stated at cost, less accumulated
        depreciation. The provision for depreciation is computed by the straight-line
        method, based on the estimated useful lives for buildings of 40 years and
        furniture and equipment of 5 to 10 years. Leasehold improvements are being
        amortized over 20 years. The cost of assets sold or otherwise disposed of
        and
        the related allowance for depreciation is eliminated from the accounts and
        the
        resulting gains or losses are reflected in the income statement when incurred.
        Maintenance and repairs are charged to current expense. The costs of major
        renewals and improvements are capitalized based upon the Company's
        policy.
 
 **Cash
        Surrender Value of Life Insurance** - Cash
        surrender value of life insurance represents the cash value of policies on
        certain officers of the Bank.
 
 **Residential
        Mortgage Origination Fees** **** Residential
        mortgage origination fees include fees from residential mortgage loans
        originated by the Company and subsequently sold in the secondary market.
        These
        fees are recognized as income at the time of the sale to the
        investor.
 
 **Income
        Taxes** - Income
        taxes are the sum of amounts currently payable to taxing authorities and
        the net
        changes in income taxes payable or refundable in future years. Income taxes
        deferred to future years are determined utilizing a liability approach. This
        method gives consideration to the future tax consequences associated with
        differences between financial accounting and tax bases of certain assets
        and
        liabilities which are principally the allowance for loan losses and depreciable
        premises and equipment.
 
 In
        2006,
        the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty
        in
        Income Taxes - an Interpretation of SFAS No. 109." FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in an enterprise's
        financial statements in accordance with SFAS No. 109, "Accounting for Income
        Taxes." FIN 48 also prescribes a recognition threshold and measurement of
        a tax
        position taken or expected to be taken in an enterprise's tax return. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. Accordingly,
        the
        Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48
        did not
        have any impact on the Company's consolidated financial position.
  -31-
 **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
            to Consolidated Financial Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
 
 **Advertising
        Expense** -
        Advertising and public relations 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 expended in the period in which the direct mailings are sent.
        Advertising and public relations costs of $525,787 and $373,005 were included
        in
        the Company's results of operations for 2007 and 2006,
        respectively.
 
 **Retirement
        Benefits** - A
        trusteed retirement savings plan is sponsored by the Company and provides
        retirement benefits to substantially all officers and employees who meet
        certain
        age and service requirements. The plan includes a “salary reduction” feature
        pursuant to Section 401(k) of the Internal Revenue Code. In 2004, the Company
        converted the 401(k) plan to a 404(c) plan. The 404 (c) plan changes investment
        alternatives to include the Company's stock. Under the plan and present
        policies, participants are permitted to make contributions up to 15% of their
        annual compensation. At its discretion, the Company can make matching
        contributions up to 6% of the participants’ compensation. The Company charged
        $152,243 and $229,032 to earnings for the retirement savings plan in 2007
        and
        2006, respectively.
 
 During
        2006, the Board of Directors approved a supplemental retirement plan for
        the
        directors and certain officers. These benefits are not qualified under the
        Internal Revenue Code and they are not funded. The current accrued but unfunded
        amount is $242,837 and $151,631 at December 31, 2007 and 2006, respectively.
        However, certain funding is provided informally and indirectly by bank owned
        life insurance policies. The cash surrender value of the life insurance policies
        are recorded as a separate line item in the accompanying consolidated balances
        sheets at $10,540,273 and $10,134,036 at December 31, 2007 and 2006,
        respectively.
 
 **Equity
        Incentive Plan** - On
        January 19, 2006, the Company approved the 2006 Equity Incentive Plan. This
        plan
        provides for the granting of dividend equivalent rights, options, performance
        unit awards, phantom shares, stock appreciation rights and stock awards,
        each of
        which shall be subject to such conditions based upon continued employment,
        passage of time or satisfaction of performance criteria or other criteria
        as
        permitted by the plan. The plan allows granting up to 350,000 shares of stock,
        to officers, employees, and directors, consultants and service providers
        of the
        Company or its affiliates. Awards may be granted for a term of up to ten
        years
        from the effective date of grant. Under this Plan, our Board of Directors
        has
        sole discretion as to the exercise date of any awards granted. The per-share
        exercise price of incentive stock options may not be less than the market
        value
        of a share of common stock on the date the option is granted. Any options
        that
        expire unexercised or are canceled become available for re-issuance. The
        Company's equity incentive plan is further described in Note 16.
 
 **Stock-Based
        Compensation** - On
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
        Standards ("SFAS") No. 123(R), "Share-Based Payment," ("SFAS 123(R)") to
        account
        for compensation costs under its stock option and other equity incentive
        plans.
 
 **Common
        Stock Owned by the 401(k) Plan and Employee Stock Ownership Plan
        (ESOP)** - All
        shares held by the 401(k) and ESOP Plans, collectively referred to as the
        "404(c)," are treated as outstanding for purposes of computing earnings per
        share. 404(c) purchases and redemptions of the Company's common stock are
        at
        estimated fair value as determined by independent valuations. Dividends on
        404
        (c) shares are charged to retained earnings. At December 31, 2007, the 404
        (c)
        owned 116,227 shares of the Company’s common stock with an estimated value of
        $1,361,664. At December 31, 2006, the 404 (c) owned 107,445 shares of the
        Company's common stock with an estimated value of $1,676,142. All of these
        shares were allocated. Contributions to the 404 (c) in 2007 and 2006 were
        $152,243 and $229,032, respectively.
 
 **Earnings
        Per Share** - Basic
        earnings per share represents income available to shareholders divided by
        the
        weighted-average number of common shares outstanding during the period. Diluted
        earnings per share reflect additional common shares that would have been
        outstanding if dilutive potential common shares had been issued. Potential
        common shares that may be issued by the Company relate solely to outstanding
        stock options and are determined using the treasury stock method (see Note
        15).
 
 -32-
 **FIRST
              RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
              to Consolidated Financial Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
  **Comprehensive
        Income** -
        Accounting principles generally require that recognized income, expenses,
        gains,
        and losses be included in net income. Although certain changes in assets
        and
        liabilities, such as unrealized gains and losses on available-for-sale
        securities, are reported as a separate component of the equity section of
        the
        balance sheet, such items, along with net income, are components of
        comprehensive income.
 
 The
        components of other comprehensive income and related tax effects are as
        follows:
 **Pre-tax**
                
                **Tax**
                
                **Net-of-tax****Amount**
                
                **Benefit**
                
                **Amount****For
                    the Year Ended December 31, 2007:**Unrealized
                    losses on securities available-for-sale
                
                $
                (20,080
                )
                $
                6,828
                
                $
                (13,252
                )Reclassification
                    adjustment for gains (losses) realized in net income
                
                
                3,496
                
                
                (1,189
                )
                
                2,307**$**
                **(16,584**
                **)**
                **$**
                **5,639**
                
                **$**
                **(10,945**
                )**For
                    the Year Ended December 31, 2006:**Unrealized
                    gains on securities available-for-sale
                
                $
                184,723
                
                $
                (63,441
                )
                $
                121,282Reclassification
                    adjustment for gains (losses) realized in net income
                
                
                -
                
                
                -
                
                
                -**$**
                **184,723**
                
                **$**
                **(63,441**
                **)**
                **$**
                **121,282**
  **Derivative
        Instruments** - SFAS
        No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
        establishes comprehensive accounting and reporting standards for derivative
        instruments and hedging activities. SFAS No. 133 requires that all derivative
        instruments be recorded in the statement of financial position at fair value.
        The accounting for the gain or loss due to change in fair value of the
        derivative instrument depends on whether the derivative instrument qualifies
        as
        a hedge. If the derivative does not qualify as a hedge, the gains or losses
        are
        reported in earnings when they occur. However, if the derivative instrument
        qualifies as a hedge, the accounting varies based on the type of risk being
        hedged.
 
 The
        Company has no material embedded derivative instruments requiring separate
        accounting treatment. The Company has freestanding derivative instruments
        consisting of fixed rate conforming loan commitments and commitments to sell
        fixed rate conforming loans. The Company does not currently engage in hedging
        activities.
 
 **Statements
        of Cash Flows** - For
        purposes of reporting cash flows in the consolidated financial statements,
        the
        Company considers certain highly liquid debt instruments purchased with a
        maturity of three months or less to be cash equivalents. Cash equivalents
        include amounts due from banks and federal funds sold. Generally, federal
        funds
        are sold for one-day periods.
 
 Changes
        in the valuation account of securities available-for-sale, including the
        deferred tax effects, are considered noncash transactions for purposes of
        the
        statement of cash flows and are presented in detail in the notes to the
        consolidated financial statements.
 
 **Off-Balance-Sheet
        Financial Instruments** - In the
        ordinary course of business, the Company enters into off-balance-sheet financial
        instruments consisting of commitments to extend credit and letters of credit.
        These financial instruments are recorded in the consolidated financial
        statements when they become payable by the customer.
 
 **Recent
        Accounting Pronouncements** **-** The
        following is a summary of recent authoritative pronouncements that may affect
        accounting, reporting, and disclosure of financial information by the
        Company:
 
 In
        September 2006, the Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
        Measurements" (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
        for measuring fair value in generally accepted accounting principles, and
        expands disclosures about fair value measurements. This standard eliminates
        inconsistencies found in various prior pronouncements but does not require
        any
        new fair value measurements. SFAS 157 is effective for the Company on January
        1,
        2008 and will not impact the Company’s accounting measurements but it is
        expected to result in additional disclosures.
  -33-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
 
 **Recent
        Accounting Pronouncements**  *(continued)* - In
        September 2006, The FASB ratified the consensuses reached by the FASB’s Emerging
        Issues Task Force (“EITF”) relating to EITF 06-4, “Accounting for the Deferred
        Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
        Life
        Insurance Arrangements” (“EITF 06-4”). Entities purchase life insurance for
        various reasons including protection against loss of key employees and to
        fund
        postretirement benefits. The two most common types of life insurance
        arrangements are endorsement split dollar life and collateral assignment
        split
        dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below)
        covers
        the latter. EITF 06-4 states that entities with endorsement split-dollar
        life
        insurance arrangements that provide a benefit to an employee that extends
        to
        postretirement periods should recognize a liability for future benefits in
        accordance with SFAS No. 106, “ Employers'
        Accounting for Postretirement Benefits Other Than Pensions,” (if, in substance,
        a postretirement benefit plan exists) ** or
        Accounting Principles Board (“APB”) Opinion No. 12, “ Omnibus
        Opinion - 1967” (if the arrangement is, in substance, an individual deferred
        compensation contract). ** Entities
        should recognize the effects of applying this Issue through either (a) a
        change
        in accounting principle through a cumulative-effect adjustment to retained
        earnings or to other components of equity or net assets in the statement
        of
        financial position as of the beginning of the year of adoption or (b) a change
        in accounting principle through retrospective application to all prior periods.
        EITF 06-4 is effective for the Company on January 1, 2008. The Company does
        not
        believe the adoption of EITF 06-4 will have a material impact on its financial
        position, results of operations or cash flows.
 
 In
        September 2006, the FASB ratified the consensus reached on EITF
        06-5, ** “Accounting
        for Purchases of Life Insurance - Determining the Amount That Could Be Realized
        in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
        of
        Life Insurance” (“EITF 06-5”).  EITF 06-5 states that a policyholder should
        consider any additional amounts included in the contractual terms of the
        insurance policy other than the cash surrender value in determining the amount
        that could be realized under the insurance contract.  EITF 06-5 also states
        that a policyholder should determine the amount that could be realized under
        the
        life insurance contract assuming the surrender of an individual-life by
        individual-life policy (or certificate by certificate in a group policy).
        EITF
        06-5 is effective for the Company on January 1, 2008.  The Company does not
        believe the adoption of EITF 06-5 will have a material impact on its financial
        position, results of operations or cash flows.
 
 In
        March
        2007, the FASB ratified the consensus reached on EITF 06-10, “Accounting for
        Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”).
        The postretirement aspect of this EITF is substantially similar to EITF 06-4
        discussed above and requires that an employer recognize a liability for the
        postretirement benefit related to a collateral assignment split-dollar life
        insurance arrangement in accordance with either FASB Statement No. 106 or
        APB
        Opinion No. 12, as appropriate, if the employer has agreed to maintain a
        life
        insurance policy during the employee's retirement or provide the employee
        with a
        death benefit based on the substantive agreement with the employee. In addition,
        a consensus was reached that an employer should recognize and measure an
        asset
        based on the nature and substance of the collateral assignment split-dollar
        life
        insurance arrangement. EITF 06-10 is effective for the Company on January
        1,
        2008. The Company does not believe the adoption of EITF 06-10 will have a
        material impact on its financial position, results of operations or cash
        flows.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an amendment of FASB
        Statement No. 115” (“SFAS 159”). This statement permits, but does not require,
        entities to measure many financial instruments at fair value. The objective
        is
        to provide entities with an opportunity to mitigate volatility in reported
        earnings caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. Entities electing this
        option will apply it when the entity first recognizes an eligible instrument
        and
        will report unrealized gains and losses on such instruments in current earnings.
        This statement 1) applies to all entities, 2) specifies certain election
        dates,
        3) can be applied on an instrument-by-instrument basis with some exceptions,
        4)
        is irrevocable and 5) applies only to entire instruments. One exception is
        demand deposit liabilities which are explicitly excluded as qualifying for
        fair
        value. With respect to SFAS 115, available-for-sale and held-to-maturity
        securities at the effective date are eligible for the fair value option at
        that
        date. If the fair value option is elected for those securities at the effective
        date, cumulative unrealized gains and losses at that date shall be included
        in
        the cumulative-effect adjustment and thereafter, such securities will be
        accounted for as trading securities. SFAS 159 is effective for the Company
        on
        January 1, 2008. The Company is currently analyzing the fair value option
        that
        is permitted, but not required, under SFAS 159.
  -34-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        continued*
 
 **Recent
        Accounting Pronouncements**  *(continued)* - In
        June 2007, the FASB ratified the consensus reached by the EITF with respect
        to
        EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
        Payment Awards” (“EITF 06-11”). Under EITF 06-11, a realized income tax benefit
        from dividends or dividend equivalents that are charged to retained earnings
        and
        are paid to employees for equity-classified nonvested equity shares, nonvested
        equity share units and outstanding equity share options should be recognized
        as
        an increase in additional paid-in capital. This EITF is to be applied
        prospectively to the income tax benefits that result from dividends on
        equity-classified employee share-based payment awards that are declared
        beginning in 2008, and interim periods within those fiscal years. Early
        application is permitted. The Company does not believe the adoption of EITF
        06-11 will have a material impact on its financial position, results of
        operations or cash flows.
 
 In
        November 2007, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
        Through Earnings” (“SAB 109”). SAB 109 expresses the current view of the SEC
        staff that the expected net future cash flows related to the associated
        servicing of the loan should be included in the measurement of all written
        loan
        commitments that are accounted for at fair value through earnings.  SEC
        registrants are expected to apply this guidance on a prospective basis to
        derivative loan commitments issued or modified in the first quarter of 2008
        and
        thereafter. The Company is currently analyzing the impact of this guidance,
        which relates to the Company’s mortgage loans held for sale.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
        141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and
        requirements for how an acquirer in a business combination recognizes and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, and any controlling interest; recognizes and measures
        goodwill acquired in the business combination or a gain from a bargain purchase;
        and determines what information to disclose to enable users of the financial
        statements to evaluate the nature and financial effects of the business
        combination. SFAS 141(R) is effective for acquisitions by the Company taking
        place on or after January 1, 2009. Early adoption is prohibited. Accordingly,
        a
        calendar year-end company is required to record and disclose business
        combinations following existing accounting guidance until January 1, 2009.
        The
        Company will assess the impact of SFAS 141(R) if and when a future acquisition
        occurs.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”).
        SFAS 160 establishes new accounting and reporting standards for the
        noncontrolling interest in a subsidiary and for the deconsolidation of a
        subsidiary. Before this statement, limited guidance existed for reporting
        noncontrolling interests (minority interest). As a result, diversity in practice
        exists. In some cases minority interest is reported as a liability and in
        others
        it is reported in the mezzanine section between liabilities and equity.
        Specifically, SFAS 160 requires the recognition of a noncontrolling interest
        (minority interest) as equity in the consolidated financials statements and
        separate from the parent’s equity. The amount of net income attributable to the
        noncontrolling interest will be included in consolidated net income on the
        face
        of the income statement. SFAS 160 clarifies that changes in a parent’s ownership
        interest in a subsidiary that do not result in deconsolidation are equity
        transactions if the parent retains its controlling financial interest. In
        addition, this statement requires that a parent recognize gain or loss in
        net
        income when a subsidiary is deconsolidated. Such gain or loss will be measured
        using the fair value of the noncontrolling equity investment on the
        deconsolidation date. SFAS 160 also includes expanded disclosure requirements
        regarding the interests of the parent and its noncontrolling interests. SFAS
        160
        is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
        The Company is currently evaluating the impact, if any, the adoption of SFAS
        160
        will have on its consolidated financial statements.
 
 Other
        accounting standards that have been issued or proposed by the FASB or other
        standards-setting bodies are not expected to have a material impact on the
        Company’s financial position, results of operations or cash flows.
  -35-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  *-
        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 basis, 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.
 
 **Reclassifications** -
        Certain captions and amounts in the 2006 consolidated financial statements
        were
        reclassified to conform with the 2007 presentation.
 
 **NOTE
        2 - CASH AND DUE FROM BANKS**
 
 The
        Company is required to maintain balances with The Federal Reserve computed
        as a
        percentage of deposits. At December 31, 2007 and 2006, this requirement was
        $25,000 and $1,389,000, respectively. This requirement was met by vault cash
        and
        balances on deposit with the Federal Reserve.
 
 **NOTE
        3 - INVESTMENT SECURITIES**
 
 The
        amortized cost and estimated fair values of securities available-for-sale
        were:
 **Amortized**
                
                **Gross
                    Unrealized**
                
                **Estimated****Cost**
                
                **Gains**
                
                **Losses**
                
                **Fair
                    Value****December
                    31, 2007**Government
                    sponsored enterprises
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -U.S.
                    Government agencies
                
                
                189,745
                
                
                3,001
                
                
                -
                
                
                192,746Mortgage-backed
                    securities
                
                
                27,028,064
                
                
                152,788
                
                
                113,890
                
                
                27,066,962Municipals
                
                
                31,145,829
                
                
                181,973
                
                
                258,847
                
                
                31,068,955Other
                
                
                218,750
                
                
                32,900
                
                
                -
                
                
                251,650**$**
                **58,582,388**
                ****
                **$**
                **370,662**
                ****
                **$**
                **372,737**
                ****
                **$**
                **58,580,313****December
                    31, 2006**Government
                    sponsored enterprises
                
                $
                4,990,352
                
                $
                -
                
                $
                40,039
                
                $
                4,950,313U.S.
                    Government agencies
                
                
                380,315
                
                
                1,226
                
                
                321
                
                
                381,220Mortgage-backed
                    securities
                
                
                15,521,860
                
                
                20,151
                
                
                339,685
                
                
                15,202,326Municipals
                
                
                14,805,485
                
                
                281,449
                
                
                1,027
                
                
                15,085,907Other
                
                
                218,750
                
                
                92,755
                
                
                -
                
                
                311,505**$**
                **35,916,762**
                ****
                **$**
                **395,581**
                ****
                **$**
                **381,072**
                ****
                **$**
                **35,931,271**
                ****
  -36-
 **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
            to Consolidated Financial Statements**
  **NOTE
        3 - INVESTMENT SECURITIES** - *continued*
  The
        following is a summary of maturities of securities available-for-sale as
        of
        December 31, 2007. The amortized cost and estimated fair values are based
        on the
        contractual maturity dates. Actual maturities may differ from contractual
        maturities because borrowers may have the right to call or prepay obligations
        with or without penalty.
 **Securities****Available-For-Sale****Amortized**
                
                **Estimated****Cost**
                
                **Fair
                    Value**Due
                    within one year
                
                $
                18,426
                
                $
                18,508Due
                    after one year but within five years
                
                
                1,266,081
                
                
                1,277,045Due
                    after five years but within ten years
                
                
                1,007,693
                
                
                1,039,348Due
                    after ten years
                
                
                29,043,374
                
                
                28,926,80031,335,574
                
                
                31,261,701Mortgage-backed
                    securities
                
                
                27,028,064
                
                
                27,066,962Other
                
                
                218,750
                
                
                251,650Total
                
                **$**
                **58,582,388**
                
                **$**
                **58,580,313**
 
 The
        following table shows gross unrealized losses and fair value, aggregated
        by
        investment category, and length of time that individual securities have been
        in
        a continuous unrealized loss position, at December 31, 2007 and
        2006.
  **Securities
        Available for Sale**
 **Less
                      than****twelve
                    months**
                
                **Twelve
                      months****or
                    more**
                
                **Total****December
                    31, 2007**
                
                **Fair
                    value**
                
                **Unrealized****losses**
                
                **Fair
                    value**
                
                **Unrealized****losses**
                
                **Fair
                    value**
                
                **Unrealized****losses**Government
                      sponsoredenterprises
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -U.S.
                    government agencies
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Municipals
                
                
                10,733,254
                
                
                (258,847
                )
                
                -
                
                
                -
                
                
                10,733,254
                
                
                (258,847
                )Mortgage-backed
                    securities
                
                
                -
                
                
                -
                
                
                6,426,610
                
                
                (113,890
                )
                
                6,426,610
                
                
                (113,890
                )Total
                
                **$**
                **10,733,254**
                ****
                **$**
                **(258,847**
                **)**
                **$**
                **6,426,610**
                ****
                **$**
                **(113,890**
                **)**
                **$**
                **17,159,864**
                ****
                **$**
                **(372,737**
                **)****December
                    31, 2006**Government
                      sponsoredenterprises
                
                $
                -
                
                $
                -
                
                $
                4,950,313
                
                $
                (40,039
                )
                $
                4,950,313
                
                $
                (40,039
                )U.S.
                    government agencies
                
                
                -
                
                
                -
                
                
                69,742
                
                
                (321
                )
                
                69,742
                
                
                (321
                )Municipals
                
                
                2,035,393
                
                
                (1,027
                )
                
                -
                
                
                -
                
                
                2,035,393
                
                
                (1,027
                )Mortgage-backed
                    securities
                
                
                -
                
                
                -
                
                
                11,363,211
                
                
                (339,685
                )
                
                11,363,211
                
                
                (339,685
                )Total
                
                **$**
                **2,035,393**
                ****
                **$**
                **(1,027**
                **)**
                **$**
                **16,383,266**
                ****
                **$**
                **(380,045**
                **)**
                **$**
                **18,418,659**
                ****
                **$**
                **(381,072**
                **)**
 At
        December 31, 2007, securities classified as available-for-sale are recorded
        at
        fair market value. Approximately 30.56% of the unrealized losses, or 6
        individual securities, consisted of securities in a continuous loss position
        for
        twelve months or more. The Company has the ability and intent to hold these
        securities until such time as the value recovers or the securities mature.
        The
        Company believes, based on industry analyst reports and credit ratings, that
        the
        deterioration in value is attributable to changes in market interest rates
        and
        is not in the credit quality of the issuer and therefore, these losses are
        not
        considered other-than-temporary.
 
 As
        of
        December 31, 2007 and 2006, the par value and market value of the securities
        held by the third-party for the underlying agreements were $8,303,216 and
        $6,087,273, respectively, and $8,391,834 and $6,148,139, respectively.
 
 -37-
 
 **FIRST
          RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
          to Consolidated Financial Statements**
 
 **NOTE
        4 - LOANS RECEIVABLE**
  Major
        classifications of loans receivable are summarized as follows:
 **December
                    31,****2007**
                
                **2006**Mortgage
                    loans on real estate:Residential
                    1-4 family
                
                $
                66,259,730
                
                $
                50,844,955Multifamily
                
                
                9,822,699
                
                
                7,826,863Commercial
                
                
                195,992,305
                
                
                127,213,968Construction
                
                
                65,431,302
                
                
                64,118,098Second
                    mortgages
                
                
                4,611,341
                
                
                4,513,048Equity
                    lines of credit
                
                
                39,503,898
                
                
                27,853,374381,621,275
                
                
                282,370,306Commercial
                    and industrial
                
                
                67,771,665
                
                
                51,710,250Consumer
                
                
                11,342,435
                
                
                12,728,353Other
                
                
                7,402,315
                
                
                6,682,127Total
                    gross loans
                
                **$**
                **468,137,690**
                ****
                **$**
                **353,491,036**
  The
        Company has pledged certain loans as collateral to secure its borrowings
        from
        the Federal Home Loan Bank. The total of loans pledged was $147,655,969 at
        December 31, 2007.
 
 The
        Company identifies impaired loans through its normal internal loan review
        process. Loans on the Company’s problem loan watch list are considered
        potentially impaired loans. These loans are evaluated in determining whether
        all
        outstanding principal and interest are expected to be collected. Loans are
        not
        considered impaired if a minimal delay occurs and all amounts due including
        accrued interest at the contractual interest rate for the period of delay
        are
        expected to be collected. At December 31, 2007, impaired loans totaled
        $1,876,221 of which $1,657,607 were in nonaccrual status, and there were
        no
        specific write downs on these loans. Accrued interest related to these loans
        totaled $1,010. At December 31, 2006, impaired loans totaled $1,313,993 of
        which
        $670,650 were in nonaccrual status, and specific collected write downs on
        these
        loans totaled $189,992. Accrued interest related to these loans totaled $6,115.
        Average impaired loans at December 31, 2007 and 2006 were $903,980 and $808,286,
        respectively.
 
 Transactions
        in the allowance for loan losses are summarized below:
 **For
                    the years ended****December
                    31,****2007**
                
                **2006**Balance,
                    beginning of year
                
                $
                4,001,881
                
                $
                3,419,368Provision
                    charged to operations
                
                
                1,643,100
                
                
                1,392,491Recoveries
                    on loans previously charged-off
                
                
                81,761
                
                
                246,600Loans
                    charged-off
                
                
                (456,135
                )
                
                (1,056,578
                )Balance,
                    end of year
                
                **$**
                **5,270,607**
                
                **$**
                **4,001,881**
  There
        were $1,780,505 in loans past due ninety days or more and still accruing
        interest and $1,657,607 in loans in nonaccrual status at December 31, 2007.
        As
        of December 31, 2006, there were $463,991 in loans past due ninety days or
        more
        and still accruing interest and $670,650 in loans on nonaccrual
        status.
 
 Loans
        sold with limited recourse are 1-4 family residential mortgages originated
        by
        the Company and sold to various other financial institutions. These loans
        are
        sold with the agreement that a loan may be returned to the Company at any
        time
        in the event the Company fails to provide necessary documents related to
        the
        mortgages to the buyers, or if it makes false representations or warranties
        to
        the buyers. Loans sold under these agreements in 2007 total $146,067,873.
        The
        Company uses the same credit policies in making loans held for sale as it
        does
        for on-balance-sheet instruments.
  -38-
 **FIRST
            RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
            to Consolidated Financial Statements**
 
 **NOTE
        4 - LOANS RECEIVABLE**  *-
        continued*
 
 The
        Company is a party to financial instruments with off-balance-sheet risk in
        the
        normal course of business to meet the financing needs of its customers. These
        financial instruments consist of commitments to extend credit and standby
        letters of credit. Commitments to extend credit are agreements to lend to
        a
        customer as long as there is no violation of any condition established in
        the
        contract. Commitments generally have fixed expiration dates or other termination
        clauses and may require payment of a fee. A commitment involves, to varying
        degrees, elements of credit and interest rate risk in excess of the amount
        recognized in the balance sheet. The Company’s exposure to credit loss in the
        event of nonperformance by the other party to the instrument is represented
        by
        the contractual notional amount of the instrument. Since certain commitments
        are
        expected to expire without being drawn upon, the total commitment amounts
        do not
        necessarily represent future cash requirements. The Company uses the same
        credit
        policies in making commitments to extend credit as it does for on-balance-sheet
        instruments. Letters of credit are conditional commitments issued to guarantee
        a
        customer’s performance to a third party and have essentially the same credit
        risk as other lending facilities.
 
 Collateral
        held for commitments to extend credit and standby letters of credit varies
        but
        may include accounts receivable, inventory, property, plant, equipment, and
        income-producing commercial properties.
 
 The
        following table summarizes the Company’s off-balance-sheet financial instruments
        whose contract amounts represent credit risk:
 **December
                    31,****2007**
                
                **2006**Commitments
                    to extend credit
                
                $
                76,545,909
                
                $
                67,370,404Standby
                    letters of credit
                
                
                2,721,249
                
                
                3,543,270
 
 The
        Company originates certain fixed rate residential mortgage loans and commits
        these loans for sale. The commitments to originate fixed rate residential
        mortgage loans and the sales commitments are freestanding derivative
        instruments. The fair value of these commitments was not significant at December
        31, 2006. The Company has forward sales commitments, totaling $19.6 million
        at
        December 31, 2007 to sell loans held for sale of $19.6 million. Such forward
        sales commitments are to sell loans at par value and are generally funded
        within
        60 days. The difference in the fair value of these commitments and the
        associated loan held for sale was not significant at December 31, 2007. The
        Company has no material embedded derivative instruments requiring separate
        accounting treatment.
 
 **NOTE
        5 - PREMISES, FURNITURE AND EQUIPMENT**
 Premises,
          furniture and equipment consisted of the following:
 **December
                    31,****2007**
                
                **2006**Land
                
                $
                6,446,267
                
                $
                4,835,609Building
                
                
                6,679,702
                
                
                4,349,778Leasehold
                    improvements
                
                
                145,497
                
                
                141,517Furniture
                    and equipment
                
                
                4,367,496
                
                
                2,676,121Construction
                    in progress
                
                
                7,689,612
                
                
                4,425,102Total
                
                
                25,328,574
                
                
                16,428,127Less,
                    accumulated depreciation
                
                
                3,094,828
                
                
                2,657,992Premises
                    and equipment, net
                
                **$**
                **22,233,746**
                
                **$**
                **13,770,135**
 
 Depreciation
        expense for the years ended December 31, 2007 and 2006 amounted to $554,760
        and
        $558,262, respectively.
 
 Construction
        in process consists of renovations to the Company's corporate office and
        architect fees and site work for new branches. The total amount of renovations
        unpaid at December 31, 2007 is $109,136.
  -39-
 **FIRST
              RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
              to Consolidated Financial Statements**
 
 **NOTE
        6 - DEPOSITS**
 
 At
        December 31, 2007, the scheduled maturities of time deposits were as
        follows:
 **Maturing
                    In**
                
                **Amount**2008
                
                $
                271,389,6052009
                
                
                5,770,4212010
                
                
                1,484,9422011
                
                
                1,647,4582012
                
                
                392,887Total
                
                **$**
                **280,685,313**
 
 Included
        in total time deposits at December 31, 2007 and 2006 were brokered time deposits
        of $85,330,473 and $29,515,694, respectively.
  **NOTE
        7 - SHORT-TERM BORROWINGS**
 
 Short-term
        borrowings payable are securities sold under agreements to repurchase which
        generally mature on a one to thirty day basis. Information concerning securities
        sold under agreements to repurchase is summarized as follows:
 **For
                    the years ended****December
                    31,****2007**
                
                **2006**Balance
                    at end of the year
                
                $
                7,927,754
                
                $
                8,120,014Average
                    balance during the year
                
                
                9,127,643
                
                
                6,064,366Average
                    interest rate during the year
                
                
                4.39
                %
                
                4.27
                %Maximum
                    month-end balance during the year
                
                
                11,651,480
                
                
                8,190,397
 Under
        the
        terms of the repurchase agreement, the Company sells an interest in securities
        issued by United States Government agencies and agrees to repurchase the
        same
        securities the following business day. As of December 31, 2007 and 2006,
        the par
        value and market value of the securities held by the third-party for the
        underlying agreements were $8,303,216 and $6,087,273, respectively, and
        $8,391,834 and $6,148,139, respectively.
 
 -40-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 
 **NOTE
        8 - ADVANCES FROM FEDERAL HOME LOAN BANK**
 
 Advances
        from the Federal Home Loan Bank consisted of the following:
 **December
                    31,****Description**
                
                **Interest
                    Rate**
                
                **2007**
                
                **2006****Fixed
                    rate advances maturing:**January
                    12, 2007
                
                
                3.72
                %
                $
                -
                
                
                2,000,000April
                    9, 2007
                
                
                3.13
                %
                
                -
                
                
                1,000,000July
                    2, 2007
                
                
                3.56
                %
                
                -
                
                
                500,000December
                    19, 2007
                
                
                3.44
                %
                
                -
                
                
                1,500,000January
                    28, 2008
                
                
                4.59
                %
                
                5,000,000
                
                
                -February
                    28, 2008
                
                
                4.58
                %
                
                5,000,000
                
                
                -March
                    28, 2008
                
                
                4.57
                %
                
                5,000,000
                
                
                -April
                    8, 2008
                
                
                3.46
                %
                
                1,000,000
                
                
                1,000,000September
                    27, 2008
                
                
                4.71
                %
                
                5,000,000
                
                
                -October
                    14, 2008
                
                
                4.86
                %
                
                5,000,000
                
                
                -December
                    22, 2008
                
                
                4.14
                %
                
                5,000,000
                
                
                -March
                    09, 2008
                
                
                4.94
                %
                
                6,000,000
                
                
                -May
                    29, 2009
                
                
                4.078
                %
                
                8,000,000
                
                
                -November
                    30, 2009
                
                
                4.028
                %
                
                9,000,000
                
                
                -November
                    29, 2010
                
                
                4.11
                %
                
                8,000,000
                
                
                -**Variable
                    rate advances maturing:**March
                    19, 2009
                
                
                2.48
                %
                
                3,000,000
                
                
                3,000,000June
                    29, 2009
                
                
                5.30
                %
                
                -
                
                
                5,000,000July
                    5, 2012
                
                
                4.08
                %
                
                1,000,000
                
                
                1,000,000March
                    10, 2015
                
                
                3.44
                %
                
                -
                
                
                6,000,000**Daily
                    variable rate advances maturing:**Daily
                
                
                Variable
                
                
                3,000,000
                
                
                7,500,000**$**
                **69,000,000**
                ****
                **$**
                **28,500,000**
 Scheduled
        principal reductions of Federal Home Loan Bank advances are as
        follows:
 **Amount**2008
                
                $
                40,000,0002009
                
                
                20,000,0002010
                
                
                8,000,0002011
                
                
                -2012
                
                
                1,000,000Total
                
                **$**
                **69,000,000**
 
 -41-
 **FIRST
              RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
              to Consolidated Financial Statements**
 
 **NOTE
        9 -** **JUNIOR
        SUBORDINATED DEBENTURES AND TRUST PREFERRED**
 
 On
        June
        30, 2005 the Company formed First Reliance Capital Trust I (the “Trust”) for the
        purpose of issuing trust preferred securities, which enable the Company to
        obtain Tier 1 capital on a consolidated basis for regulatory purposes. On
        July
        1, 2005, the Company closed a private offering of $10,000,000 of floating
        rate
        preferred securities offered and sold by the Trust. The proceeds from such
        issuance, together with the proceeds from a related issuance of common
        securities of the Trust purchased by the Company in the amount of $310,000,
        were
        invested by the Trust in floating rate Junior Subordinated Debentures issued
        by
        the Company (the “Debentures”) totaling $10,310,000. The Debentures are due and
        payable on November 23, 2035 and may be redeemed by the Company after five
        years, and sooner in certain specific events, including in the event that
        certain circumstances render the Debentures ineligible for treatment as Tier
        1
        capital, subject to prior approval by the Federal Reserve Board, if then
        required. The Debentures presently qualify as Tier 1 capital for regulatory
        reporting. The sole assets of the Trust are the Debentures. The Company owns
        100% of the common securities of the Trust. The Debentures are unsecured
        and
        rank junior to all senior debt of the Company. At December 31, 2007, the
        floating rate preferred securities and the Debentures had an annual interest
        rate of 5.93%. This interest rate is fixed until August 23, 2010, when the
        interest rate will adjust quarterly. After August 23, 2010, the interest
        rate
        will equal three-month LIBOR plus 1.83%.
 
 On
        December 28, 2007 the Company borrowed 3,000,000, which was injected into
        the
        Bank as permanent capital. The debt is unsecured and has a fixed interest
        rate
        of 6.00%, and is due and payable on December 28, 2008.
 
 **NOTE
        10 - RESTRICTIONS ON SHAREHOLDERS’ EQUITY**
 
 South
        Carolina banking regulations restrict the amount of dividends that can be
        paid
        to shareholders. All of the Bank’s dividends to First Reliance Bancshares, Inc.
        are payable only from the undivided profits of the Bank. At December 31,
        2007,
        the Bank had undivided profits of $12,397,058. The Bank is authorized to
        upstream 100% of net income in any calendar year without obtaining the prior
        approval of the Commissioner of Banking provided that the Bank received a
        composite rating of one or two at the last Federal or State regulatory
        examination. Under Federal Reserve Board regulations, the amounts of loans
        or
        advances from the Bank to the parent company are also restricted.
  **NOTE
        11 - OTHER OPERATING EXPENSE**
 
 Other
        operating expenses are summarized below:
 **For
                    the years ended****December
                    31,****2007**
                
                **2006**Professional
                    fees
                
                $
                634,214
                
                $
                470,927Office
                    supplies, forms, and stationery
                
                
                327,537
                
                
                275,028Advertising
                
                
                525,787
                
                
                373,005Employee
                    education and conventions
                
                
                53,282
                
                
                65,239Computer
                    supplies and software amortization
                
                
                493,674
                
                
                441,276Telephone
                
                
                315,201
                
                
                197,085Directors
                    fees
                
                
                175,309
                
                
                172,426Other
                
                
                3,579,944
                
                
                2,931,849Total
                
                **$**
                **6,104,948**
                ****
                **$**
                **4,926,835**
  -42-
  **FIRST
              RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
              to Consolidated Financial Statements**
 **NOTE
        12 - INCOME TAXES**
 
 Income
        tax expense is summarized as follows:
 **For
                    the years ended****December
                    31,****2007**
                
                **2006**Currently
                    payableFederal
                
                $
                1,534,994
                
                $
                1,294,202State
                
                
                117,553
                
                
                164,735Total
                    current
                
                
                1,652,547
                
                
                1,458,937Deferred
                    income taxes
                
                
                (413,004
                )
                
                (212,700
                )Total
                    income tax expense
                
                **$**
                **1,239,543**
                ****
                **$**
                **1,246,237**Income
                    tax expense is allocated as follows:To
                    continuing operations
                
                $
                1,245,182
                
                $
                1,182,796To
                    shareholders' equity
                
                
                (5,639
                )
                
                63,441**$**
                **1,239,543**
                ****
                **$**
                **1,246,237**
 The
        components of deferred tax assets and deferred tax liabilities are as
        follows:
 **December
                    31,****2007**
                
                **2006**Deferred
                    tax assets:Allowance
                    for loan losses
                
                $
                1,532,913
                
                $
                1,072,758Organizational
                    costs
                
                
                -
                
                
                1,202Non-accrual
                    interest
                
                
                44,936
                
                
                44,645Unrealized
                    loss on securities available for sale
                
                
                705
                
                
                -Deferred
                    compensation
                
                
                122,868
                
                
                51,555Other
                
                
                42,913
                
                
                86,410Total
                    gross deferred tax assets
                
                
                1,744,335
                
                
                1,256,570Deferred
                    tax liabilities:Accumulated
                    depreciation
                
                
                159,140
                
                
                106,937Prepaid
                    expenses
                
                
                88,657
                
                
                67,603Other
                
                
                60,098
                
                
                58,594Total
                    gross deferred tax liabilities
                
                
                307,895
                
                
                233,134Net
                    deferred tax asset recognized
                
                **$**
                **1,436,440**
                
                **$**
                **1,023,436**
  Deferred
        tax assets represent the future tax benefit of deductible differences and,
        if it
        is more likely than not that a tax asset will not be realized, a valuation
        allowance is required to reduce the recorded deferred tax assets to net
        realizable value. As of December 31, 2007, management has determined that
        it is
        more likely than not that the total deferred tax asset will be realized and,
        accordingly, has not established a valuation allowance. Net deferred tax
        assets
        are included in other assets at December 31, 2007 and 2006.
  -43-
  **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 **NOTE
        12 - INCOME TAXES** - *continued*
 
 A
        reconciliation between the income tax expense and the amount computed by
        applying the federal statutory rate of 34% to income before income taxes
        follows:
 **For
                    the years ended****December
                    31,****2007**
                
                **2006**Tax
                    expense at statutory rate
                
                $
                1,293,599
                
                $
                1,505,759State
                    income tax, net of federal income tax benefit
                
                
                77,585
                
                
                108,725Tax-exempt
                    interest income
                
                
                (265,265
                )
                
                (217,501
                )Disallowed
                    interest expense
                
                
                43,884
                
                
                31,004Life
                    insurance surrender value
                
                
                (138,121
                )
                
                (129,836
                )Other,
                    net
                
                
                233,500
                
                
                (115,355
                )**$**
                **1,245,182**
                
                **$**
                **1,182,796**
 The
        Company had analyzed the tax positions taken or expected to be taken in an
        its
        tax returns and concluded it has no liability related to uncertain tax positions
        in accordance with FIN 48.
 
 **NOTE
        13 - RELATED PARTY TRANSACTIONS**
 
 Certain
        parties (principally certain directors and executive officers of the Company,
        their immediate families and business interests) were loan customers of and
        had
        other transactions in the normal course of business with the Company. Related
        party loans are made on substantially the same terms, including interest
        rates
        and collateral, as those prevailing at the time for comparable transactions
        with
        unrelated persons and do not involve more than the normal risk of
        collectibility. As of December 31, 2007 and 2006, the Company had related
        party
        loans totaling $3,433,523 and $2,929,127, respectively. During 2007, $1,335,425
        of advances were made to related parties and repayments totaled $831,029.
        As of
        December 31, 2007, all related party loans were current.
 
 Deposits
        from directors and executive officers and their related interests totaled
        $4,591,514 and $4,324,992 at December 31, 2007 and 2006,
        respectively.
 
 During
        2005, the Company entered into a lease agreement with SP Financial LLC (the
        LLC), a limited liability company owned 50% each by two of the Bank's executive
        officers. The LLC obtained third party financing to purchase the property
        which
        is leased to the Bank. The debt related to this property is guaranteed by
        these
        officers but not by the Company. Additionally, the Company has no investment
        risk related to the property, and has a valid lease agreement which will
        remain
        in place even if an ownership transfer occurs. For these reasons the LLC
        is not
        considered a Variable Interest Entity under FIN 46(R), and its financial
        statements have not been consolidated with the Company’s. The lease has an
        initial five year term and is included in the total future rental payments
        discussed in Note 14. Total lease and tax payments to the LLC for December
        31,
        2007 and 2006 were $288,000 and $305,147.
  **NOTE
        14 - COMMITMENTS AND CONTINGENCIES**
 
 In
        the
        ordinary course of business, the Company may, from time to time, become a
        party
        to legal claims and disputes. At December 31, 2007, management and legal
        counsel
        are not aware of any pending or threatened litigation or unasserted claims
        or
        assessments that could result in losses, if any, that would be material to
        the
        consolidated financial statements.
 
 The
        Company has entered into eight separate lease agreements for properties in
        West
        Columbia, Columbia, Florence, Charleston, Mount Pleasant and Lexington, South
        Carolina for branch banking and mortgage operations. The leases have various
        initial terms and expire on various dates. The lease agreements generally
        provide that the Bank is responsible for ongoing repairs and maintenance,
        insurance and real estate taxes. The leases also provide for renewal options
        and
        certain scheduled increases in monthly lease payments. Rental expenses recorded
        under leases for the years ended December 31, 2007 and 2006 were $645,353
        and
        $528,230, respectively.
  -44-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial
                Statements**
 
 **NOTE
        14 - COMMITMENTS AND CONTINGENCIES** - *continued*
 
 The
        minimal future rental payments under non-cancelable operating leases having
        remaining terms in excess of one year, for each of the next five years in
        the
        aggregate are:
 2008
                
                $
                686,4262009
                
                
                659,5672010
                
                
                638,9002011
                
                
                617,2532012
                    and thereafter
                
                
                13,620,503**$**
                **16,222,649**
 **NOTE
        15 - EARNINGS PER SHARE**
 
 Earnings
        per share - basic is computed by dividing net income by the weighted average
        number of common shares outstanding. Earnings per share - diluted is computed
        by
        dividing net income by the weighted average number of common shares outstanding
        and dilutive common share equivalents using the treasury stock method. Dilutive
        common share equivalents include common shares issuable upon exercise of
        outstanding stock options.
 **For
                    the years ended****December
                    31,****2007**
                
                **2006****Basic
                    earnings per share:**Net
                    income available to common shareholders
                
                **$**
                **2,559,520**
                ****
                **$**
                **3,245,908**Average
                    common shares outstanding - basic
                
                
                **3,466,008**
                
                
                **3,388,457**Basic
                    earnings per share
                
                **$**
                **0.74**
                ****
                **$**
                **0.96****Diluted
                    earnings per share:**Net
                    income available to common shareholders
                
                **$**
                **2,559,520**
                ****
                **$**
                **3,245,908**Average
                    common shares outstanding - basic
                
                
                3,466,008
                
                
                3,388,457Incremental
                    shares from assumed conversionof
                    stock options
                
                
                70,953
                
                
                171,100Average
                    common shares outstanding - diluted
                
                
                **3,536,961**
                
                
                **3,559,557**Diluted
                    earnings per share
                
                **$**
                **0.72**
                ****
                **$**
                **0.91**
  **NOTE
        16 - EQUITY INCENTIVE PLAN**
 
 The
        2006
        Equity Incentive Plan provides for the granting of dividend equivalent rights
        options, performance unit awards, phantom shares, stock appreciation rights
        and
        stock awards, each of which shall be subject to such conditions based upon
        continued employment, passage of time or satisfaction of performance criteria
        or
        other criteria as permitted by the plan. The plan allows granting up to 350,000
        shares of stock, to officers, employees, and directors, consultants and service
        providers of the Company or its affiliates. Awards may be granted for a term
        of
        up to ten years from the effective date of grant. Under this Plan, our Board
        of
        Directors has sole discretion as to the exercise date of any awards granted.
        The
        per-share exercise price of incentive stock awards may not be less than the
        market value of a share of common stock on the date the award is granted.
        Any
        awards that expire unexercised or are canceled become available for re-issuance
 
 The
        Company can issue the restricted shares as of the grant date either by the
        issuance of share certificate(s) evidencing restricted shares or by documenting
        the issuance in uncertificated or book entry form on the Company's stock
        records. Except as provided by the Plan, the employee does not have the right
        to
        make or permit to exist any transfer or hypothecation of any restricted shares.
        When restricted shares vest the employee must either pay the Company within
        two
        business days the amount of all tax withholding obligations imposed on the
        Company or make an election pursuant to Section 83(b) of the Internal Revenue
        Code to pay taxes at grant date.
  -45-
 **FIRST
                  RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                  to Consolidated Financial Statements**
 **NOTE
        16 - EQUITY INCENTIVE PLAN** - *continued*
 
 Restricted
        shares may be subject to one or more objective employment, performance or
        other
        forfeiture conditions as established by the Plan Committee at the time of
        grant.
        Any shares of restricted stock that are forfeited will again become available
        for issuance under the Plan. An employee or director has the right to vote
        the
        shares of restricted stock after grant until they are forfeited or vested.
        Compensation cost for restricted stock is equal to the market value of the
        shares at the date of the award and is amortized to compensation expense
        over
        the vesting period. Dividends, if any, will be paid on awarded but unvested
        stock.
 
 During
        2007 we issued 12,987 shares of restricted stock pursuant to the 2006 Equity
        Incentive Plan. The shares cliff vest in three years and are fully vested
        on
        January 19, 2010. The weighted-average market value of restricted stock issued
        during 2007 was $13.99. Total compensation cost associated with this issuance
        was $178,574 for the year ended December 31, 2007, of which there was $42,747
        compensation expense recognized in 2007 and $135,827 of total unrecognized
        compensation cost related to nonvested share based compensation. The remaining
        cost is expected to be recognized over a weighted-average period of 2.25
        years.
        During 2007 there were 1,287 restricted shares forfeited with a weighted-average
        exercise price of $14.91 and 2,276 restricted shares exercised with a
        weighted-average exercise price of $14.86.
 
 During
        2007 we also granted 62,481 Stock Appreciation Rights ("SARs") under the
        2006
        Equity Incentive Plan. The SARs entitle the participant to receive the excess
        of
        (1) the market value of a specified or determinable number of shares of the
        stock at the exercise date over the fair value at grant date or (2) a specified
        or determinable price which may not in any event be less than the fair market
        value of the stock at the time of the award. Upon exercise, the Company can
        elect to settle the awards using either Company stock or cash. The compensation
        costs are classified as liabilities. The shares start vesting after five
        years
        and vest at 20% per year until fully vested.
  A
          summary
          of the status of the Company's SARs as of December 31, 2007 is presented
          below:
 **Weighted-****Average****Exercise****Shares**
                
                **Price**Outstanding
                    at January 1
                
                
                45,501
                
                $
                14.87Granted
                
                
                62,481
                
                
                15.00Exercised
                
                
                -Forfeited
                
                
                (14,001
                )
                
                14.94Outstanding
                    at December 31, 2007
                
                
                **93,981**
                
                
                **14.95**
  At
          December 31, 2007, we had 235,044 stock awards available for grant under
          the
          2006 Equity Incentive Plan.
 **Weighted-Average****Exercise****Shares**
                
                **Price**Outstanding
                    at January 1
                
                
                -
                
                $
                -Granted
                
                
                45,774
                
                
                14.87Exercised
                
                
                -
                
                
                -Forfeited
                
                
                (273
                )
                
                14.85Outstanding
                    at December 31, 2006
                
                
                **45,501**
                
                
                **14.87**
  -46-
 **FIRST
                RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
  **Notes
                to Consolidated Financial Statements**
 **NOTE
          16 - EQUITY INCENTIVE PLAN** - *continued*
 
 The
          Company measures compensation cost based on the fair value of SARs awards
          on the
          date of grant using the Black-Scholes option pricing model using the following
          assumptions: the risk-free interest rate is based on the U.S. Treasury
          yield
          curve in effect at the time of the grant; the dividend yield is based on
          the
          Company's dividend yield at the time of the grant subject to adjustment
          if the
          dividend yield on the grant date is not expected to approximate the dividend
          yield over the expected life of the options; the volatility factor is based
          on
          the historical volatility of the Company's stock (subject to adjustment
          if
          historical volatility is reasonably expected to differ from the past);
          the
          weighted-average expected life is based on the historical behavior of employees
          related to exercises, forfeitures and cancellations. These assumptions
          are
          summarized in the table following:
 
 In
          calculating the pro forma disclosures for 2005, and the stock appreciation
          rights granted in 2007, and 2006, the fair value of options granted is
          estimated
          as of the date granted using the Black-Scholes option pricing model with
          the
          following weighted-average assumptions:
 **2007**
                  
                  **2006**Dividend
                      yield
                  
                  
                  0.00
                  %
                  
                  0.00
                  %Expected
                      volatility
                  
                  
                  26.00
                  %
                  
                  20.0
                  %Risk-free
                      interest rate
                  
                  
                  4.78
                  %
                  
                  4.38
                  %Expected
                      life
                  
                  
                  10
                      years
                  
                  
                  10
                      years
  Compensation
          expense associated with the SARs grant was $43,397 for the year ended December
          31, 2007. The grant date per share weighted average fair value of the SARs
          granted during 2007 was $15.00. As of December 31, 2007, there was $411,207
          of
          total unrecognized compensation cost related to nonvested SARs. The cost
          is
          expected to be recognized over a weighted-average period of 9.06
          years.
 
 **NOTE
          17 - STOCK COMPENSATION PLAN**
 
 On
          June
          19, 2003, the Company established the 2003 First Reliance Bank Employee
          Stock
          Option Plan (Stock Plan) that provides for the granting of options to purchase
          up to 250,000 shares of the Company’s common stock to directors, officers, or
          employees of the Company. This plan was preceded by the 1999 First Reliance
          Bank
          Employee Stock Option Plan, which provided for the granting of options
          to
          purchase up to 238,000 shares of the Company’s common stock to directors,
          officers, or employees of the Company. The per-share exercise price of
          incentive
          stock options granted under the Stock Plan may not be less than the fair
          market
          value of a share on the date of grant. The per-share exercise price of
          stock
          options granted is determined by the Board of Directors. The expiration
          date of
          any option may not be greater than ten years from the date of grant. Options
          that expire unexercised or are canceled become available for reissuance.
          At
          December 31, 2007, there were no options available for grant under the
          2003 plan
          and no options available for grant under the 1999 plan. In 2005, the Company
          accelerated vesting of all options outstanding at the end of that
          year.
 
 The
          decision to accelerate vesting in 2005 of the 2003 plan-related options
          avoided
          recognition of pre-tax compensation expense by the Company upon the adoption
          of
          SFAS 123(R). In the Company’s view, the future compensation expense could
          outweigh the incentive and retention value associated with the stock options.
          The future pre-tax compensation expense that was or will be avoided, based
          upon
          the effective date of January 1, 2006, is approximately $419,263 and $108,981
          in
          fiscal years 2006 and 2007, respectively. The Company believes that the
          acceleration of vesting stock options meets the criteria for variable accounting
          under FIN No. 44. Based upon past experience, the Company believes the
          grantees
          of these stock options will remain as an employee of the Company.
  -47-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**


**NOTE
      17 - STOCK COMPENSATION PLAN** - *continued*





A
      summary
      of the status of the Company’s 2003 stock option plan as of December 31, 2007
      and 2006, and changes during the period is presented below:


**2007**
              
              **2006****Weighted-**
              
              
              
              **Weighted-****Average**
              
              
              
              **Average****Exercise**
              
              
              
              **Exercise****Shares**
              
              **Price**
              
              **Shares**
              
              **Price**Outstanding
                  at beginning of year
              
              
              321,992
              
              $
              7.95
              
              
              400,363
              
              $
              7.75Granted
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (43,145
              )
              
              5.56
              
              
              (78,371
              )
              
              6.94Forfeited
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              
              
              
              -Outstanding
                  at end of year
              
              
              **278,847**
              
              
              8.32
              
              
              **321,992**
              
              
              **7.95**




The
      total
      intrinsic value of options exercised during December 31, 2007 and 2006 was
      $375,627 and $678,693, respectively.





The
      following table summarizes information about stock options outstanding under
      the
      Company’s plan at December 31, 2007:


**Outstanding**
              
              **Exercisable**Number
                  of options
              
              
              278,847
              
              
              278,846Weighted
                  average remaining life
              
              
              4.99
              
              
              4.99Weighted
                  average exercise price
              
              $
              8.32
              
              $
              8.32




The
      aggregate intrinsic value of options outstanding at December 31, 2007 was
      $731,057.





The
      Company measures the fair value of each option award on the date of grant using
      the Black-Scholes option pricing model with the following assumptions: the
      risk-free interest rate is based on the U.S. Treasury yield curve in effect
      at
      the time of the grant; the dividend yield is based on the Company's dividend
      yield at the time of the grant (subject to adjustment if the dividend yield
      on
      the grant date is not expected to approximate the dividend yield over the
      expected life of the options); the volatility factor is based on the historical
      volatility of the Company's stock (subject to adjustment if historical
      volatility is reasonably expected to differ from the past); the weighted-average
      expected life is based on the historical behavior of employees related to
      exercises, forfeitures and cancellations. These assumptions are summarized
      in a
      table appearing in Note 16 to these financial statements.





No
      stock
      options have been granted since June 2005. The Company received $239,746 and
      $544,138 as a result of stock option exercises during the years ended December
      31, 2007 and 2006, respectively. In accordance with SFAS 123(R), the amounts
      received upon exercise will be included as a financing activity in the
      accompanying statements of cash flows for the period subsequent to the adoption
      of SFAS 123(R), and is reported as an operating activity in periods prior to
      its
      adoption.





**NOTE
      18 - REGULATORY MATTERS**





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




-48-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**




**NOTE
      18 - REGULATORY MATTERS** - *continued*





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum ratios (set forth in the table below)
      of Tier 1 and total capital as a percentage of assets and off-balance-sheet
      exposures, adjusted for risk-weights ranging from 0% to 100%. Tier 1 capital
      of
      the Company and the Bank consists of common shareholders’ equity, excluding the
      unrealized gain or loss on securities available-for-sale, minus certain
      intangible assets. Tier 2 capital consists of the allowance for loan losses
      subject to certain limitations. Total capital for purposes of computing the
      capital ratios consists of the sum of Tier 1 and Tier 2 capital.





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





As
      of the
      most recent regulatory examination, the Bank was deemed well-capitalized under
      the regulatory framework for prompt corrective action. To be categorized well
      capitalized, the Bank must maintain total risk-based, Tier 1 risk-based, and
      Tier 1 leverage ratios as set forth in the table below. There are no conditions
      or events that management believes have changed the Bank’s
      categories.





The
      following table summarizes the capital amounts and ratios of the Company and
      the
      Bank and the regulatory minimum requirements.


**To
                  Be Well-****Minimum
                  Requirement**
              
              **Capitalized
                  Under****For
                  Capital**
              
              **Prompt
                    Corrective****Actual**
              
              **Adequacy
                  Purposes**
              
              **Action
                  Provisions***(Dollars
                  in thousands)*
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****December
                  31, 2007****The
                  Company**Total
                  capital (to risk-weighted assets)
              
              $
              52,586
              
              
              10.29
              %
              $
              40,883
              
              
              8.00
              %
              
              N/A
              
              
              N/ATier
                  1 capital (to risk-weighted assets)
              
              
              47,315
              
              
              9.26
              %
              
              20,438
              
              
              4.00
              %
              
              N/A
              
              
              N/ATier
                  1 capital (to average assets)
              
              
              47,315
              
              
              9.46
              %
              
              20,006
              
              
              4.00
              %
              
              N/A
              
              
              N/A**The
                  Bank**Total
                  capital (to risk-weighted assets)
              
              $
              53,824
              
              
              10.53
              %
              $
              40,877
              
              
              8.00
              %
              $
              51,096
              
              
              10.00
              %Tier
                  1 capital (to risk-weighted assets)
              
              
              48,554
              
              
              9.50
              %
              
              20,438
              
              
              4.00
              %
              
              30,658
              
              
              6.00
              %Tier
                  1 capital (to average assets)
              
              
              48,554
              
              
              8.85
              %
              
              21,945
              
              
              4.00
              %
              
              27,445
              
              
              5.00
              %**December
                  31, 2006****The
                  Company**Total
                  capital (to risk-weighted assets)
              
              $
              48,458
              
              
              12.45
              %
              $
              31,149
              
              
              8.00
              %
              
              N/A
              
              
              N/ATier
                  1 capital (to risk-weighted assets)
              
              
              44,456
              
              
              11.42
              %
              
              15,575
              
              
              4.00
              %
              
              N/A
              
              
              N/ATier
                  1 capital (to average assets)
              
              
              44,456
              
              
              9.90
              %
              
              17,968
              
              
              4.00
              %
              
              N/A
              
              
              N/A**The
                  Bank**Total
                  capital (to risk-weighted assets)
              
              $
              46,444
              
              
              11.86
              %
              
              4
                  31,333
              
              
              8.00
              %
              $
              39,166
              
              
              10.00
              %Tier
                  1 capital (to risk-weighted assets)
              
              
              42,442
              
              
              10.84
              %
              
              15,666
              
              
              4.00
              %
              
              23,500
              
              
              6.00
              %Tier
                  1 capital (to average assets)
              
              
              42,442
              
              
              9.45
              %
              
              17,968
              
              
              4.00
              %
              
              22,460
              
              
              5.00
              %




**NOTE
      19 - UNUSED LINES OF CREDIT**





As
      of
      December 31, 2007, the Company had unused lines of credit to purchase federal
      funds from unrelated companies totaling $37,000,000. These lines of credit
      are
      available on a one to fourteen day basis for general corporate purposes. The
      Company also has a line of credit to borrow funds from the Federal Home Loan
      Bank of up to $177,511,264. As of December 31, 2007 and 2006, the Company had
      borrowed $69,000,000 and $28,500,000, respectively, on this line. Additionally,
      the Company has the ability to buy brokered time deposits at December 31,
      2007.




-49-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**




**NOTE
      20 - FAIR VALUE OF FINANCIAL INSTRUMENTS**





The
      fair
      value of a financial instrument is the amount for which the asset or obligation
      could be exchanged in a current transaction between willing parties, other
      than
      in a forced or liquidation sale. Fair value estimates are made at a specific
      point in time based on relevant market information and information about the
      financial instruments. Because no market value exists for a significant portion
      of the financial instruments, fair value estimates are based on judgments
      regarding future expected loss experience, current economic conditions, risk
      characteristics of various financial instruments, and other
      factors.





The
      following methods and assumptions were used to estimate the fair value of
      significant financial instruments:




***Cash
      and Due from Banks*** **** -
      The
      carrying amount is a reasonable estimate of fair value.




***Federal
      Funds Sold and Purchased*** **** -
      Federal
      funds sold and purchased are for a term of one day and the carrying amount
      approximates the fair value.





***Securities
      Available-for-Sale*** **** -
      Fair
      value equals the carrying amount which is the quoted market price. If quoted
      market prices are not available, fair values are based on quoted market prices
      of comparable securities.





***Nonmarketable
      Equity Securities -*** The
      carrying amount of nonmarketable equity securities is a reasonable estimate
      of
      fair value since no ready market exists for these securities.





***Loans
      Held-for-Sale*** - The
      carrying amount of loans held for sale is a reasonable estimate of fair
      value.





***Loans
      Receivable*** **** -
      For
      certain categories of loans, such as variable rate loans which are repriced
      frequently and have no significant change in credit risk and credit card
      receivables, fair values are based on the carrying amounts. The fair value
      of
      other types of loans is estimated by discounting the future cash flows using
      the
      current rates at which similar loans would be made to the borrowers with similar
      credit ratings and for the same remaining maturities.





***Deposits*** **** -
      The
      fair value of demand deposits, savings, and money market accounts is the amount
      payable on demand at the reporting date. The fair values of certificates of
      deposit are estimated using a discounted cash flow calculation that applies
      current interest rates to a schedule of aggregated expected
      maturities.





***Securities
      Sold Under Agreements to Repurchase*** **** -
      The
      carrying amount is a reasonable estimate of fair value because these instruments
      typically have terms of one day.





***Advances
      From Federal Home Loan Bank*** *-* The
      fair
      values of fixed rate borrowings are estimated using a discounted cash flow
      calculation that applies the Company’s current borrowing rate from the Federal
      Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable
      estimates of fair value because they can be repriced frequently.





***Junior
      Subordinated Debentures*** - The
      carrying value of junior subordinated debentures approximates its fair value
      since the debentures were issued at a floating rate.





***Accrued
      Interest Receivable and Payable*** **** -
      The
      carrying value of these instruments is a reasonable estimate of fair
      value.





***Off-Balance-Sheet
      Financial 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.




-50-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**




**NOTE
      20 - FAIR VALUE OF FINANCIAL INSTRUMENTS** - *continued*





The
      carrying values and estimated fair values of the Company’s financial instruments
      were as follows:


**December
                  31,****2007**
              
              **2006****Carrying**
              
              **Estimated
                  Fair**
              
              **Carrying**
              
              **Estimated
                  Fair****Amount**
              
              **Value**
              
              **Amount**
              
              **Value****Financial
                  Assets:**Cash
                  and due from banks
              
              $
              7,164,650
              
              $
              7,164,650
              
              $
              17,328,075
              
              $
              17,328,075Federal
                  funds sold
              
              
              -
              
              
              -
              
              
              14,135,000
              
              
              14,135,000Securities
                  available-for-sale
              
              
              58,580,313
              
              
              58,580,313
              
              
              35,931,271
              
              
              35,931,271Nonmarketable
                  equity securities
              
              
              3,930,400
              
              
              3,930,400
              
              
              2,187,600
              
              
              2,187,600Loans,
                  including loans held for sale
              
              
              487,738,540
              
              
              481,470,000
              
              
              360,123,046
              
              
              350,547,000Accrued
                  interest receivable
              
              
              3,092,767
              
              
              3,092,767
              
              
              2,464,531
              
              
              2,464,531**Financial
                  Liabilities:**Demand
                  deposit, interest-bearingtransaction,
                  and savings accounts
              
              $
              168,812,402
              
              $
              168,812,402
              
              $
              154,182,263
              
              $
              154,182,263Certificates
                  of deposit
              
              
              280,685,313
              
              
              280,593,000
              
              
              218,755,820
              
              
              219,450,000Securities
                    sold under agreements to repurchase
              
              
              7,927,754
              
              
              7,927,754
              
              
              8,120,014
              
              
              8,120,014Advances
                    from Federal Home Loan Bank
              
              
              69,000,000
              
              
              69,000,000
              
              
              28,500,000
              
              
              28,465,000Federal
                  Funds Purchased
              
              
              13,359,000
              
              
              13,359,000
              
              
              -
              
              
              -Note
                  payable
              
              
              3,000,000
              
              
              3,000,000
              
              
              -
              
              
              -Junior
                  subordinated debentures
              
              
              10,310,000
              
              
              10,310,000
              
              
              10,310,000
              
              
              10,310,000Accrued
                  interest payable
              
              
              767,577
              
              
              767,577
              
              
              766,276
              
              
              766,276
  **Notional**
              
              
              **Estimated
                  Fair**
              
              
              **Notional**
              
              
              **Estimated
                  Fair****Amount**
              
              
              **Value**
              
              
              **Amount**
              
              
              **Value****Off-Balance-Sheet
                  Financial Instruments:**Commitments
                  to extend credit
              
              $
              76,545,909
              
              $
              -
              
              $
              67,370,404
              
              $
              -Standby
                  letters of credit
              
              
              2,721,249
              
              
              -
              
              
              3,543,270
              
              
              -





**NOTE
      21 - SUBSEQUENT EVENTS**





On
      November 10, 2007, the Bank entered into a contract to purchase approximately
      1.37 acres of land located in North Charleston, South Carolina. The purchase
      price for the property was $1,400,000. The contract included an inspection
      period of ninety days from the effective date in which the Banj had the right
      to
      terminate the contract. The purchase of this property closed on March 10,
      2008.




-51-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**


**NOTE
      22 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY
      ONLY)**




**Condensed
        Balance Sheets**


**December
                  31,****2007**
              
              **2006****Assets**Cash
              
              $
              665,117
              
              $
              923,308Investment
                  in banking subsidiary
              
              
              48,530,277
              
              
              42,389,421Marketable
                  Investments
              
              
              251,650
              
              
              311,505Nonmarketable
                  equity securities
              
              
              -
              
              
              100,000Investment
                  in trust
              
              
              310,000
              
              
              310,000Other
                  assets
              
              
              773,761
              
              
              499,301Total
                  assets
              
              **$**
              **50,530,805**
              
              **$**
              **44,533,535****Liabilities**Accounts
                  payable
              
              $
              192,901
              
              $
              130,272Note
                  payable
              
              
              3,000,000
              
              
              -Junior
                  subordinated debentures
              
              
              10,310,000
              
              
              10,310,000Total
                  liabilities
              
              
              13,502,901
              
              
              10,440,272**Shareholders’
                  equity**
              
              
              37,027,904
              
              
              34,093,263Total
                  liabilities and shareholders’ equity
              
              **$**
              **50,530,805**
              
              **$**
              **44,533,535**


**Condensed
        Statements of Income**


**December
                  31,****2007**
              
              **2006****Income**
              
              $
              21,533
              
              $
              24,623**Expenses**
              
              
              850,585
              
              
              755,001**Loss
                  before income taxes and equity in undistributed earnings of banking
                  subsidiary**
              
              
              (829,052
              )
              
              (730,378
              )Income
                  tax benefit
              
              
              276,275
              
              
              315,501Income
                  before equity in undistributed earning of banking
                  subsidiary
              
              
              (552,777
              )
              
              (414,877
              )Equity
                  in undistributed earnings of banking subsidiary
              
              
              3,112,297
              
              
              3,660,785**Net
                  income**
              
              **$**
              **2,559,520**
              
              **$**
              **3,245,908**




-52-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**




**NOTE
      22 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY
      ONLY)** - *continued*


**Condensed
        Statements of Cash Flows**
 **December
                    31,****2007**
                
                **2006****Cash
                    flows from operating activities**Net
                    income
                
                $
                2,559,520
                
                $
                3,245,908Adjustments
                      to reconcile net income to net cashprovided
                      by operating activities:Increase
                    in other assets
                
                
                (276,960
                )
                
                (441,960
                )Increase
                    in other liabilities
                
                
                82,980
                
                
                65,476Equity
                    in undistributed earnings of banking subsidiary
                
                
                (3,112,297
                )
                
                (3,660,785
                )Net
                    cash used by operating activities
                
                
                (746,757
                )
                
                (791,361
                )**Cash
                    flows from investing activities**Purchase
                    of nonmarketable equity securities
                
                
                
                
                
                (100,000
                )Investment
                    in banking subsidiary
                
                
                (3,000,000
                )Proceeds
                    on sale of non marketable securities
                
                
                102,500
                
                
                -Net
                    cash used by investing activities
                
                
                (2,897,500
                )
                
                (100,000
                )**Cash
                    flows from financing activities**Proceeds
                    from exercise of stock options
                
                
                239,746
                
                
                544,138Issuance
                    of shares to ESOP
                
                
                198,380
                
                
                472,747Sale
                    of treasury stock
                
                
                (145,198
                )
                
                9,896Issuance
                    of restricted stock
                
                
                76,379
                
                
                33,632Issuance
                    of shares to Advisory Board
                
                
                16,759
                
                
                15,025Proceeds
                    from note payable
                
                
                3,000,000
                
                
                -Net
                    cash provided (used) by financing activities
                
                
                3,386,066
                
                
                1,075,438**(Decrease)
                    increase in cash**
                
                
                (258,191
                )
                
                184,077**Cash
                    and cash equivalents, beginning of year**
                
                
                923,308
                
                
                739,231**Cash
                    and cash equivalents, ending of year**
                
                **$**
                **665,117**
                
                **$**
                **923,308**


-53-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Notes
        to Consolidated Financial Statements**




**NOTE
      23 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**




The
      tables below represent the quarterly results of operations for the years ended
      December 31, 2007 and 2006, respectively:


**December
                  31, 2007****Fourth**
              
              **Third**
              
              **Second**
              
              **First**Total
                  interest and fee income
              
              $
              10,097,678
              
              $
              9,708,594
              
              $
              9,318,103
              
              $
              8,416,112Total
                  interest expense
              
              
              4,740,765
              
              
              5,011,381
              
              
              4,653,632
              
              
              4,027,431Net
                  interest income
              
              
              5,356,913
              
              
              4,697,213
              
              
              4,664,471
              
              
              4,388,681Provision
                  for loan losses
              
              
              773,702
              
              
              408,962
              
              
              325,202
              
              
              135,234Net
                  interest income after provisions for loan losses
              
              
              4,583,211
              
              
              4,288,251
              
              
              4,339,269
              
              
              4,253,447Other
                  income
              
              
              1,420,328
              
              
              1,264,500
              
              
              1,423,726
              
              
              1,193,185Other
                  expense
              
              
              5,344,626
              
              
              4,624,605
              
              
              4,486,802
              
              
              4,505,242Income
                  before income tax expense
              
              
              658,913
              
              
              928,208
              
              
              1,276,193
              
              
              941,390Income
                  tax expense
              
              
              299,182
              
              
              343,331
              
              
              368,486
              
              
              234,183Net
                  income
              
              **$**
              **359,731**
              
              **$**
              **584,877**
              
              **$**
              **907,708**
              
              **$**
              **707,207**Basic
                  income per common share
              
              **$**
              **.10**
              
              **$**
              **.17**
              
              **$**
              **.26**
              
              **$**
              **.21**Diluted
                  income per common share
              
              **$**
              **.10**
              
              **$**
              **.17**
              
              **$**
              **.26**
              
              **$**
              **.20**


**December
                  31, 2006****Fourth**
              
              **Third**
              
              **Second**
              
              **First**Total
                  interest and fee income
              
              $
              8,571,562
              
              $
              8,484,778
              
              $
              7,635,918
              
              $
              7,024,327Total
                  interest expense
              
              
              4,001,265
              
              
              3,938,100
              
              
              3,258,676
              
              
              3,015,658Net
                  interest income
              
              
              4,570,297
              
              
              4,546,678
              
              
              4,377,242
              
              
              4,008,669Provision
                  for loan losses
              
              
              224,500
              
              
              477,205
              
              
              440,501
              
              
              250,285Net
                  interest income after provisions for loan losses
              
              
              4,345,797
              
              
              4,069,473
              
              
              3,936,741
              
              
              3,758,384Other
                  income
              
              
              1,166,574
              
              
              1,232,896
              
              
              1,252,768
              
              
              938,455Other
                  expense
              
              
              4,340,612
              
              
              4,024,389
              
              
              4,022,098
              
              
              3,885,285Income
                  before income tax expense
              
              
              1,171,759
              
              
              1,277,980
              
              
              1,167,411
              
              
              811,554Income
                  tax expense
              
              
              187,382
              
              
              413,068
              
              
              344,495
              
              
              237,851Net
                  income
              
              **$**
              **984,377**
              
              **$**
              **864,912**
              
              **$**
              **822,916**
              
              **$**
              **573,703**Basic
                  income per common share
              
              **$**
              **.30**
              
              **$**
              **.25**
              
              **$**
              **.24**
              
              **$**
              **.17**Diluted
                  income per common share
              
              **$**
              **.27**
              
              **$**
              **.25**
              
              **$**
              **.23**
              
              **$**
              **.16**




-54-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**
 **Corporate
        Data**
  **ANNUAL
        MEETING:**





The
      annual meeting of Shareholders of First Reliance Bancshares, Inc. and Subsidiary
      will be held at First Reliance Bank on June 19, 2008.


**CORPORATE
                  OFFICE:**
              
              **INDEPENDENT
                  AUDITORS:**2170
                  West Palmetto Street
              
              Elliott
                  Davis, LLCFlorence,
                  South Carolina 29501
              
              1901
                  Main Street, Suite 1650Phone
                  (843) 662-8802
              
              P.O.
                  Box 2227Fax
                  (843) 662-8373
              
              Columbia,
                  S.C. 29202





**STOCK
      TRANSFER DEPARTMENT:**





Registrar
      and Transfer Company


10
      Commerce Drive


Cranford,
      New Jersey 07016-3572





**MARKET
      FOR FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY COMMON STOCK;** **PAYMENT
      OF DIVIDENDS**





On
      March
      30, 2004, the Company’s common stock became listed on the Over The Counter
      Bulletin Board. Arms-length transactions in the common stock are anticipated
      to
      be infrequent and negotiated privately between the persons involved in those
      transactions.





**High
      and Low Stock Price Information for First Reliance Bancshares, Inc. and
      Subsidiary**





**2007**
            
            **2006**
            
            **2005****Applicable
                Period**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            15.60
            
            $
            14.75
            
            $
            16.60
            
            $
            14.60
            
            $
            14.25
            
            $
            12.51Second
                Quarter
            
            $
            15.00
            
            $
            14.00
            
            $
            19.50
            
            $
            16.35
            
            $
            14.00
            
            $
            12.00Third
                Quarter
            
            $
            13.75
            
            $
            12.00
            
            $
            17.00
            
            $
            16.60
            
            $
            14.25
            
            $
            13.10Fourth
                Quarter
            
            $
            12.85
            
            $
            9.85
            
            $
            17.25
            
            $
            15.60
            
            $
            16.00
            
            $
            13.00


-55-


**FIRST
        RELIANCE BANCSHARES, INC. AND SUBSIDIARY**


**Corporate
      Data** *-
      continued*





As
      of
      March 8, 2004, the Company's common stock began trading in the over-the-counter
      market under the symbol FSRL. The development of an active secondary market
      requires the existence of an adequate number of willing buyers and sellers.
      The
      Company’s current reported average daily trading volume is approximately 2,137
      shares. This level of trading volume in the secondary market for the Company's
      common stock may materially impact a shareholder's ability to promptly sell
      a
      large block of the Company’s common stock at a price acceptable to the selling
      shareholder. According to the Company's transfer agent, there are approximately
      1,308 shareholders of record as of January 1, 2007.





The
      Company is a legal entity separate and distinct from the Bank. The principal
      sources of the Company’s cash flow, including cash flow to pay dividends to its
      shareholders, are dividends that the Bank pays to its sole shareholder, the
      Company. Statutory and regulatory limitations apply to the Bank’s payment of
      dividends to the Company as well as to the Company’s payment of dividends to its
      shareholders. Statutory and regulatory limitations apply to the Bank’s payment
      of dividends to the Company as well as to the Company’s payment of dividends to
      its shareholders. For example, all FDIC insured institutions, regardless of
      their level of capitalization, are prohibited from paying any dividend or making
      any other kind of distribution if following the payment or distribution the
      institution would be undercapitalized. Moreover, federal agencies having
      regulatory authority over the Company or the Bank have issued policy statements
      that provide that bank holding companies and insured banks should generally
      only
      pay dividends out of current operating earnings.





Additionally,
      under South Carolina law, the Bank is authorized to pay cash dividends up to
      100% of net income in any calendar year without obtaining the prior approval
      of
      the State Board, provided that the Bank received a composite rating of one
      or
      two at the last examination conducted by a state or federal regulatory
      authority. All other cash dividends require prior approval by the State Board.
      South Carolina law requires each state nonmember bank to maintain the same
      reserves against deposits as are required for a state member bank under the
      Federal Reserve Act. This requirement is not expected to limit the ability
      of
      the Bank to pay dividends on its common stock.





It
      is the
      current policy of the Bank to retain earnings to permit possible future
      expansion. As a result, the Company has no current plans to initiate the payment
      of cash dividends, and its future dividend policy will depend on the Bank’s
      earnings, capital requirements, financial condition and other factors considered
      relevant by the board of directors of the Company and the Bank.





Shareholders
      may obtain, without charge, a copy of the Company’s Annual Report filed with the
      Securities and Exchange Commission on Form 10-K for the period ended December
      31, 2007. Written requests should be addressed to Jeffrey A. Paolucci, 2170
      W.
      Palmetto Street, Florence, South Carolina 29501.




-56-


**FIRST
      RELIANCE BANCSHARES, INC. AND SUBSIDIARY**


**Corporate
      Data** *-
      continued*




**EXECUTIVE
      OFFICERS OF FIRST RELIANCE BANCSHARES, INC. AND
      SUBSIDIARY**





**F.
      R. Saunders, Jr.**


President
      and Chief Executive Officer




**Jeffrey
      A. Paolucci**


Senior
      Vice President, Chief Financial and Operating Officer and Secretary




**Thomas
      C. Ewart**


Senior
      Vice President and Chief Banking Officer




**Jess
      Nance**


Senior
      Vice President and Chief Credit Officer




**Paul
      C. Saunders**


Senior
      Vice President and Senior Retail Banking Officer




**DIRECTORS
      OF FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**





**F.
      R. Saunders, Jr.**


President
      and Chief Executive Officer of First Reliance Bancshares, Inc. and First
      Reliance Bank




**Jeffrey
      A. Paolucci**


Senior
      Vice President, Chief Financial Officer and Secretary of First Reliance
      Bancshares, Inc. and First Reliance Bank




**Paul
      C. Saunders**


Senior
      Vice President of First Reliance Bancshares, Inc. and First Reliance
      Bank




**A.
      Dale Porter**


Senior
      Branch Administration Manager, First Reliance Bank




**Leonard
      A. Hoogenboom**


Chairman
      of the Board of Directors of First Reliance Bancshares, Inc.; Owner
      and
      Chief Executive Officer of Hoogenboom,
      CPA, PA


**John
      M. Jebaily**


Owner
      and
      President of Jebaily Properties, Inc, a real estate agency




**Andrew
      G. Kampiziones**


Owner,
      President and Treasurer of Fairfax Development Corporation, a real estate
      development corporation; Professor, Florence-Darlington Technical College and
      Francis Marion University




**C.
      Dale Lusk, MD**


Physician
      and Owner/Partner of Advanced Women’s Care




**T.
      Daniel Turner**


Owner
      and
      President of Turner’s Custom Auto Glass Inc.; Owner of Glass Connection USA, a
      billing service company




**A.
      Joe Willis, DC**


Retired
      and former President of Willis Chiromed, a chiropractic practice





**J.
      Munford Scott, Jr.**


Attorney,
      Turner Padget Graham & Laney Attorneys




-57-