EXHIBIT 13.1



FIRST RELIANCE BANCSHARES, INC.



Table of Contents



|                                                                                    |  |      
|----------------------------------------------------------------------------------- |  | -----
|                                                                                    |  | Page 
|Selected Financial Data                                                             |  | 2    
|Managements Discussion and Analysis                                                |  | 3-21 
|Independent Auditors Report                                                        |  | 22   
|Consolidated Balance Sheets                                                         |  | 23   
|Consolidated Statements of Income                                                   |  | 24   
|Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income |  | 25   
|Consolidated Statements of Cash Flows                                               |  | 26   
|Notes to Consolidated Financial Statements                                          |  | 27-45
|Corporate Data                                                                      |  | 46-48



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FIRST RELIANCE BANCSHARES, INC.



Selected Financial Data



The following selected financial data is derived from the consolidated financial statements and other data of First Reliance Bancshares, Inc. (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.



|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|---------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | --
|                                         |  | 2003 |         |   | 2002 |   |         | 2001 |  |   | 2000   |   |  | 1999 |       
|(Dollars in thousands, except per share) |  |      |         |   |      |   |         |      |  |   |        |   |  |      |       
|Income Statement Data:                   |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Interest income                          |  | $    | 8,499   |   |      | $ | 6,932   |      |  | $ | 6,251  |   |  | $    | 4,420  |   |  | $ | 541    |   
|Interest expense                         |  |      | 2,460   |   |      |   | 2,337   |      |  |   | 2,886  |   |  |      | 2,055  |   |  |   | 173    |   
|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Net interest income                      |  |      | 6,039   |   |      |   | 4,595   |      |  |   | 3,365  |   |  |      | 2,365  |   |  |   | 368    |   
|Provision for loan losses                |  |      | 792     |   |      |   | 349     |      |  |   | 347    |   |  |      | 628    |   |  |   | 163    |   
|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Net interest income after provision      |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|for loan losses                          |  |      | 5,247   |   |      |   | 4,246   |      |  |   | 3,018  |   |  |      | 1,737  |   |  |   | 205    |   
|Noninterest income                       |  |      | 2,138   |   |      |   | 1,734   |      |  |   | 1,404  |   |  |      | 855    |   |  |   | 109    |   
|Noninterest expense                      |  |      | 5,966   |   |      |   | 4,680   |      |  |   | 3,493  |   |  |      | 2,130  |   |  |   | 973    |   
|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Income (loss) before income taxes        |  |      | 1,419   |   |      |   | 1,300   |      |  |   | 929    |   |  |      | 462    |   |  |   | (659   | ) 
|Income tax expense (benefit)             |  |      | 403     |   |      |   | 406     |      |  |   | 312    |   |  |      | 169    |   |  |   | (165   | ) 
|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Net income (loss)                        |  | $    | 1,016   |   |      | $ | 894     |      |  | $ | 617    |   |  | $    | 293    |   |  | $ | (494   | ) 
|                                         |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Balance Sheet Data:                      |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Assets                                   |  | $    | 180,364 |   |      | $ | 116,077 |      |  | $ | 86,195 |   |  | $    | 64,366 |   |  | $ | 24,790 |   
|Earning assets                           |  |      | 169,258 |   |      |   | 108,114 |      |  |   | 80,380 |   |  |      | 58,835 |   |  |   | 22,807 |   
|Securities available for sale(1)         |  |      | 28,689  |   |      |   | 23,449  |      |  |   | 14,306 |   |  |      | 10,194 |   |  |   | 1,231  |   
|Loans(2)                                 |  |      | 140,361 |   |      |   | 81,559  |      |  |   | 64,875 |   |  |      | 46,745 |   |  |   | 16,678 |   
|Allowance for loan losses                |  |      | 1,752   |   |      |   | 1,137   |      |  |   | 1,045  |   |  |      | 780    |   |  |   | 163    |   
|Deposits                                 |  |      | 139,415 |   |      |   | 100,323 |      |  |   | 75,687 |   |  |      | 54,643 |   |  |   | 17,995 |   
|Shareholders equity                     |  |      | 17,703  |   |      |   | 8,644   |      |  |   | 7,658  |   |  |      | 7,047  |   |  |   | 6,673  |   
|                                         |  |      |         |   |     
|Per-Share Data:(5)                       |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Basic earnings (losses)                  |  | $    | 0.48    |   |      | $ | 0.62    |      |  | $ | 0.43   |   |  | $    | 0.20   |   |  | $ | (0.34  | ) 
|Diluted earnings (losses)                |  |      | 0.46    |   |      |   | 0.59    |      |  |   | 0.42   |   |  |      | 0.20   |   |  |   | (0.34  | ) 
|Book value (period end)                  |  |      | 7.18    |   |      |   | 5.97    |      |  |   | 5.29   |   |  |      | 4.87   |   |  |   | 4.61   |   
|                                         |  |      |         |   |     
|Performance Ratios:                      |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Return on average assets                 |  |      | 0.70    | % |      |   | 0.86    | %    |  |   | 0.79   | % |  |      | 0.56   | % |  |   | (7.43  | )%
|Return on average equity                 |  |      | 7.07    |   |      |   | 10.87   |      |  |   | 8.29   |   |  |      | 4.28   |   |  |   | (19.27 | ) 
|Net interest margin(3)                   |  |      | 4.44    |   |      |   | 4.77    |      |  |   | 4.71   |   |  |      | 4.84   |   |  |   | 6.19   |   
|Efficiency(4)                            |  |      | 72.99   |   |      |   | 74.89   |      |  |   | 73.36  |   |  |      | 66.13  |   |  |   | 204.15 |   
|                                         |  |      |         |   |     
|Capital and Liquidity Ratios:            |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Average equity to average assets         |  |      | 9.93    |   |      |   | 7.92    |      |  |   | 9.58   |   |  |      | 12.98  |   |  |   | 38.53  |   
|Leverage (4.00% required minimum)        |  |      | 10.30   |   |      |   | 7.48    |      |  |   | 8.96   |   |  |      | 11.03  |   |  |   | 32.38  |   
|Risk-based capital                       |  |      |         |   |      |   |         |      |  |   |        |   |  |      |        |   |  |   |        |   
|Tier 1                                   |  |      | 12.60   |   |      |   | 10.21   |      |  |   | 11.07  |   |  |      | 17.97  |   |  |   | 39.35  |   
|Total                                    |  |      | 13.85   |   |      |   | 11.46   |      |  |   | 12.32  |   |  |      | 19.22  |   |  |   | 40.31  |   
|Average loans to average deposits        |  |      | 94.43   |   |      |   | 82.51   |      |  |   | 82.39  |   |  |      | 85.93  |   |  |   | 82.25  |   

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|(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) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(5) | Amounts have been restated for two for one stock split.
|--- | -------------------------------------------------------



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FIRST RELIANCE BANCSHARES, INC.



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, 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.



The Bank announced in 2003 its intentions to open a branch in Lexington, South Carolina. As of December 31, 2003, the Bank had leased a plot of land in which it plans to locate a temporary facility. The branch is
expected to open for business in the second quarter of 2004.



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 shares
of stock options were exercised in 2003 for a total amount of $52,000.



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



General- continued



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. For example, 2003 was
characterized by steady low interest rates intended to stabilize the economy and stimulate industrial economic growth. 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 2003, with increases in assets, deposits, shareholders equity, earnings per share and returns on average assets and equity. The following chart shows our growth in these
areas from December 31, 2002 to December 31, 2003:



|                                                 |  |              |  |                            |  |      
|------------------------------------------------ |  | ------------ |  | -------------------------- |  | -----
|                                                 |  | December 31, |  | PercentIncrease (Decrease)
|(Dollars in thousands, except per share amounts) |  | 2003         |  | 2002                       | 
|Total assets                                     |  | 180.4        |  | 116.1                      |  | 55.4 
|Loans                                            |  | 139.4        |  | 79.8                       |  | 74.7 
|Investment securities                            |  | 28.7         |  | 23.7                       |  | 21.1 
|Deposits                                         |  | 139.4        |  | 100.3                      |  | 39.0 
|Shareholders equity                             |  | 17.7         |  | 8.6                        |  | 105.8



A significant portion of our growth in
2003 was due to the completion of a secondary stock offering which resulted in the issuance of 1,007,430 shares of our common stock and provided additional capital of $7,896,474. The additional capital increased our legal lending limit, thereby
allowing us to extend larger loans to our customers. However, the issuance of additional shares resulted in a decrease in our return on average equity in 2003 from 2002. Our loan portfolio increased $59.6 million from December 31, 2002 to December
31, 2003. Our deposit base also increased in 2003 by $39.1 million from $100.3 million in 2002.



The significant increase in average earning assets had a positive impact on our results of operations for 2003. Average earning assets increased from $96.3 million in 2002 to $136.0 million in 2003. However, return on
average assets decreased from 2003 to 2002 due to the effect of compressed interest margins on net income. Our increased volume in deposits also increased our fees from service charges and deposit accounts by approximately $366,000 from 2002 to
2003. Gains on sales of mortgage loans were also an important source of noninterest income in 2003.



Results of Operations



Year ended December 31, 2003, compared with year ended December 31, 2002



Net interest income increased $1,444,557, or 31.44%, to $6,039,328 in 2003 from $4,594,771 in 2002. The increase in net interest income was due primarily to an increase
in average earning assets. Average earning assets increased $39,625,454 or 41.13%, mainly due to continued growth in the loan portfolio. The primary components of interest income were interest on loans, including fees, of $7,504,097, and interest on
taxable investment securities of $604,306.



The Companys net interest
spread and net interest margin were 4.04% and 4.44%, respectively, in 2003, compared to 4.32% and 4.77%, respectively, in 2002. The decrease in net interest spread was primarily the result of lower interest rates during a declining interest rate
environment. Yields on all earning assets declined in 2003. Yields on earning assets decreased from 7.20% in 2002 to 6.25% in 2003. Yields on interest-bearing liabilities decreased from 2.88% in 2002 to 2.21% in 2003.



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Results of Operations -continued



The provision for loan losses was $791,650 in 2003 compared to $348,533 in 2002. The
allowance for loan losses was 1.26% of total loans at December 31, 2003 as compared to 1.42% of total loans at December 31, 2002. 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 $404,716, or 23.35%, to $2,138,233 in 2003 from $1,733,517 in 2002. The increase is primarily attributable to increased service charges on deposit accounts and other charges. Service charges on deposit accounts increased $366,497, or
62.10% from 2002, to $956,665 for the year ended December 31, 2003. The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts and change in the service charge structure in 2003.
Other noninterest income increased $51,175, or 282.98% from 2002, to $69,259 for the year ended December 31, 2003. The increase is primarily attributable to increased wire fees of $16,056 in 2003 from $1,917 in 2002 and rental income of $39,032 in
2003 from $0 in 2002. Rental income is derived from rent on property adjacent to the main office which was acquired in 2003.



Noninterest expense increased $1,287,035, or 27.50%, to $5,966,528 in 2003 from $4,679,493 in 2002. 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 $703,822, or 26.65%, to $3,344,854 in 2003 from $2,641,032 in 2002. This increase is
attributable to normal pay increases, and continued growth in the company. A portion of the increase in salaries was due to the addition of new staff to facilitate the growth of the Bank. Other operating expenses increased $382,676 from 2002 to
$2,025,914 for the year ended December 31, 2003. This increase was due to the expected increases in overhead caused by the growth of the Company. The Companys efficiency ratio was 72.99% in 2003, compared to 74.89% in 2002.



The net income was $1,015,799 in 2003, compared to $894,303 in 2002. The
increase in net income reflects the Companys continued growth, as average-earning assets increased from $96,335,043 for the year ended December 31, 2002 to $135,960,497 for the year ended December 31, 2003. Return on average assets during 2003
was 0.70%, compared to 0.86% during 2002, and return on average equity was 7.07% during 2003, compared to 10.87% during 2002. These decreases came primarily as a result of additions of capital from the Companys secondary stock offering during
2003.



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.



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Net Interest Income- continued



Average Balances, Income and Expenses, and Rates



|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|------------------------------------------ |  | -------------- | ------- | - | -------------- | - | ---------- |  | ---- | -------------- |  | - | -------------- | - | ---------- | - | ----- |  | ---- | -
|                                           |  | 2003           |         |   | 2002           |  
|(Dollars in thousands)                     |  | AverageBalance |         |   | Income/Expense |   | Yield/Rate |  |      | AverageBalance |  |   | Income/Expense |   | Yield/Rate |  
|Assets:                                    |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Earning Assets:                            |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Loans(1)(2)                                |  | $              | 110,051 |   |                | $ | 7,504      |  | 6.82 | %              |  | $ | 73,777         |   |            | $ | 5,940 |  | 8.05 | %
|Securities, taxable(2)                     |  |                | 15,288  |   |                |   | 604        |  | 3.95 |                |  |   | 12,519         |   |            |   | 663   |  | 5.30 |  
|Securities, tax exempt(2)                  |  |                | 8,619   |   |                |   | 357        |  | 4.14 |                |  |   | 5,193          |   |            |   | 233   |  | 4.49 |  
|Federal funds sold and other               |  |                | 1,469   |   |                |   | 18         |  | 1.23 |                |  |   | 4,630          |   |            |   | 85    |  | 1.83 |  
|Nonmarketable equity securities            |  |                | 533     |   |                |   | 16         |  | 3.00 |                |  |   | 215            |   |            |   | 11    |  | 5.12 |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total earning assets                       |  |                | 135,960 |   |                |   | 8,499      |  | 6.25 |                |  |   | 96,334         |   |            |   | 6,932 |  | 7.20 |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Cash and due from banks                    |  |                | 2,988   |   |                |   |            |  |      |                |  |   | 3,394          |   |            |   |       |  |      |  
|Premises and equipment                     |  |                | 5,381   |   |                |   |            |  |      |                |  |   | 3,860          |   |            |   |       |  |      |  
|Other assets                               |  |                | 1,837   |   |                |   |            |  |      |                |  |   | 1,350          |   |            |   |       |  |      |  
|Allowance for loan losses                  |  |                | (1,350  | ) |                |   |            |  |      |                |  |   | (1,113         | ) |            |   |       |  |      |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total assets                               |  | $              | 144,816 |   |                |   |            |  |      |                |  | $ | 103,825        |   |            |   |       |  |      |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Liabilities:                               |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest-bearing liabilities:              |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest-bearing transaction accounts      |  | $              | 17,720  |   |                | $ | 203        |  | 1.15 | %              |  | $ | 14,659         |   |            |   | 260   |  | 1.77 | %
|Savings deposits                           |  |                | 15,994  |   |                |   | 196        |  | 1.23 |                |  |   | 13,795         |   |            |   | 236   |  | 1.71 |  
|Time deposits                              |  |                | 64,926  |   |                |   | 1,799      |  | 2.27 |                |  |   | 47,328         |   |            |   | 1,714 |  | 3.62 |  
|Other borrowings                           |  |                | 12,780  |   |                |   | 262        |  | 2.05 |                |  |   | 5,400          |   |            |   | 126   |  | 2.33 |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total interest-bearing liabilities         |  |                | 111,420 |   |                |   | 2,460      |  | 2.21 |                |  |   | 81,182         |   |            |   | 2,336 |  | 2.88 |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Demand deposits                            |  |                | 17,903  |   |                |   |            |  |      |                |  |   | 13,637         |   |            |   |       |  |      |  
|Accrued interest and other liabilities     |  |                | 1,119   |   |                |   |            |  |      |                |  |   | 785            |   |            |   |       |  |      |  
|Shareholders equity                       |  |                | 14,374  |   |                |   |            |  |      |                |  |   | 8,221          |   |            |   |       |  |      |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total liabilities and shareholders equity |  | $              | 144,816 |   |                |   |            |  |      |                |  | $ | 103,825        |   |            |   |       |  |      |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Net interest spread                        |  |                |         |   |                |   |            |  | 4.04 | %              |  |   |                |   |            |   |       |  | 4.32 | %
|Net interest income                        |  |                |         |   |                | $ | 6,039      |  |      |                |  |   |                |   |            | $ | 4,596 |  |      |  
|                                           |  |                |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Net interest margin                        |  |                |         |   |                |   |            |  | 4.44 | %              |  |   |                |   |            |   |       |  | 4.77 | %

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|(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) | Tax exempt income is based on actual amounts and is not on a tax equivalent basis. A tax
equivalent adjustment to net interest income of $184 and $121 in 2003 and 2002, respectively, would adjust the yield for assets earning tax exempt income to a comparable yield on a taxable basis. (This results in an estimated 2% and 1% in 2003 and
2002, respectively, overall increase in the tax rate).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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FIRST RELIANCE BANCSHARES, INC.



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.



|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|------------------------------- |  | --------------------------------------------------- | ----- | - | ---- | - | ------ | ----- |  | - | ----- | -
|                                |  | 2003 Compared to 2002 Due to increase (decrease) in |      
|(Dollars in thousands)          |  | Volume                                              |       |   | Rate |   |        | Total | 
|Interest income:                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Loans                           |  | $                                                   | 2,577 |   |      | $ | (1,013 | )     |  | $ | 1,564 |  
|Securities, taxable             |  |                                                     | 130   |   |      |   | (189   | )     |  |   | (59   | )
|Securities, tax exempt          |  |                                                     | 143   |   |      |   | (19    | )     |  |   | 124   |  
|Federal funds sold and other    |  |                                                     | (45   | ) |      |   | (22    | )     |  |   | (67   | )
|Nonmarketable equity securities |  |                                                     | 11    |   |      |   | (6     | )     |  |   | 5     |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Total interest income           |  |                                                     | 2,816 |   |      |   | (1,249 | )     |  |   | 1,567 |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Interest expense:               |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Interest-bearing deposits       |  |                                                     | 47    |   |      |   | (104   | )     |  |   | (57   | )
|Savings deposits                |  |                                                     | 34    |   |      |   | (74    | )     |  |   | (40   | )
|Time deposits                   |  |                                                     | 545   |   |      |   | (460   | )     |  |   | 85    |  
|Other borrowings                |  |                                                     | 153   |   |      |   | (17    | )     |  |   | 136   |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Total interest expense          |  |                                                     | 779   |   |      |   | (655   | )     |  |   | 124   |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Net interest income             |  | $                                                   | 2,037 |   |      | $ | (594   | )     |  | $ | 1,443 |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|                                | 
|                                |  | 2002 Compared to 2001 Due to increase (decrease) in |      
|(Dollars in thousands)          |  | Volume                                              |       |   | Rate |   |        | Total | 
|Interest income:                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Loans                           |  | $                                                   | 1,604 |   |      | $ | (900   | )     |  | $ | 704   |  
|Securities, taxable             |  |                                                     | 83    |   |      |   | (186   | )     |  |   | (103  | )
|Securities, tax exempt          |  |                                                     | 162   |   |      |   | (23    | )     |  |   | 139   |  
|Federal funds sold              |  |                                                     | 33    |   |      |   | (97    | )     |  |   | (64   | )
|Nonmarketable equity securities |  |                                                     | 5     |   |      |   |       |       |  |   | 5     |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Total interest income           |  |                                                     | 1,887 |   |      |   | (1,206 | )     |  |   | 681   |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Interest expense:               |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Interest-bearing deposits       |  |                                                     | 173   |   |      |   | (10    | )     |  |   | 163   |  
|Savings deposits                |  |                                                     | 10    |   |      |   | (248   | )     |  |   | (238  | )
|Time deposits                   |  |                                                     | 438   |   |      |   | (955   | )     |  |   | (517  | )
|Other borrowings                |  |                                                     | 69    |   |      |   | (27    | )     |  |   | 42    |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Total interest expense          |  |                                                     | 690   |   |      |   | (1,240 | )     |  |   | (550  | )
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  
|Net interest income             |  | $                                                   | 1,197 |   |      | $ | 34     |       |  | $ | 1,231 |  
|                                |  |                                                     |       |   |      |   |        |       |  |   |       |  



-7-



---

FIRST RELIANCE BANCSHARES, INC.



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
the risk 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, 2003



Interest Sensitivity Analysis



|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|----------------------------------------------- |  | --------------- | ------ | - | --------------------------- | - | ------ | ------------------------------ |  | - | -------------- | - |  | ----------------------------------- | ------- | - | ----- | - | ------ | - |  | - | -------
|December 31, 2003 (Dollars in
thousands)        |  | Within OneMonth |        |   | After OneThroughThreeMonths |   |        | After ThreeThroughTwelveMonths |  |   | WithinOne Year |   |  | GreaterThan OneYear orNon-Sensitive |         |   | Total
|Assets                                          |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Interest-earning assets                         |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Loans                                           |  | $               | 82,357 |   |                             | $ | 5,164  |                                |  | $ | 26,854         |   |  | $                                   | 114,375 |   |       | $ | 25,014 |   |  | $ | 139,389
|Securities, taxable                             |  |                 |        |   |                             |   | 506    |                                |  |   |                |   |  |                                     | 506     |   |       |   | 18,390 |   |  |   | 18,896 
|Securities, nontaxable                          |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   | 8,793  |   |  |   | 8,793  
|Nonmarketable securities                        |  |                 | 1,108  |   |                             |   |        |                                |  |   |                |   |  |                                     | 1,108   |   |       |   |        |   |  |   | 1,108  
|Federal funds sold                              |  |                 | 100    |   |                             |   |        |                                |  |   |                |   |  |                                     | 100     |   |       |   |        |   |  |   | 100    
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Total earning assets                            |  |                 | 83,465 |   |                             |   | 5,670  |                                |  |   | 26,854         |   |  |                                     | 115,989 |   |       |   | 52,197 |   |  |   | 168,186
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Liabilities                                     |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Interest-bearing liabilities:                   |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Interest-bearing deposits:                      |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Demand deposits                                 |  |                 | 15,866 |   |                             |   |        |                                |  |   |                |   |  |                                     | 15,866  |   |       |   |        |   |  |   | 15,866 
|Savings deposits                                |  |                 | 18,217 |   |                             |   |        |                                |  |   |                |   |  |                                     | 18,217  |   |       |   |        |   |  |   | 18,217 
|Time deposits                                   |  |                 | 5,476  |   |                             |   | 12,850 |                                |  |   | 34,290         |   |  |                                     | 52,616  |   |       |   | 33,631 |   |  |   | 86,247 
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Total interest-bearing deposits                 |  |                 | 39,559 |   |                             |   | 12,850 |                                |  |   | 34,290         |   |  |                                     | 86,699  |   |       |   | 33,631 |   |  |   | 120,330
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Advances from Federal Home Loan Bank            |  |                 | 4,100  |   |                             |   |        |                                |  |   | 1,500          |   |  |                                     | 5,600   |   |       |   | 13,500 |   |  |   | 19,100 
|Federal funds purchased                         |  |                 | 1,043  |   |                             |   |       |                                |  |   |               |   |  |                                     | 1,043   |   |       |   |       |   |  |   | 1,043  
|Repurchase agreements                           |  |                 | 2,364  |   |                             |   |        |                                |  |   |                |   |  |                                     | 2,364   |   |       |   |        |   |  |   | 2,364  
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Total interest-bearing liabilities              |  |                 | 47,066 |   |                             |   | 12,850 |                                |  |   | 35,790         |   |  |                                     | 95,706  |   |       |   | 47,131 |   |  |   | 142,837
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Period gap                                      |  | $               | 36,399 |   |                             | $ | (7,180 | )                              |  | $ | (8,936         | ) |  | $                                   | 20,283  |   |       | $ | 5,066  |   |  |   |        
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Cumulative gap                                  |  | $               | 36,399 |   |                             | $ | 29,219 |                                |  | $ | 20,283         |   |  | $                                   | 20,283  |   |       | $ | 25,349 |   |  |   |        
|                                                |  |                 |        |   |                             |   |        |                                |  |   |                |   |  |                                     |         |   |       |   |        |   |  |   |        
|Ratio of cumulative gap to total earning assets |  |                 | 21.64  | % |                             |   | 17.37  | %                              |  |   | 12.06          | % |  |                                     | 12.06   | % |       |   | 15.07  | % |  |   |        



-8-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Net Interest Income- continued



The above table reflects the balances of interest-earning assets and interest-bearing
liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt 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 savings deposits and interest-bearing transaction accounts, 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 a thirty-day 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. Securities sold under agreements to repurchase mature on a daily basis and are reflected in the
earliest pricing period. Advances from the Federal Home Loan Bank are reflected at their contractual maturity date.



The Company is in an asset sensitive position (or a positive gap) of $20.2 million over the 12 month timeframe. The gap is positive when interest sensitive assets exceed
interest sensitive liabilities, as was the case at the end of 2003 with respect to the one-year time horizon. When interest sensitive liabilities exceed interest sensitive assets for a specific repricing horizon, a negative interest
sensitivity gap results.



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 rate sensitive assets maturing or repricing within one year exceeds the dollar amount of rate sensitive 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 cannot predict if interest rates will rise or fall in 2004, but has positioned its interest sensitivity to be prepared for rising rates.



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 than the Companys internal risk measurement system for loan risk until a history is established. The Board maintained an allowance for loan losses level of 1.26% of total loans at December 31, 2003. This level of
allowance still exceeds the loan risk measurement system the Company is currently using and management believes the allowance is adequate to meet any loan losses the Company may experience.



-9-



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Provision and Allowance for Loan Losses -continued



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 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 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, 2003 and 2002, the Company had no specific allocations on its significant credits in its calculation of the allowance for loan losses.



The Company calculates its general reserve based on a percentage allocation for each of the categories of the following unclassified loan types: real estate, commercial,
consumer and mortgage. The Company applies general loss factors to each category and 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 general estimate is then added to the specific allocations made to determine the amount of the total allowance for loan losses. 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, 2003, the Companys general
reserves totaled $1,752,282, an increase of $614,945 from 2002. This increase results from an overall increase of $59,587,612 in our loan portfolio. The categories and concentrations of loans have been consistent between the past two years.



-10-



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Provision and Allowance for Loan Losses -continued



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, 2003 and 2002.



Allowance for Loan Losses



|                                                          |  |      |         |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|(Dollars in thousands)                                    |  | 2003 |         |   | 2002 |  
|Total loans outstanding at end of year                    |  | $    | 139,389 |   |      | $ | 79,801 |  
|                                                          |  |      |         |   |      |   |        |  
|Average loans outstanding                                 |  | $    | 100,051 |   |      | $ | 73,777 |  
|                                                          |  |      |         |   |      |   |        |  
|Balance of allowance for loan losses at beginning of year |  | $    | 1,137   |   |      | $ | 1,045  |  
|Loans charged off:                                        |  |      |         |   |      |   |        |  
|Real estate - construction                                |  |      |        |   |      |   |       |  
|Real estate - mortgage                                    |  |      | 47      |   |      |   | 32     |  
|Commercial and industrial                                 |  |      | 42      |   |      |   | 78     |  
|Consumer and other                                        |  |      | 106     |   |      |   | 185    |  
|                                                          |  |      |         |   |      |   |        |  
|Total loan losses                                         |  |      | 195     |   |      |   | 295    |  
|                                                          |  |      |         |   |      |   |        |  
|Recoveries of previous loan losses:                       |  |      |         |   |      |   |        |  
|Real estate - construction                                |  |      |        |   |      |   |       |  
|Real estate - mortgage                                    |  |      |        |   |      |   | 2      |  
|Commercial and industrial                                 |  |      |        |   |      |   |       |  
|Consumer and other                                        |  |      | 18      |   |      |   | 36     |  
|                                                          |  |      |         |   |      |   |        |  
|Total recoveries                                          |  |      | 18      |   |      |   | 38     |  
|                                                          |  |      |         |   |      |   |        |  
|Net charge-offs                                           |  |      | 177     |   |      |   | 257    |  
|Provision for loan losses                                 |  |      | 792     |   |      |   | 349    |  
|                                                          |  |      |         |   |      |   |        |  
|Balance of allowance for loan losses at end of year       |  | $    | 1,752   |   |      | $ | 1,137  |  
|                                                          |  |      |         |   |      |   |        |  
|Ratios:                                                   |  |      |         |   |      |   |        |  
|Net charge-offs to average loans outstanding              |  |      | 0.18    | % |      |   | 0.35   | %
|Net charge-offs to loans at end of year                   |  |      | 0.13    |   |      |   | 0.32   |  
|Allowance for loan losses to average loans                |  |      | 1.75    |   |      |   | 1.54   |  
|Allowance for loan losses to loans at end of year         |  |      | 1.26    |   |      |   | 1.42   |  
|Net charge-offs to allowance for loan losses              |  |      | 10.10   |   |      |   | 22.60  |  
|Net charge-offs to provisions for loan losses             |  |      | 22.35   |   |      |   | 73.64  |  



Nonperforming Assets



Nonperforming Assets. There were no loans in
nonaccrual status at December 31, 2003. There were loans totaling $292,725 in nonaccrual status as December 31, 2002. There were $433,622 and $291,804 in loans ninety days or more overdue and still accruing interest at December 31, 2003 and 2002,
respectively. There was $491,862 and $307,000 in restructured loans at December 31, 2003 and 2002, respectively.



-11-



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Nonperforming Assets -continued



Accrual of interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that 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, 2003, the Company had classified loans totaling $1,225,625 as compared to $740,367 at December 31, 2002. Classified loans as a percentage of total loans was .88%
at December 31, 2003 as compared to .93% at December 31, 2002. The loan portfolio increased 74.67% during the same period.



Noninterest Income and Expense



Noninterest Income. Noninterest income for year ended December 31, 2003 was $2,138,233, an increase of $404,716 from $1,733,517 in 2002. The increase
is primarily attributable to increased service charges on deposit accounts and credit life insurance commissions. Mortgage origination fees increased $76,644, or 9.24%, to $906,452 in 2003, from $829,808 in 2002. The mortgage origination fees
increased due to increased volume of mortgage originations due to a low interest rate environment. Service charges increased $366,497, or 62.10% from 2002, to $956,665 for the year ended December 31, 2003. The increase in service charges on deposit
accounts was attributable to an overall increase in the number of deposit accounts in 2003 and a restructure of fee schedules in the fourth quarter of 2002. Securities and brokerage commissions decreased $72,781, or 71.38%, to $29,182 in 2003 from
$101,963 in 2002. This decrease is attributable to market conditions and the Companys restructuring of the department. Credit life insurance commissions increased $32,582, or 103.15% from 2002, to $64,170 for the year ended December 31, 2003.



The following table sets forth the principal components of noninterest income
for the years ended December 31, 2003 and 2002.



|                                               |  |      |       |      |   |      
|---------------------------------------------- |  | ---- | ----- | ---- | - | -----
|(Dollars in thousands)                         |  | 2003 |       | 2002
|Service charges on deposit accounts            |  | $    | 957   |      | $ | 590  
|Credit life insurance commissions              |  |      | 64    |      |   | 32   
|Residential mortgage origination fees          |  |      | 906   |      |   | 830  
|Securities and insurance brokerage commissions |  |      | 29    |      |   | 102  
|Other income                                   |  |      | 182   |      |   | 180  
|                                               |  |      |       |      |   |      
|Total noninterest income                       |  | $    | 2,138 |      | $ | 1,734
|                                               |  |      |       |      |   |      



-12-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Noninterest Income and Expense- continued



Noninterest Expense.Noninterest expense increased $1,287,035, or
27.50%, to $5,966,528 for year ended December 31, 2003 as compared to 2002. Of this total, other operating expenses increased $382,676, or 23.29%, to $2,025,914 in 2003 from $1,643,238 in 2002. Salaries and employee benefits increased $703,822, or
26.65%, to $3,344,854 in 2003 from $2,641,032 in 2002. This increase is attributable to normal pay increases and continued expansion of the Bank.



The following table sets forth the primary components of noninterest expense for the years ended December 31, 2003 and 2002.



|                                          |  |      |       |   |      |   |       |  
|----------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(Dollars in thousands)                    |  | 2003 |       |   | 2002 |  
|Salaries and employee benefits            |  | $    | 3,345 |   |      | $ | 2,641 |  
|Net occupancy and equipment expense       |  |      | 596   |   |      |   | 395   |  
|Advertising and public relations          |  |      | 73    |   |      |   | 118   |  
|Office supplies, stationery, and printing |  |      | 146   |   |      |   | 146   |  
|Data processing and supplies              |  |      | 231   |   |      |   | 286   |  
|Computer and software                     |  |      | 177   |   |      |   | 114   |  
|Professional fees and services            |  |      | 231   |   |      |   | 172   |  
|Employee education and conventions        |  |      | 67    |   |      |   | 120   |  
|Loan origination fees                     |  |      | 66    |   |      |   | 35    |  
|Other                                     |  |      | 1,035 |   |      |   | 652   |  
|                                          |  |      |       |   |      |   |       |  
|Total noninterest expense                 |  | $    | 5,967 |   |      | $ | 4,679 |  
|                                          |  |      |       |   |      |   |       |  
|Efficiency ratio                          |  |      | 72.99 | % |      |   | 74.89 | %



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
$110,051,305 in 2003 compared to $73,777,402 in 2002, an increase of $36,273,903, or 49.17%. At December 31, 2003, total loans were $139,389,064, compared to $79,801,452 at December 31, 2002, an increase of $59,587,612, or 74.67%.



-13-



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Earning Assets- continued



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,              |  | 2003   |         |   | 2002             |       
|(Dollars in thousands)    |  | Amount |         |   | Percent of Total |        |   | Amount |   |        | Percent of Total | 
|Commercial and industrial |  | $      | 27,893  |   |                  | 20.00  | % |        | $ | 15,628 |                  |  | 19.58  | %
|Real estate               |  |        |         |   |                  |        |   |        |   |        |                  |  |        |  
|Construction              |  |        | 18,343  |   |                  | 13.16  |   |        |   | 9,799  |                  |  | 12.28  |  
|Mortgage-residential      |  |        | 42,267  |   |                  | 30.32  |   |        |   | 23,236 |                  |  | 29.12  |  
|Mortgage-nonresidential   |  |        | 32,826  |   |                  | 23.56  |   |        |   | 20,632 |                  |  | 25.85  |  
|Consumer                  |  |        | 13,200  |   |                  | 9.47   |   |        |   | 9,944  |                  |  | 12.46  |  
|Other                     |  |        | 4,860   |   |                  | 3.49   |   |        |   | 562    |                  |  | 0.71   |  
|                          |  |        |         |   |                  |        |   |        |   |        |                  |  |        |  
|Total loans               |  |        | 139,389 |   |                  | 100.00 | % |        |   | 79,801 |                  |  | 100.00 | %
|Allowance for loan losses |  |        | (1,752  | ) |                  |        |   |        |   | (1,137 | )                |  |        |  
|                          |  |        |         |   |                  |        |   |        |   |        |                  |  |        |  
|Net loans                 |  | $      | 137,637 |   |                  |        |   |        | $ | 78,664 |                  |  |        |  
|                          |  |        |         |   |                  |        |   |        |   |        |                  |  |        |  



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, 2003, real estate mortgage loans totaled $75,092,913 and
represented 53.87% of the total loan portfolio, compared to $43,868,326 or 54.97%, at December 31, 2002.



Residential mortgage loans totaled $42,266,822 at December 31, 2003, and represented 30.32% of the total loan portfolio, compared to $23,236,215 at December 31, 2002 or 29.12%. 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 $32,826,091 at December 31, 2003,
compared to $20,632,111 at December 31, 2002. This represents an increase of $12,193,980, or 59.10%, from the December 31, 2002 balance. The demand for residential and commercial real estate loans in the Florence market increased as a result of the
low interest rate environment.



Commercial and industrial loans increased
$12,265,783, or 78.49%, to $27,893,370 at December 31, 2003, from $15,627,587 at December 31, 2002.



The Companys loan portfolio is also comprised of consumer loans. Consumer loans increased $3,255,695, or 32.74%, to $13,199,988 at December 31, 2003, from $9,944,293 at December 31, 2002.



The Companys loan portfolio reflects the diversity of its market. The Companys
home office is located in Florence County, South Carolina. The economy of Florence 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.



-14-



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FIRST RELIANCE BANCSHARES, INC.



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, 2003.



Loan Maturity Schedule and Sensitivity to Changes in Interest Rates



|                                         |  |                  |        |                                  |   |                 |  |       |       |  |   |        
|---------------------------------------- |  | ---------------- | ------ | -------------------------------- | - | --------------- |  | ----- | ----- |  | - | -------
|December 31, 2003 (Dollars in
thousands) |  | One Year or Less |        | Over One Year Through Five Years |   | Over Five Years |  | Total
|Commercial and industrial                |  | $                | 15,190 |                                  | $ | 11,466          |  | $     | 1,237 |  | $ | 27,893 
|Real estate                              |  |                  | 28,090 |                                  |   | 57,872          |  |       | 7,474 |  |   | 93,436 
|Consumer and other                       |  |                  | 8,510  |                                  |   | 9,211           |  |       | 339   |  |   | 18,060 
|                                         |  |                  |        |                                  |   |                 |  |       |       |  |   |        
|                                         |  | $                | 51,790 |                                  | $ | 78,549          |  | $     | 9,050 |  | $ | 139,389
|                                         |  |                  |        |                                  |   |                 |  |       |       |  |   |        
|Loans maturing after one year with:      |  |                  |        |                                  |   |                 |  |       |       |  |   |        
|Fixed interest rates                     |  |                  |        |                                  |   |                 |  |       |       |  | $ | 42,247 
|Floating interest rates                  |  |                  |        |                                  |   |                 |  |       |       |  |   | 46,324 
|                                         |  |                  |        |                                  |   |                 |  |       |       |  |   |        
|                                         |  |                  |        |                                  |   |                 |  |       |       |  | $ | 88,571 
|                                         |  |                  |        |                                  |   |                 |  |       |       |  |   |        



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 $23,907,300 in 2003, compared to $17,712,186 in 2002. At December 31, 2002, total securities available-for-sale were $27,688,992, an increase of $4,240,217, or 18.08%, over the December 31, 2002 balance. Investment
securities also contains Federal Home Loan Bank stock and the stock of an unrelated financial institution. This stock is recorded at its original cost and totaled $1,055,000 and $250,000 at December 31, 2003 and 2002, respectively.



The following table sets forth the fair market value of the securities available-for-sale
held by the Bank at December 31, 2003 and 2002.



Fair Value of Securities
available-for-sale



|                                          |  |      |        |      |   |       
|----------------------------------------- |  | ---- | ------ | ---- | - | ------
|December 31, (Dollars in
thousands)       |  | 2003 |        | 2002
|U.S. government agencies and corporations |  | $    | 3,536  |      | $ | 3,904 
|Municipals                                |  |      | 8,793  |      |   | 10,821
|Mortgage-backed securities                |  |      | 15,196 |      |   | 8,219 
|Commercial paper                          |  |      | 164    |      |   | 505   
|                                          |  |      |        |      |   |       
|Total securities available-for-sale       |  | $    | 27,689 |      | $ | 23,449
|                                          |  |      |        |      |   |       



-15-



---

FIRST RELIANCE BANCSHARES, INC.



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, 2003.



Investment Securities Maturity Distribution and
Yields





|                                          |  |                 |     |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|----------------------------------------- |  | --------------- | --- | ----- | ------------------------------- | - | ------ | ------------------------------- | ----- |  | --------------- | ------ |  | ----- | ----- |  | ------ | - | ----- | - | ----- | ------ | ---- | ----- |  | - | ------ |  | ---- | -
|December 31, 2003                         |  | Within One Year |     |       | After One But Within Five Years |   |        | After Five But Within Ten Years |       |  | After Ten Years |        |  | Total |      
|                                          |  | Amount          |     | Yield |                                 |   | Amount |                                 | Yield |  |                 | Amount |  | Yield |       |  | Amount |   | Yield |   |       | Amount |      | Yield | 
|U.S. government agencies and corporations |  | $               | 506 |       | 7.21                            | % |        | $                               | 2,204 |  | 4.23            | %      |  | $     | 827   |  | 4.10   | % |       | $ | 163   |        | 4.13 | %     |  | $ | 3,700  |  | 5.18 | %
|Municipals(2)                             |  |                 |    |       |                                 |   |        |                                 | 117   |  | 2.25            | %      |  |       | 1,960 |  | 3.69   | % |       |   | 6,715 |        | 4.86 | %     |  |   | 8,793  |  | 4.23 | %
|                                          |  |                 |     |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|Total securities(1)                       |  | $               | 506 |       | 7.21                            | % |        | $                               | 2,321 |  | 4.19            | %      |  | $     | 2,787 |  | 3.89   | % |       | $ | 6,878 |        | 4.71 | %     |  | $ | 12,493 |  | 4.70 | %
|                                          |  |                 |     |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  

---

|(1) | Excludes mortgage-backed securities totaling $15,196 with a yield of 4.67 % and non-marketable equity securities.
|--- | -----------------------------------------------------------------------------------------------------------------

|(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 and Other. Federal funds sold
and other, which consists of federal funds sold and an interest earning deposit account with the Federal Home Loan Bank, averaged $1,469,425 in 2003 compared to $4,630,128 in 2002. At December 31, 2003 and 2002, federal funds sold totaled $100,000
and $2,856,000, and interest earning deposits totaled $245,184 and $18,933, respectively.



Deposits and Other Interest-Bearing Liabilities



Average interest-bearing liabilities increased $30,237,444, or 37.25%, to $111,420,332 in 2003, from $81,182,888 in 2002. The increase is primarily a result of the continued growth of the Company.



Deposits. Average total deposits increased $35,358,980, or 43.56%, to
$116,541,868 in 2003, from $89,419,745 in 2002. At December 31, 2003, total deposits were $139,414,951, compared to $100,323,081 a year earlier, an increase of 38.97%.



The following table sets forth the deposits of the Company by category at December 31, 2003 and 2002.



Deposits



|                              |  |        |         |                     |        |   |        |   |                     |  |        |  
|----------------------------- |  | ------ | ------- | ------------------- | ------ | - | ------ | - | ------------------- |  | ------ | -
|December 31,                  |  | 2003   |         |                     | 2002   |  
|(Dollars in thousands)        |  | Amount |         | Percent of Deposits |        |   | Amount |   | Percent of Deposits | 
|Demand deposit accounts       |  | $      | 19,085  |                     | 13.69  | % |        | $ | 16,471              |  | 16.42  | %
|NOW accounts                  |  |        | 15,866  |                     | 11.38  |   |        |   | 16,490              |  | 16.44  |  
|Savings accounts              |  |        | 18,217  |                     | 13.07  |   |        |   | 15,493              |  | 15.44  |  
|Time deposits less than $100  |  |        | 31,883  |                     | 22.87  |   |        |   | 30,344              |  | 30.25  |  
|Time deposits of $100 or over |  |        | 54,364  |                     | 38.99  |   |        |   | 21,525              |  | 21.45  |  
|                              |  |        |         |                     |        |   |        |   |                     |  |        |  
|Total deposits                |  | $      | 139,415 |                     | 100.00 | % |        | $ | 100,323             |  | 100.00 | %
|                              |  |        |         |                     |        |   |        |   |                     |  |        |  



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 $85,050,947 and $78,797,896 at December 31, 2003 and 2002, respectively.
Included in time deposits at December 31, 2003 and 2002 are brokered time deposits of $22,607,082 and $1,000,000, respectively.



-16-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Deposits and Other Interest-Bearing Liabilities- continued



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 98.72% at December 31, 2003, and 78.41% at December 31, 2002. The maturity distribution of the Companys time
deposits over $100,000 at December 31, 2003, is set forth in the following table:



Maturities of Time Deposits of $100,000 or More



|                                            |  |                     |       |                                |   |                                 |  |                     |        |       |   |        |  |   |       
|------------------------------------------- |  | ------------------- | ----- | ------------------------------ | - | ------------------------------- |  | ------------------- | ------ | ----- | - | ------ |  | - | ------
|(Dollars in thousands)                      |  | Within Three Months |       | After Three Through Six Months |   | After Six Through Twelve Months |  | After Twelve Months |        | Total
|Certificates of deposit of $100,000 or more |  | $                   | 8,608 |                                | $ | 9,072                           |  | $                   | 10,295 |       | $ | 26,389 |  | $ | 54,364



Approximately 15.83% of the
Companys time deposits of $100,000 or more had scheduled maturities within three months, and 32.52% had maturities within 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 other funding sources. The Company has an available line to borrow funds from the Federal Home Loan Bank up to 20% of the Banks total assets which provided available funds of $16,973,000 at December 31, 2003 and lines
available to purchase federal funds with various financial institutions up to $8,210,516 at December 31, 2003. Management believes that these funds would be sufficient to meet future liquidity needs.



Other Borrowings. The following table summarizes the Companys borrowings
for the years ended December 31, 2003 and 2002. These borrowings consist of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank and federal funds purchased. 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) Year Ended
December 31, |  | Maximum Outstanding at any Month End |        | Average Balance |   | Weighted Average Interest Rate |  |      | Balance December 31, |  | Interest Rate at December 31, |       
|2003                                           |  |                                      |        |                 |   |                                |  |      |                      |  |                               |        |  |      |  
|                                               |  |                                      |        |                 |  
|Securities sold under agreement to repurchase  |  | $                                    | 2,686  |                 | $ | 2,273                          |  | 0.45 | %                    |  | $                             | 2,364  |  | 0.31 | %
|Advances from Federal Home Loan Bank           |  |                                      | 19,100 |                 |   | 9,228                          |  | 2.72 | %                    |  |                               | 19,100 |  | 2.90 | %
|Federal funds purchased                        |  |                                      | 1,043  |                 |   | 389                            |  | 2.67 | %                    |  |                               | 1,043  |  | 1.30 | %
|                                               |  |                                      |        |                 |  
|2002                                           |  |                                      |        |                 |   |                                |  |      |                      |  |                               |        |  |      |  
|                                               |  |                                      |        |                 |  
|Securities sold under agreements to repurchase |  |                                      | 1,928  |                 |   | 1,684                          |  | 0.87 | %                    |  |                               | 1,882  |  | 0.38 | %
|Advances from Federal Home Loan Bank           |  |                                      | 4,500  |                 |   | 3,605                          |  | 3.01 | %                    |  |                               | 4,500  |  | 3.47 | %



-17-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



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.



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, 2003. The following table shows the
Companys and the Banks ratios at December 31, 2003:



Analysis of Capital and Capital Ratios



|                                                                   |  |         |         |   |      |   |         |  
|------------------------------------------------------------------ |  | ------- | ------- | - | ---- | - | ------- | -
|                                                                   |  | Company |         |   | Bank |  
|(Dollars in thousands)                                             |  |         |         |   |      |  
|Tier 1 capital                                                     |  | $       | 17,457  |   |      | $ | 17,261  |  
|Tier 2 capital                                                     |  |         | 1,734   |   |      |   | 1,731   |  
|                                                                   |  |         |         |   |      |   |         |  
|Total qualifying capital                                           |  | $       | 19,191  |   |      | $ | 18,992  |  
|                                                                   |  |         |         |   |      |   |         |  
|Risk-adjusted total assets (including off-balance-sheet exposures) |  | $       | 138,563 |   |      | $ | 138,481 |  
|                                                                   |  |         |         |   |      |   |         |  
|Risk-based capital ratios:                                         |  |         |         |   |      |   |         |  
|Tier 1 risk-based capital ratio                                    |  |         | 12.60   | % |      |   | 12.46   | %
|Total risk-based capital ratio                                     |  |         | 13.85   |   |      |   | 13.71   |  
|Tier 1 leverage ratio                                              |  |         | 10.30   |   |      |   | 10.18   |  



-18-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



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, 2003, commitments to extend credit totaled $19,621,687 and its standby letters of credit totaled $169,000.



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, 2003.



|                                    |  |                |     |                             |   |                                |  |                |        |                     |   |        |  |   |       |  |   |       
|----------------------------------- |  | -------------- | --- | --------------------------- | - | ------------------------------ |  | -------------- | ------ | ------------------- | - | ------ |  | - | ----- |  | - | ------
|(Dollars in thousands)              |  | WithinOneMonth |     | After OneThroughThreeMonths |   | After ThreeThroughTwelveMonths |  | Within OneYear |        | GreaterThanOne Year |   | Total 
|Unused commitments to extend credit |  | $              | 326 |                             | $ | 1,160                          |  | $              | 11,743 |                     | $ | 13,229 |  | $ | 6,392 |  | $ | 19,621
|Standby letters of credit           |  |                |    |                             |   | 10                             |  |                | 159    |                     |   | 169    |  |   |       |  |   | 169   
|                                    |  |                |     |                             |   |                                |  |                |        |                     |   |        |  |   |       |  |   |       
|Totals                              |  | $              | 326 |                             | $ | 1,170                          |  | $              | 11,902 |                     | $ | 13,398 |  | $ | 6,392 |  | $ | 19,790
|                                    |  |                |     |                             |   |                                |  |                |        |                     |   |        |  |   |       |  |   |       



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, commercial and residential real estate.



-19-



---

FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



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 47.16% of total assets at
December 31, 2003. 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 $4,793,102 in cash and $27,688,992 in securities
available for sale at December 31, 2003. The Company has $8,210,516 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 $36,073,000, of which $16,973,000 is available at December 31, 2003.



During 2003, the Companys primary sources of cash were $139,414,951 from deposits and $19,100,000 from Federal Home Loan Bank advances. The Companys primary uses of cash resources were to fund loans of approximately $139,389,064
and the purchase of investment securities of approximately $28,743,992, net of maturities and sales. 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 2004 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, 2003 as filed on the annual report on Form 10-KSB. 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.



-20-



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FIRST RELIANCE BANCSHARES, INC.



Managements Discussion and Analysis

of Financial Condition and Results of Operations



Industry Developments



On November 4, 1999, the U.S. Senate and House of Representatives each passed the Gramm-Leach-Bliley Act, previously known as the Financial
Services Modernization Act of 1999. The Act was signed into law by President Clinton in November 1999. Among other things, the Act repeals the restrictions on companies affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new financial holding company under the Bank Holding Company Act, which will permit holding companies to engage in a statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities. The Act also authorizes activities that are complementary to financial activities. The Act is intended to grant to
community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may have the result of increasing the amount of competition that the Company faces from larger institutions and
other types of companies. In fact, it is not possible to predict the full effect that the Act will have on the Company.



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.



Change of Accountants



Legislation and Securities Exchange Commission rules adopted in 2002 have significantly
increased, and will continue to increase, the regulatory burdens on audit firms that audit the financial statements of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Consequently, many smaller audit
firms have decided to limit their audit practice to companies that are not subject to the 1934 Act. Tourville, Simpson & Caskey, L.L.P., which served as the Companys principal independent accountant since the Companys inception, is
one such firm. Accordingly, effective January 2, 2003, Tourville, Simpson & Caskey resigned as the Companys principal independent public accountant. Elliott Davis, LLC was engaged by the Company on January 2, 2003 to audit the
Companys financial statements for the year ended December 31, 2002, and was selected to audit the Companys financial statements for the year ending December 31, 2003.



Tourville, Simpson & Caskey, L.L.P.s reports on the Companys financial statements for the years ended December 31, 2002,
2001 and 2000 neither contained an adverse opinion or disclaimer of opinion, nor was modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Tourville, Simpson & Caskey, L.L.P. on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Tourville, Simpson & Caskey, L.L.P.s satisfaction, would have caused it to make reference to the subject matter
of the disagreement in its report.



-21-



---

INDEPENDENT AUDITORS REPORT



The Board of Directors

First Reliance Bancshares, Inc.

Florence, South Carolina



We have audited the
accompanying consolidated balance sheets of First Reliance Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders equity and comprehensive income, and
cash flows for the two years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



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



In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of First Reliance Bancshares, Inc. and
subsidiary as of December 31, 2003 and 2002, and the consolidated results of their operations and cash flows for each of the years in the two year period ended December 31, 2003 in conformity with accounting principles generally accepted in the
United States of America.



/s/ Elliott Davis,
LLC

---

Elliott Davis, LLC

Columbia, South Carolina

February 19, 2004



-22-



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Balance Sheets



|                                                                                                                                                              |  |              |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                              |  | December 31, |            
|                                                                                                                                                              |  | 2003         |             |   | 2002 |  
|Assets:                                                                                                                                                       |  |              |             |   |      |   |             |  
|Cash and cash equivalents:                                                                                                                                    |  |              |             |   |      |   |             |  
|Cash and due from banks                                                                                                                                       |  | $            | 4,693,102   |   |      | $ | 3,789,927   |  
|Federal funds sold                                                                                                                                            |  |              | 100,000     |   |      |   | 2,856,000   |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total cash and cash equivalents                                                                                                                               |  |              | 4,793,102   |   |      |   | 6,645,927   |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Investment securities:                                                                                                                                        |  |              |             |   |      |   |             |  
|Securities available-for-sale                                                                                                                                 |  |              | 27,688,992  |   |      |   | 23,448,775  |  
|Nonmarketable equity securities                                                                                                                               |  |              | 1,055,000   |   |      |   | 250,000     |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total investment securities                                                                                                                                   |  |              | 28,743,992  |   |      |   | 23,698,775  |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Loans held for sale                                                                                                                                           |  |              | 971,627     |   |      |   | 1,757,375   |  
|Loans receivable                                                                                                                                              |  |              | 139,389,064 |   |      |   | 79,801,452  |  
|Less allowance for loan losses                                                                                                                                |  |              | (1,752,282  | ) |      |   | (1,137,337  | )
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Loans, net                                                                                                                                                    |  |              | 137,636,782 |   |      |   | 78,664,115  |  
|Premises, furniture and equipment, net                                                                                                                        |  |              | 5,796,819   |   |      |   | 3,993,363   |  
|Accrued interest receivable                                                                                                                                   |  |              | 949,663     |   |      |   | 698,590     |  
|Other real estate owned                                                                                                                                       |  |              | 279,393     |   |      |   | 120,872     |  
|Other assets                                                                                                                                                  |  |              | 1,192,505   |   |      |   | 497,574     |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total assets                                                                                                                                                  |  | $            | 180,363,883 |   |      | $ | 116,076,591 |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Liabilities:                                                                                                                                                  |  |              |             |   |      |   |             |  
|Deposits:                                                                                                                                                     |  |              |             |   |      |   |             |  
|Noninterest-bearing transaction accounts                                                                                                                      |  | $            | 19,084,520  |   |      | $ | 16,470,767  |  
|Interest-bearing transaction accounts                                                                                                                         |  |              | 15,866,254  |   |      |   | 16,489,757  |  
|Savings                                                                                                                                                       |  |              | 18,217,378  |   |      |   | 15,492,740  |  
|Time deposits $100,000 and over                                                                                                                               |  |              | 54,364,004  |   |      |   | 21,525,185  |  
|Other time deposits                                                                                                                                           |  |              | 31,882,795  |   |      |   | 30,344,632  |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total deposits                                                                                                                                                |  |              | 139,414,951 |   |      |   | 100,323,081 |  
|Securities sold under agreements to repurchase                                                                                                                |  |              | 2,363,570   |   |      |   | 1,881,750   |  
|Federal funds purchased                                                                                                                                       |  |              | 1,043,000   |   |      |   |            |  
|Advances from Federal Home Loan Bank                                                                                                                          |  |              | 19,100,000  |   |      |   | 4,500,000   |  
|Accrued interest payable                                                                                                                                      |  |              | 442,233     |   |      |   | 376,961     |  
|Other liabilities                                                                                                                                             |  |              | 297,490     |   |      |   | 350,621     |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total liabilities                                                                                                                                             |  |              | 162,661,244 |   |      |   | 107,432,413 |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Commitments and contingencies (Notes 5 and 14)                                                                                                                |  |              |             |   |      |   |             |  
|Shareholders Equity:                                                                                                                                         |  |              |             |   |      |   |             |  
|                                                                                                                                                              |  |             
|Common stock, $0.01 par value, 5,000,000 shares authorized; 2,466,660 and 1,448,830 shares issued and outstanding at December 31, 2003 and
2002, respectively |  |              | 24,667      |   |      |   | 14,488      |  
|Capital surplus                                                                                                                                               |  |              | 15,106,070  |   |      |   | 7,091,562   |  
|Retained earnings                                                                                                                                             |  |              | 2,325,602   |   |      |   | 1,309,803   |  
|Accumulated other comprehensive income                                                                                                                        |  |              | 246,300     |   |      |   | 228,325     |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total shareholders equity                                                                                                                                    |  |              | 17,702,639  |   |      |   | 8,644,178   |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  
|Total liabilities and shareholders equity                                                                                                                    |  | $            | 180,363,883 |   |      | $ | 116,076,591 |  
|                                                                                                                                                              |  |              |             |   |      |   |             |  



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



-23-



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Income



|                                                    |  |                                  |           |      |   |          
|--------------------------------------------------- |  | -------------------------------- | --------- | ---- | - | ---------
|                                                    |  | For the years ended December 31,
|                                                    |  | 2003                             |           | 2002
|Interest income:                                    |  |                                  |           |      |   |          
|Loans, including fees                               |  | $                                | 7,504,097 |      | $ | 5,939,949
|Investment securities:                              |  |                                  |           |      |   |          
|Taxable                                             |  |                                  | 604,306   |      |   | 662,951  
|Tax exempt                                          |  |                                  | 357,377   |      |   | 232,807  
|Federal funds sold                                  |  |                                  | 15,822    |      |   | 84,277   
|Other interest income                               |  |                                  | 17,861    |      |   | 11,759   
|                                                    |  |                                  |           |      |   |          
|Total                                               |  |                                  | 8,499,463 |      |   | 6,931,743
|                                                    |  |                                  |           |      |   |          
|Interest expense:                                   |  |                                  |           |      |   |          
|Time deposits $100,000 and over                     |  |                                  | 870,123   |      |   | 706,350  
|Other deposits                                      |  |                                  | 1,327,754 |      |   | 1,504,468
|Other interest expense                              |  |                                  | 262,258   |      |   | 126,154  
|                                                    |  |                                  |           |      |   |          
|Total                                               |  |                                  | 2,460,135 |      |   | 2,336,972
|                                                    |  |                                  |           |      |   |          
|Net interest income                                 |  |                                  | 6,039,328 |      |   | 4,594,771
|Provision for loan losses                           |  |                                  | 791,650   |      |   | 348,533  
|                                                    |  |                                  |           |      |   |          
|Net interest income after provision for loan losses |  |                                  | 5,247,678 |      |   | 4,246,238
|                                                    |  |                                  |           |      |   |          
|Noninterest income:                                 |  |                                  |           |      |   |          
|Service charges on deposit accounts                 |  |                                  | 956,665   |      |   | 590,168  
|Gain on sale of mortgage loans                      |  |                                  | 906,452   |      |   | 829,808  
|Securities and insurance brokerage commissions      |  |                                  | 29,182    |      |   | 101,963  
|Credit life insurance commissions                   |  |                                  | 64,170    |      |   | 31,588   
|Other service charges, commissions, and fees        |  |                                  | 109,515   |      |   | 82,121   
|Gain of sales of securities available-for-sale      |  |                                  | 2,990     |      |   | 79,785   
|Other                                               |  |                                  | 69,259    |      |   | 18,084   
|                                                    |  |                                  |           |      |   |          
|Total                                               |  |                                  | 2,138,233 |      |   | 1,733,517
|                                                    |  |                                  |           |      |   |          
|Noninterest expenses:                               |  |                                  |           |      |   |          
|Salaries and benefits                               |  |                                  | 3,344,854 |      |   | 2,641,032
|Occupancy                                           |  |                                  | 237,814   |      |   | 173,565  
|Furniture and equipment                             |  |                                  | 357,946   |      |   | 221,658  
|Other operating                                     |  |                                  | 2,025,914 |      |   | 1,643,238
|                                                    |  |                                  |           |      |   |          
|Total                                               |  |                                  | 5,966,528 |      |   | 4,679,493
|                                                    |  |                                  |           |      |   |          
|Income before income taxes                          |  |                                  | 1,419,383 |      |   | 1,300,262
|                                                    |  |                                 
|Income tax expense                                  |  |                                  | 403,584   |      |   | 405,959  
|                                                    |  |                                  |           |      |   |          
|Net income                                          |  | $                                | 1,015,799 |      | $ | 894,303  
|                                                    |  |                                  |           |      |   |          
|Earnings per share:                                 |  |                                  |           |      |   |          
|Basic                                               |  | $                                | 0.48      |      | $ | 0.62     
|Diluted                                             |  | $                                | 0.46      |      | $ | 0.59     



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



-24-



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income

For the years ended December 31, 2003 and 2002



|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|--------------------------------------------------------- | ------ | ------------ | ------ | --------------- | ------ |  | ----------------- | ---------- | -------------------------------------- |  | ----- | --------- |  | - | ------- |  | - | ---------- | -
|                                                          |        | Common stock |        | Capital surplus |        |  | Retained earnings |            | Accumulated other comprehensive income |  | Total |          
|                                                          | Shares |              | Amount |                 |        |  |                  
|Balance, December 31, 2001                                |        | 724,115      |        | $               | 11,488 |  | $                 | 7,167,775  |                                        |  | $     | 415,500   |  | $ | 63,244  |  | $ | 7,658,007  |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Net income                                                |        |              |        |                 |        |  |                   |            |                                        |  |       | 894,303   |  |   |         |  |   | 894,303    |  
|                                                          |        |              |        |                 |        | 
|Other comprehensive income, net of tax expense of $89,409 |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   | 165,081 |  |   | 165,081    |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Comprehensive income                                      |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   | 1,056,384  |  
|                                                          |        |              |        |                 |        | 
|Stock issuance costs (Note 2)                             |        |              |        |                 |        |  |                   | (76,213    | )                                      |  |       |           |  |   |         |  |   | (76,213    | )
|                                                          |        |              |        |                 |        | 
|Exercise of stock options                                 |        | 600          |        |                 | 3,000  |  |                   |            |                                        |  |       |           |  |   |         |  |   | 3,000      |  
|                                                          |        |              |        |                 |        | 
|Two for one stock split                                   |        | 724,115      |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Balance, December 31, 2002                                |        | 1,448,830    |        |                 | 14,488 |  |                   | 7,091,562  |                                        |  |       | 1,309,803 |  |   | 228,325 |  |   | 8,644,178  |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Net income                                                |        |              |        |                 |        |  |                   |            |                                        |  |       | 1,015,799 |  |   |         |  |   | 1,015,799  |  
|                                                          |        |              |        |                 |        | 
|Other comprehensive income, net of tax expense of $10,015 |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   | 17,975  |  |   | 17,975     |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Comprehensive income                                      |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   | 9,677,952  |  
|                                                          |        |              |        |                 |        | 
|Proceeds from stock issuance                              |        | 1,007,430    |        |                 | 10,075 |  |                   | 8,049,364  |                                        |  |       |           |  |   |         |  |   | 8,059,439  |  
|                                                          |        |              |        |                 |        | 
|Costs associated with stock offering                      |        |              |        |                 |        |  |                   | (86,752    | )                                      |  |       |           |  |   |         |  |   | (86,752    | )
|                                                          |        |              |        |                 |        | 
|Exercise of stock options                                 |        | 10,400       |        |                 | 104    |  |                   | 51,896     |                                        |  |       |           |  |   |         |  |   | 52,000     |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  
|Balance, December 31, 2003                                |        | 2,466,660    |        | $               | 24,667 |  | $                 | 15,106,070 |                                        |  | $     | 2,325,602 |  | $ | 246,300 |  | $ | 17,702,639 |  
|                                                          |        |              |        |                 |        |  |                   |            |                                        |  |       |           |  |   |         |  |   |            |  



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



-25-



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Cash Flows



|                                                                                            |  |                                  |             |   |      |   |             |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                            |  | For the years ended December 31, |            
|                                                                                            |  | 2003                             |             |   | 2002 |  
|Cash flows from operating activities:                                                       |  |                                  |             |   |      |   |             |  
|Net income                                                                                  |  | $                                | 1,015,799   |   |      | $ | 894,303     |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities:    |  |                                  |             |   |      |   |             |  
|Provision for loan losses                                                                   |  |                                  | 791,650     |   |      |   | 348,533     |  
|Depreciation and amortization expense                                                       |  |                                  | 474,926     |   |      |   | 281,470     |  
|Gain on sales of securities available-for-sales                                             |  |                                  | (2,991      | ) |      |   | (79,785     | )
|Discount (accretion) and premium amortization                                               |  |                                  | 184,128     |   |      |   | 86,406      |  
|Disbursements for mortgages held for sale                                                   |  |                                  | (32,577,008 | ) |      |   | (16,397,632 | )
|Proceeds from sales of mortgages held for sale                                              |  |                                  | 33,362,756  |   |      |   | 14,640,257  |  
|Writedown of other real estate owned                                                        |  |                                  | 16,611      |   |      |   |            |  
|Gain on sale of other real estate owned                                                     |  |                                  | (6,256      | ) |      |   |            |  
|Deferred income tax provision (benefit)                                                     |  |                                  | 27,915      |   |      |   | (5,607      | )
|Increase in interest receivable                                                             |  |                                  | (251,073    | ) |      |   | (10,979     | )
|Increase (decrease) in interest payable                                                     |  |                                  | 65,272      |   |      |   | (95,887     | )
|Increase in other assets                                                                    |  |                                  | (772,000    | ) |      |   | (175,205    | )
|Increase (decrease) in other liabilities                                                    |  |                                  | (53,131     | ) |      |   | (134,432    | )
|                                                                                            |  |                                  |             |   |      |   |             |  
|Net cash provided (used) by operating activities                                            |  |                                  | 2,276,598   |   |      |   | (648,558    | )
|                                                                                            |  |                                  |             |   |      |   |             |  
|Cash flows from investing activities:                                                       |  |                                  |             |   |      |   |             |  
|Purchases of securities available-for-sale                                                  |  |                                  | (11,561,638 | ) |      |   | (22,726,876 | )
|Maturities of securities available-for-sale                                                 |  |                                  | 6,067,811   |   |      |   | 6,392,036   |  
|Proceeds from sales of securities available-for-sale                                        |  |                                  | 1,099,463   |   |      |   | 7,439,616   |  
|Purchases of nonmarketable equity securities                                                |  |                                  | (1,008,100  | ) |      |   |            |  
|Proceeds from the sales of nonmarketable equity securities                                  |  |                                  | 150,000     |   |      |   |            |  
|Purchase of Federal Home Loan Bank stock                                                    |  |                                  |            |   |      |   | (107,600    | )
|Net increase in loans receivable                                                            |  |                                  | (60,137,622 | ) |      |   | (15,248,343 | )
|Purchases of premises, furniture and equipment                                              |  |                                  | (2,535,984  | ) |      |   | (544,912    | )
|Proceeds from disposal of premises, furniture and equipment                                 |  |                                  | 369,541     |   |      |   |            |  
|Proceeds from sale of other real estate owned                                               |  |                                  | 185,729     |   |      |   | 28,160      |  
|                                                                                            |  |                                  |             |   |      |   |             |  
|Net cash used by investing activities                                                       |  |                                  | (67,370,800 | ) |      |   | (24,767,919 | )
|                                                                                            |  |                                  |             |   |      |   |             |  
|Cash flows from financing activities:                                                       |  |                                  |             |   |      |   |             |  
|Net increase in demand deposits, interest-bearing transaction accounts and savings accounts |  |                                  | 4,714,888   |   |      |   | 12,788,711  |  
|Net increase in certificates of deposit and other time deposits                             |  |                                  | 34,376,982  |   |      |   | 11,847,726  |  
|Increase in advances from Federal Home Loan Bank                                            |  |                                  | 14,600,000  |   |      |   | 4,500,000   |  
|Increase in federal funds purchased                                                         |  |                                  | 1,043,000   |   |      |   |            |  
|Net increase (decrease) in securities sold under agreements to repurchase                   |  |                                  | 481,820     |   |      |   | (45,414     | )
|Stock issuance costs                                                                        |  |                                  | (86,752     | ) |      |   | (76,213     | )
|Exercise of stock options                                                                   |  |                                  | 52,000      |   |      |   | 3,000       |  
|Proceeds from stock issuance                                                                |  |                                  | 8,059,439   |   |      |   |            |  
|                                                                                            |  |                                  |             |   |      |   |             |  
|Net cash provided by financing activities                                                   |  |                                  | 63,241,377  |   |      |   | 29,017,810  |  
|                                                                                            |  |                                  |             |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                                  | (1,852,825  | ) |      |   | 3,601,333   |  
|                                                                                            |  |                                 
|Cash and cash equivalents, beginning of year                                                |  |                                  | 6,645,927   |   |      |   | 3,044,594   |  
|                                                                                            |  |                                  |             |   |      |   |             |  
|Cash and cash equivalents, end of year                                                      |  | $                                | 4,793,102   |   |      | $ | 6,645,927   |  
|                                                                                            |  |                                  |             |   |      |   |             |  
|Cash paid during the year for:                                                              |  |                                  |             |   |      |   |             |  
|Income taxes                                                                                |  | $                                | 500,598     |   |      | $ | 640,543     |  
|                                                                                            |  |                                 
|Interest                                                                                    |  | $                                | 2,394,863   |   |      | $ | 2,432,859   |  
|Supplemental noncash investing and financing activities:                                    |  |                                  |             |   |      |   |             |  
|Foreclosures on loans                                                                       |  | $                                | 373,305     |   |      | $ | 65,872      |  



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



-26-



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FIRST RELIANCE BANCSHARES, INC.



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 County, 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.



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.



Significant Group
Concentrations of Credit Risk - Most of the Companys activities are with customers located within Florence County in South Carolina. The types of securities in which the Company invests are discussed in Note 4. The types of lending in
which the Company engages are discussed in Note 5. The Company does not have any significant concentrations with any one industry or customer.



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 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. 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, 2003 and 2002, the Companys investment in Federal Home Loan Bank stock was $955,000 and $250,000, respectively. Dividends received on this stock
is included as a separate component of interest income. In 2003, the Company purchased stock in another community bank totaling $100,000.



-27-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued



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.



Impaired loans are measured based on the present value of discounted expected cash flows.
When it is determined that a loan is impaired, a direct charge to bad debt expense is made for the difference between the net present value of expected future cash flows based on the contractual rate and discount rate and the Companys recorded
investment in the related loan. The corresponding entry is to a related allowance account. Interest is discontinued on impaired loans when management determines that a borrower may be unable to meet payments as they become due.



Allowance for Loan Losses - An allowance for loan losses is maintained at a
level deemed appropriate by management to provide adequately for known and inherent risks in the loan portfolio. The allowance is based upon a continuing review of past loan loss experience, current and future economic conditions which may affect
the borrowers ability to pay and the underlying collateral value of the loans. Loans, which are deemed to be uncollectible, are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously
charged off are added to the allowance.



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. Application and originations fees collected by the Company are recognized as income upon
sale to the investor.



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.



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.



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 $73,284 and $117,732, were included in
the Companys results of operations for 2003 and 2002.



-28-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued



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 2003, 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 $60,840 and $39,795 to earnings for the retirement savings plan
in 2003 and 2002, respectively.



Stock-Based Compensation - The
Company has a stock-based employee compensation plan which is further described in Note 16. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                            |  |                                 |           |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | -------
|                                                                                                                                            |  | For the years endedDecember 31,
|                                                                                                                                            |  | 2003                            |           | 2002
|Net income, as reported                                                                                                                     |  | $                               | 1,015,799 |      | $ | 894,303
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | 139,102   |      |   | 82,577 
|                                                                                                                                            |  |                                 |           |      |   |        
|Pro forma net income                                                                                                                        |  | $                               | 876,697   |      | $ | 811,726
|                                                                                                                                            |  |                                 |           |      |   |        
|Earnings per share:                                                                                                                         |  |                                 |           |      |   |        
|Basic - as reported                                                                                                                         |  | $                               | 0.48      |      | $ | 0.62   
|                                                                                                                                            |  |                                 |           |      |   |        
|Basic - pro forma                                                                                                                           |  | $                               | 0.41      |      | $ | 0.56   
|                                                                                                                                            |  |                                 |           |      |   |        
|Diluted - as reported                                                                                                                       |  | $                               | 0.46      |      | $ | 0.59   
|                                                                                                                                            |  |                                 |           |      |   |        
|Diluted - pro forma                                                                                                                         |  | $                               | 0.40      |      | $ | 0.54   
|                                                                                                                                            |  |                                 |           |      |   |        



Common Stock Owned by the
Employee Stock Ownership Plan (ESOP) - All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share. ESOP purchases and redemptions of the Companys common stock are at estimated fair value as
determined by independent valuations. Dividends on ESOP shares are charged to retained earnings. At December 31, 2003, the ESOP owned 17,991 shares of the Companys common stock with an estimated value of $171,454. Of this total, 6,950 shares
were allocated and 11,042 were unallocated. Contributions to the ESOP in 2003 and 2002 were $30,428 and $79,500, 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. Earnings per share have been restated to reflect the two for one stock split. See Note 15.



-29-



---

FIRST RELIANCE BANCSHARES, INC.



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:



|                                                             |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                             |  | For the years endedDecember 31, |        
|                                                             |  | 2003                            |         |   | 2002 |  
|Unrealized gains (losses) on securities available-for-sale:  |  | $                               | 30,980  |   |      | $ | 334,275 |  
|                                                             |  |                                
|Reclassification adjustment for gains realized in net income |  |                                 | (2,990  | ) |      |   | (79,785 | )
|                                                             |  |                                 |         |   |      |   |         |  
|Net unrealized gains (losses) on securities                  |  |                                 | 27,990  |   |      |   | 254,490 |  
|                                                             |  |                                
|Tax effect                                                   |  |                                 | (10,015 | ) |      |   | (89,409 | )
|                                                             |  |                                 |         |   |      |   |         |  
|Net-of-tax amount                                            |  | $                               | 17,975  |   |      | $ | 165,081 |  
|                                                             |  |                                 |         |   |      |   |         |  



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 - In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While
SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years
ending after December 15, 2002, and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The disclosure-only provisions of SFAS No. 148 had no impact on the financial condition of the
Company.



-30-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the
financial condition or operating results of the Company.



In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity.
SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have any impact on the financial condition or operating results of the Company.



In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires a
company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods ending after December 15, 2002. The adoption of FIN No. 45
did not have any effect on the Companys financial position or results of operations.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns, or both. FIN No. 46 also requires disclosures about variable interest entities that a company
is not required to consolidate, but in which it has a significant variable interest. FIN No. 46 provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the
entity lacks sufficient equity or its equity holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements
apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest
entity was established. The adoption of FIN No. 46 did not have any effect on the Companys financial position or results of operations.



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 2002 consolidated financial statements were reclassified to conform with the 2003 presentation.



-31-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 2 - STOCK OFFERING



The Company completed a stock offering during the second quarter of 2003 whereby 1,007,430 shares of the Companys common stock were
issued at an offering price of $8.00 per share. The gross proceeds from the offering were $8,059,439 and expenses related to the offering totaled $162,965. The proceeds will be used to support future loan production and asset growth, as well as fund
the Companys planned expansion into the Lexington, South Carolina market area (Note 14).



NOTE 3 - 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, 2003 and 2002, this requirement was met by the cash balance in the vault.



NOTE 4 - INVESTMENT SECURITIES



The amortized cost and estimated fair values of securities available-for-sale were:



|                           |  |               |            |                  |        |                      |  |   |        |  |   |           
|-------------------------- |  | ------------- | ---------- | ---------------- | ------ | -------------------- |  | - | ------ |  | - | ----------
|                           |  | AmortizedCost |            | Gross Unrealized |        | Estimated Fair Value
|                           |  |               | Gains      |                  | Losses |                     
|December 31, 2003          |  |               |            |                  |        |                      |  |   |        |  |   |           
|U.S. Government agencies   |  | $             | 3,634,893  |                  | $      | 65,808               |  | $ |       |  | $ | 3,700,701 
|Mortgage-backed securities |  |               | 15,196,513 |                  |        | 78,452               |  |   | 79,452 |  |   | 15,195,513
|Municipals                 |  |               | 8,485,366  |                  |        | 311,012              |  |   | 3,600  |  |   | 8,792,778 
|                           |  |               |            |                  |        |                      |  |   |        |  |   |           
|                           |  | $             | 27,316,772 |                  | $      | 455,272              |  | $ | 83,052 |  | $ | 27,688,992
|                           |  |               |            |                  |        |                      |  |   |        |  |   |           
|December 31, 2002          |  |               |            |                  |        |                      |  |   |        |  |   |           
|U.S. Government agencies   |  | $             | 4,327,391  |                  | $      | 82,565               |  | $ | 1,478  |  | $ | 4,408,478 
|Mortgage-backed securities |  |               | 10,646,356 |                  |        | 177,189              |  |   | 2,667  |  |   | 10,820,878
|Municipals                 |  |               | 8,129,798  |                  |        | 105,645              |  |   | 16,024 |  |   | 8,219,419 
|                           |  |               |            |                  |        |                      |  |   |        |  |   |           
|                           |  | $             | 23,103,545 |                  | $      | 365,399              |  | $ | 20,169 |  | $ | 23,448,775
|                           |  |               |            |                  |        |                      |  |   |        |  |   |           



For the years ended December 31, 2003
and 2002, proceeds from the sales of securities available-for-sale amounted to $1,099,463 and $7,439,616, respectively. Gross realized gains amounted to $2,990 and $79,785, respectively. There were no gross realized losses.



The following is a summary of maturities of securities available-for-sale as of December 31,
2003. 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
|                                          |  | AmortizedCost                 |            | Estimated Fair Value
|Due in less than one year                 |  | $                             | 498,518    |                      | $ | 505,514   
|Due after one year but within five years  |  |                               | 2,286,469  |                      |   | 2,321,087 
|Due after five years but within ten years |  |                               | 2,717,652  |                      |   | 2,786,879 
|Due after ten years                       |  |                               | 6,617,620  |                      |   | 6,879,999 
|                                          |  |                               |            |                      |   |           
|                                          |  |                               | 12,120,259 |                      |   | 12,493,479
|Mortgage-backed securities                |  |                               | 15,196,513 |                      |   | 15,195,513
|                                          |  |                               |            |                      |   |           
|Total                                     |  | $                             | 27,316,772 |                      | $ | 27,688,992
|                                          |  |                               |            |                      |   |           



-32-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 4 - INVESTMENT SECURITIES- continued



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, 2003.



Securities Available for Sale



|                           |  |                         |           |                       |   |           |  |                   |   |            |   |                   |  |   |           |  |   |       
|-------------------------- |  | ----------------------- | --------- | --------------------- | - | --------- |  | ----------------- | - | ---------- | - | ----------------- |  | - | --------- |  | - | ------
|                           |  | Less than twelve months |           | Twelve months or more |   | Total    
|                           |  | Fair value              |           | Unrealized losses     |   | Fairvalue |  | Unrealized losses |   | Fair value |   | Unrealized losses
|Municipals                 |  | $                       | 389,552   |                       | $ | 3,600     |  | $                 |  |            | $ |                  |  | $ | 389,552   |  | $ | 3,600 
|Mortgage-backed securities |  |                         | 9,034,617 |                       |   | 79,452    |  |                   |  |            |   |                  |  |   | 9,034,617 |  |   | 79,452
|                           |  |                         |           |                       |   |           |  |                   |   |            |   |                   |  |   |           |  |   |       
|Total                      |  | $                       | 9,424,169 |                       | $ | 83,052    |  | $                 |  |            | $ |                  |  | $ | 9,424,169 |  | $ | 83,052
|                           |  |                         |           |                       |   |           |  |                   |   |            |   |                   |  |   |           |  |   |       



At December 31, 2003 and 2002,
securities with amortized costs of $6,986,863 and $4,293,005 and estimated fair values of $7,201,019 and $4,434,777, respectively, were pledged to secure public deposits and for other purposes as required and permitted by law.



NOTE 5 - LOANS RECEIVABLE



Major classifications of loans receivable are summarized as follows:



|                               |  |              |             |      |   |           
|------------------------------ |  | ------------ | ----------- | ---- | - | ----------
|                               |  | December 31,
|                               |  | 2003         |             | 2002
|Mortgage loans on real estate: |  |              |             |      |   |           
|Residential 1-4 family         |  | $            | 31,343,019  |      | $ | 15,355,643
|Commercial                     |  |              | 32,826,091  |      |   | 20,632,111
|Construction                   |  |              | 18,343,137  |      |   | 9,799,410 
|Second mortgages               |  |              | 5,124,025   |      |   | 4,491,109 
|Equity lines of credit         |  |              | 5,799,778   |      |   | 3,389,463 
|                               |  |              |             |      |   |           
|                               |  |              | 93,436,050  |      |   | 53,667,736
|Commercial and industrial      |  |              | 27,893,370  |      |   | 15,627,587
|Consumer                       |  |              | 13,199,988  |      |   | 9,944,293 
|Other                          |  |              | 4,859,656   |      |   | 561,836   
|                               |  |              |             |      |   |           
|Total gross loans              |  | $            | 139,389,064 |      | $ | 79,801,452
|                               |  |              |             |      |   |           



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, 2003 and 2002, management
has determined that no impairment of loans existed.



-33-



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 5 - LOANS RECEIVABLE- continued



Transactions in the allowance for loan losses are summarized below:



|                                           |  |                                  |           |   |      |   |           |  
|------------------------------------------ |  | -------------------------------- | --------- | - | ---- | - | --------- | -
|                                           |  | For the years ended December 31, |          
|                                           |  | 2003                             |           |   | 2002 |  
|Balance, beginning of year                 |  | $                                | 1,137,337 |   |      | $ | 1,045,014 |  
|Provision charged to operations            |  |                                  | 791,650   |   |      |   | 348,533   |  
|Recoveries on loans previously charged-off |  |                                  | 17,850    |   |      |   | 37,659    |  
|Loans charged-off                          |  |                                  | (194,555  | ) |      |   | (293,869  | )
|                                           |  |                                  |           |   |      |   |           |  
|Balance, end of year                       |  | $                                | 1,752,282 |   |      | $ | 1,137,337 |  
|                                           |  |                                  |           |   |      |   |           |  



As of December 31, 2003, there were
$433,622 in loans past due ninety days or more and still accruing interest and no loans in nonaccrual status. There were $291,804 in loans past due ninety days or more and $292,725 of loans in nonaccrual status at December 31, 2002.



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 2003 total $42,670,090. The Company uses the same credit policies in making loans held for sale as it does for on-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 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,
|                             |  | 2003         |            | 2002
|Commitments to extend credit |  | $            | 19,621,000 |      | $ | 11,040,303
|Standby letters of credit    |  |              | 169,000    |      |   | 159,000   



Management is not aware of any
significant concentrations of loans to classes of borrowers or industries that would be affected similarly by economic conditions. Although the Companys loan portfolio is diversified, a substantial portion of its borrowers ability to
honor the terms of their loans is dependent on the economic conditions in Florence County and surrounding areas.



-34-



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 6 - PREMISES, FURNITURE AND EQUIPMENT



Premises, furniture and equipment consisted of the following:



|                               |  |              |           |      |   |          
|------------------------------ |  | ------------ | --------- | ---- | - | ---------
|                               |  | December 31,
|                               |  | 2003         |           | 2002
|Land                           |  | $            | 1,305,609 |      | $ | 958,609  
|Building                       |  |              | 3,828,188 |      |   | 2,299,424
|Furniture and equipment        |  |              | 1,597,790 |      |   | 937,568  
|Construction in progress       |  |              |          |      |   | 369,541  
|                               |  |              |           |      |   |          
|Total                          |  |              | 6,731,587 |      |   | 4,565,142
|Less, accumulated depreciation |  |              | 934,768   |      |   | 571,779  
|                               |  |              |           |      |   |          
|Premises and equipment, net    |  | $            | 5,796,819 |      | $ | 3,993,363
|                               |  |              |           |      |   |          



Depreciation expense for the years
ended December 31, 2003 and 2002 amounted to $362,989 and $281,470, respectively.



NOTE 7 - DEPOSITS



At December
31, 2003, the scheduled maturities of time deposits were as follows:



|            |  |        |           
|----------- |  | ------ | ----------
|Maturing In |  | Amount
|2004        |  | $      | 52,731,388
|2005        |  |        | 17,029,607
|2006        |  |        | 9,099,757 
|2007        |  |        | 3,458,420 
|2008        |  |        | 3,902,627 
|Thereafter  |  |        | 25,000    
|            |  |        |           
|Total       |  | $      | 86,246,799
|            |  |        |           



Included in total time deposits at
December 31, 2003 and 2002 were brokered time deposits of $22,607,082 and $1,000,000, respectively.



NOTE 8 - 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, |          
|                                          |  | 2003                             |           |   | 2002 |  
|Average balance during the year           |  | $                                | 2,272,905 |   |      | $ | 1,683,987 |  
|Average interest rate during the year     |  |                                  | 0.45      | % |      |   | 0.87      | %
|Maximum month-end balance during the year |  |                                  | 2,685,868 |   |      |   | 1,927,726 |  



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, 2003 and 2002, the par value and market value of the
securities held by the third-party for the underlying agreements were $2,892,448 and $2,854,526, respectively, and $2,790,904 and $4,232,966, respectively.



-35-



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK



Advances from the Federal Home Loan Bank consisted of the following:



|                                 |  |               |   |      |              |            |  |   |          
|-------------------------------- |  | ------------- | - | ---- | ------------ | ---------- |  | - | ---------
|Description                      |  | Interest Rate |   |      | December 31,
|                                 |  | 2003          |   | 2002
|Fixed rate advances maturing:    |  |               |   |      |              |            |  |   |          
|January 16, 2003                 |  | 2.23          | % |      | $            |           |  | $ | 500,000  
|July 16, 2003                    |  | 2.53          | % |      |              |           |  |   | 500,000  
|January 16, 2004                 |  | 3.04          | % |      |              | 500,000    |  |   | 500,000  
|April 8, 2004                    |  | 1.67          | % |      |              | 1,000,000  |  |   |         
|July 1, 2004                     |  | 3.46          | % |      |              | 500,000    |  |   | 500,000  
|January 18, 2005                 |  | 2.24          | % |      |              | 500,000    |  |   |         
|April 8, 2005                    |  | 2.04          | % |      |              | 1,000,000  |  |   |         
|July 1, 2005                     |  | 4.12          | % |      |              | 500,000    |  |   | 500,000  
|April 10, 2006                   |  | 2.60          | % |      |              | 1,000,000  |  |   |         
|September 12, 2006               |  | 0.64          | % |      |              | 3,500,000  |  |   |         
|December 19, 2006                |  | 2.87          | % |      |              | 1,500,000  |  |   |         
|April 9, 2007                    |  | 3.13          | % |      |              | 1,000,000  |  |   |         
|December 19, 2007                |  | 3.44          | % |      |              | 1,500,000  |  |   |         
|April 8, 2008                    |  | 3.46          | % |      |              | 1,000,000  |  |   |         
|January 17, 2012                 |  | 3.83          | % |      |              | 1,000,000  |  |   | 1,000,000
|July 5, 2012                     |  | 4.08          | % |      |              | 1,000,000  |  |   | 1,000,000
|Variable rate advances maturing: |  |               |   |      |              |            |  |   |          
|March 25, 2004                   |  | 1.15          | % |      |              | 3,600,000  |  |   |         
|                                 |  |               |   |      |              |            |  |   |          
|                                 |  |               |   |      | $            | 19,100,000 |  | $ | 4,500,000
|                                 |  |               |   |      |              |            |  |   |          



Scheduled principal reductions of
Federal Home Loan Bank advances are as follows:



|           |  |        |           
|---------- |  | ------ | ----------
|           |  | Amount
|2004       |  | $      | 5,600,000 
|2005       |  |        | 2,000,000 
|2006       |  |        | 6,000,000 
|2007       |  |        | 2,500,000 
|2008       |  |        | 1,000,000 
|Thereafter |  |        | 2,000,000 
|           |  |        |           
|Total      |  | $      | 19,100,000
|           |  |        |           



As collateral, the Company had pledged
first mortgage loans on one to four family residential loans aggregating $31,343,019 (see Note 5) at December 31, 2003. In addition, the Companys Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to
prepayment penalties.



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, 2003, the Bank had undivided profits of $2,078,648. 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.



-36-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 11 - OTHER OPERATING EXPENSES



Other operating expenses are summarized below:



|                                       |  |                                  |           |      |   |          
|-------------------------------------- |  | -------------------------------- | --------- | ---- | - | ---------
|                                       |  | For the years ended December 31,
|                                       |  | 2003                             |           | 2002
|Professional fees                      |  | $                                | 231,333   |      | $ | 172,299  
|Office supplies, forms, and stationery |  |                                  | 145,689   |      |   | 141,371  
|Advertising                            |  |                                  | 73,284    |      |   | 117,732  
|Data processing and supplies           |  |                                  | 231,055   |      |   | 285,887  
|Employee education and conventions     |  |                                  | 66,742    |      |   | 120,392  
|Computer and software expenses         |  |                                  | 173,110   |      |   | 112,253  
|Telephone                              |  |                                  | 74,275    |      |   | 73,140   
|Directors fees                         |  |                                  | 74,967    |      |   | 16,500   
|Other                                  |  |                                  | 955,459   |      |   | 603,664  
|                                       |  |                                  |           |      |   |          
|Total                                  |  | $                                | 2,025,914 |      | $ | 1,643,238
|                                       |  |                                  |           |      |   |          



NOTE 12 - INCOME TAXES



Income tax expense is summarized as follows:



|                                            |  |                                  |         |   |      |   |        
|------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | -------
|                                            |  | For the years ended December 31,
|                                            |  | 2003                             |         |   | 2002
|Currently payable                           |  |                                  |         |   |      |   |        
|Federal                                     |  | $                                | 404,933 |   |      | $ | 370,121
|State                                       |  |                                  | 47,112  |   |      |   | 41,445 
|                                            |  |                                  |         |   |      |   |        
|Total current                               |  |                                  | 452,045 |   |      |   | 411,566
|                                            |  |                                  |         |   |      |   |        
|Deferred income taxes                       |  | $                                | (39,447 | ) |      |   | 83,800 
|                                            |  |                                  |         |   |      |   |        
|Total income tax expense                    |  | $                                | 412,598 |   |      | $ | 495,366
|                                            |  |                                  |         |   |      |   |        
|Income tax expense is allocated as follows: |  |                                  |         |   |      |   |        
|To continuing operations                    |  | $                                | 403,584 |   |      | $ | 405,959
|To shareholders equity                     |  |                                  | 9,014   |   |      |   | 89,407 
|                                            |  |                                  |         |   |      |   |        
|                                            |  | $                                | 412,598 |   |      | $ | 495,366
|                                            |  |                                  |         |   |      |   |        



-37-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 12 - INCOME TAXES- continued



The components of deferred tax assets and deferred tax
liabilities are as follows:



|                                                 |  |              |         |      |   |        
|------------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                                 |  | December 31,
|                                                 |  | 2003         |         | 2002
|Deferred tax assets:                             |  |              |         |      |   |        
|Allowance for loan losses                        |  | $            | 535,359 |      | $ | 357,523
|Organizational costs                             |  |              | 12,339  |      |   | 46,181 
|Other                                            |  |              | 10,827  |      |   | 9,330  
|                                                 |  |              |         |      |   |        
|Total gross deferred tax assets                  |  |              | 558,525 |      |   | 413,034
|                                                 |  |             
|Deferred tax liabilities:                        |  |              |         |      |   |        
|Unrealized gain on securities available-for-sale |  |              | 125,919 |      |   | 116,905
|Accumulated depreciation                         |  |              | 146,841 |      |   | 49,811 
|                                                 |  |              |         |      |   |        
|Total gross deferred tax liabilities             |  |              | 272,760 |      |   | 166,716
|                                                 |  |              |         |      |   |        
|Net deferred tax asset recognized                |  | $            | 285,765 |      | $ | 246,318
|                                                 |  |              |         |      |   |        



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, 2003,
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, 2003 and
2002.



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, |         
|                                                    |  | 2003                             |          |   | 2002 |  
|Tax expense at statutory rate                       |  | $                                | 482,590  |   |      | $ | 442,089   |  
|State income tax, net of federal income tax benefit |  |                                  | 31,094   |   |      |   | 33,716    |  
|Tax-exempt interest income                          |  |                                  | (123,245 | ) |      |   | (81,562   | )
|Disallowed interest expense                         |  |                                  | 9,650    |   |      |   | 7,948     |  
|Other, net                                          |  |                                  | 3,495    |   |      |   | 3,768,689 |  
|                                                    |  |                                  |          |   |      |   |           |  
|                                                    |  | $                                | 403,584  |   |      | $ | 405,959   |  
|                                                    |  |                                  |          |   |      |   |           |  



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, 2003 and 2002, the Company had related
party loans totaling $2,320,218 and $2,460,785, respectively. During 2003, $240,522 of advances were made to related parties and repayments totaled $381,089. During 2002, $2,491,966 of advances were made to related parties and repayments totaled
$1,498,347.



At December 31, 2003 and 2002, the Company had securities sold
under agreements to repurchase with related parties of $1,405,061 and $415,215, respectively.



-38-



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



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, 2003,
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 an agreement to lease a plot of land in Lexington, South
Carolina, where it plans to open a new branch. The operating lease has an initial three year term, which expires December 31, 2006. The lease requires monthly payments of $2,500 for the first year of the initial term, $3,333 for the second year, and
$4,000 for the third year. Additionally, the lease has a renewal provision for seven additional option periods for one year each. The rental rate for each of the seven periods will be increased by 3% from the annual rate charged in the immediately
preceding year.



Minimal future rental payments under non-cancelable operating
leases having remaining terms in excess of one year, for each of the next three years in the aggregate are:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 30,000 
|2005 |  |   | 40,000 
|2006 |  |   | 48,000 
|     |  |   |        
|     |  | $ | 118,000
|     |  |   |        



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,
|                                                            |  | 2003                             |           | 2002
|Basic earnings per share:                                   |  |                                  |           |      |   |          
|                                                            |  |                                 
|Net income available to common shareholders                 |  | $                                | 1,015,799 |      | $ | 894,303  
|                                                            |  |                                  |           |      |   |          
|Average common shares outstanding - basic                   |  |                                  | 2,135,285 |      |   | 1,448,710
|                                                            |  |                                  |           |      |   |          
|Basic earnings per share                                    |  | $                                | 0.48      |      | $ | 0.62     
|                                                            |  |                                  |           |      |   |          
|Diluted earnings per share:                                 |  |                                  |           |      |   |          
|                                                            |  |                                 
|Net income available to common shareholders                 |  | $                                | 1,015,799 |      | $ | 894,303  
|                                                            |  |                                 
|Average common shares outstanding - basic                   |  |                                  | 2,135,285 |      |   | 1,448,710
|                                                            |  |                                 
|Incremental shares from assumed conversion of stock options |  |                                  | 51,010    |      |   | 68,316   
|                                                            |  |                                  |           |      |   |          
|Average common shares outstanding - diluted                 |  |                                  | 2,186,295 |      |   | 1,517,026
|                                                            |  |                                  |           |      |   |          
|Diluted earnings per share                                  |  | $                                | 0.46      |      | $ | 0.59     
|                                                            |  |                                  |           |      |   |          



-39-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 16 - 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 had 232,200 options
outstanding at December 31, 2002 (see below). 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 a committee appointed 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, 2003, there were 93,682 options available for grant under the 2003 plan and no options available for grant under the 1999 plan.



In calculating the pro forma disclosures, 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:



|                        |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | 2003     |   |  | 2002     |  
|Dividend yield          |  | 0.00     | % |  | 0.00     | %
|Expected volatility     |  | 86.77    | % |  | 10.00    | %
|Risk-free interest rate |  | 3.98     | % |  | 5.41     | %
|Expected life           |  | 10 years |   |  | 10 years |  



A summary of the status of the
Companys stock option plan as of December 31, 2003 and 2002, and changes during the period is presented below:



|                                 |  |         |   |      |                                |      |        |         |   |                                |   |     
|-------------------------------- |  | ------- | - | ---- | ------------------------------ | ---- | ------ | ------- | - | ------------------------------ | - | ----
|                                 |  | 2003    |   | 2002
|                                 |  | Shares  |   |      | Weighted-AverageExercise Price |      | Shares |         |   | Weighted-AverageExercise Price
|Outstanding at beginning of year |  | 232,200 |   |      | $                              | 5.11 |        | 222,800 |   |                                | $ | 5.04
|Granted                          |  | 156,318 |   |      |                                | 8.02 |        | 14,000  |   |                                |   | 6.59
|Exercised                        |  | (10,400 | ) |      |                                | 5.00 |        | (600    | ) |                                |   | 5.00
|Cancelled                        |  |        |   |      |                                |      |        | (4,000  | ) |                                |   | 6.59
|                                 |  |         |   |      |                                |      |        |         |   |                                |   |     
|Outstanding at end of year       |  | 378,118 |   |      |                                | 6.32 |        | 232,200 |   |                                |   | 5.11
|                                 |  |         |   |      |                                |      |        |         |   |                                |   |     



The 2002 options and prices have been
adjusted to reflect the two for one stock split in 2002.



The following table
summarizes information about stock options outstanding under the Companys plan at December 31, 2003:



|                                |  |             |            |             |   |           
|------------------------------- |  | ----------- | ---------- | ----------- | - | ----------
|                                |  | Outstanding |            | Exercisable
|Number of options               |  |             | 378,118    |             |   | 190,601   
|Weighted average remaining life |  |             | 7.33 years |             |   | 6.68 years
|Weighted average exercise price |  | $           | 6.32       |             | $ | 5.76      
|High exercise price             |  | $           | 8.32       |             | $ | 6.59      
|Low exercise price              |  | $           | 5.00       |             | $ | 5.00      



-40-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 17 - 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.



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.



|                                         |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | ------------------------------------------------ | - | ------ | ------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | Minimum RequirementFor Capital Adequacy Purposes |   |        | To Be Well-CapitalizedUnder PromptCorrective ActionProvisions |           
|                                         |  | Amount |            | Ratio |                                                  |   | Amount |                                                               | Ratio      |  |      | Amount |  | Ratio |           
|December 31, 2003                        |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|The Company                              |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|Total capital (to risk-weighted assets)  |  | $      | 19,190,641 |       | 13.85                                            | % |        | $                                                             | 11,086,995 |  | 8.00 | %      |  |       | N/A        |  | N/A   |  
|Tier 1 capital (to risk-weighted assets) |  |        | 17,457,111 |       | 12.60                                            |   |        |                                                               | 5,543,497  |  | 4.00 |        |  |       | N/A        |  | N/A   |  
|Tier 1 capital (to average assets)       |  |        | 17,457,111 |       | 10.30                                            |   |        |                                                               | 6,781,062  |  | 4.00 |        |  |       | N/A        |  | N/A   |  
|                                         |  |        |            |       |                                                  |  
|The Bank                                 |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|Total capital (to risk-weighted assets)  |  | $      | 18,992,372 |       | 13.71                                            | % |        | $                                                             | 11,078,498 |  | 8.00 | %      |  | $     | 13,848,222 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |        | 17,261,195 |       | 12.46                                            |   |        |                                                               | 5,539,259  |  | 4.00 |        |  |       | 8,308,873  |  | 6.00  |  
|Tier 1 capital (to average assets)       |  |        | 17,261,195 |       | 10.18                                            |   |        |                                                               | 6,781,062  |  | 4.00 |        |  |       | 8,476,328  |  | 5.00  |  
|                                         |  |        |            |       |                                                  |  
|December 31, 2002                        |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|The Bank                                 |  |        |            |       |                                                  |   |        |                                                               |            |  |      |        |  |       |            |  |       |  
|Total capital (to risk-weighted assets)  |  | $      | 9,586,230  |       | 11.46                                            | % |        | $                                                             | 6,692,520  |  | 8.00 | %      |  | $     | 8,364,400  |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |        | 8,538,974  |       | 10.21                                            |   |        |                                                               | 3,345,760  |  | 4.00 |        |  |       | 5,018,640  |  | 6.00  |  
|Tier 1 capital (to average assets)       |  |        | 8,538,974  |       | 7.48                                             |   |        |                                                               | 4,567,160  |  | 4.00 |        |  |       | 5,708,950  |  | 5.00  |  



The Federal Reserve Board has similar
requirements for bank holding companies. The Company was not subject to these requirements at December 31, 2002 because the Federal Reserve guidelines contain an exemption for bank holding companies with less than $150,000,000 in consolidated
assets.



-41-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 18 - UNUSED LINES OF CREDIT



As of December 31, 2003, the Company had unused lines of credit to purchase federal funds from unrelated companies totaling $8,210,516.
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 $36,073,000. As of December 31, 2003, the Company had
borrowed $19,100,000 on this line. Additionally, the Company has the ability to buy brokered time deposits at December 31, 2003.



NOTE 19 - 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.



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.



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.



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.



-42-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS-continued



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



|                                                                   |  |                |             |                      |   |                |  |                      |            |  |   |           
|------------------------------------------------------------------ |  | -------------- | ----------- | -------------------- | - | -------------- |  | -------------------- | ---------- |  | - | ----------
|                                                                   |  | December 31,  
|                                                                   |  | 2003           |             | 2002                
|                                                                   |  | CarryingAmount |             | Estimated FairValue  |   | CarryingAmount |  | Estimated FairValue 
|Financial Assets:                                                  |  |                |             |                      |   |                |  |                      |            |  |   |           
|Cash and due from banks                                            |  | $              | 4,693,102   |                      | $ | 4,693,102      |  | $                    | 3,789,927  |  | $ | 3,789,927 
|Federal funds sold                                                 |  |                | 100,000     |                      |   | 100,000        |  |                      | 2,856,000  |  |   | 2,856,000 
|Securities available-for-sale                                      |  |                | 27,688,992  |                      |   | 27,688,992     |  |                      | 23,448,775 |  |   | 23,448,775
|Nonmarketable equity securities                                    |  |                | 1,055,000   |                      |   | 1,055,000      |  |                      | 250,000    |  |   | 250,000   
|Loans, including loans held for sale                               |  |                | 140,360,691 |                      |   | 139,888,125    |  |                      | 81,558,827 |  |   | 82,139,875
|Accrued interest receivable                                        |  |                | 949,663     |                      |   | 949,663        |  |                      | 698,590    |  |   | 698,590   
|                                                                   |  |                |             |                     
|Financial Liabilities:                                             |  |                |             |                      |   |                |  |                      |            |  |   |           
|Demand deposit, interest-bearing transaction, and savings accounts |  | $              | 53,168,152  |                      | $ | 53,168,152     |  | $                    | 48,453,264 |  | $ | 48,453,264
|Certificates of deposit                                            |  |                | 86,246,799  |                      |   | 86,447,697     |  |                      | 51,869,817 |  |   | 52,457,543
|Securities sold under agreements to repurchase                     |  |                | 2,363,570   |                      |   | 2,363,570      |  |                      | 1,881,750  |  |   | 1,881,750 
|Federal funds purchased                                            |  |                | 1,043,000   |                      |   | 1,043,000      |  |                      |           |  |   |          
|Advances from Federal Home Loan Bank                               |  |                | 19,100,000  |                      |   | 18,685,518     |  |                      | 4,500,000  |  |   | 4,445,356 
|Accrued interest payable                                           |  |                | 442,233     |                      |   | 442,233        |  |                      | 376,961    |  |   | 376,961   
|                                                                   |  |                |             |                     
|                                                                   |  | NotionalAmount |             | Estimated Fair Value |   | NotionalAmount |  | Estimated Fair Value
|Off-Balance-Sheet Financial Instruments:                           |  |                |             |                      |   |                |  |                      |            |  |   |           
|Commitments to extend credit                                       |  | $              | 19,621,000  |                      | $ |               |  | $                    | 11,040,303 |  | $ |          
|Standby letters of credit                                          |  |                | 169,000     |                      |   |               |  |                      | 159,000    |  |   |          



-43-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 20 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY)



Condensed Balance Sheets



|                                           |  |              |            |      |   |          
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ---------
|                                           |  | December 31,
|                                           |  | 2003         |            | 2002
|Assets                                     |  |              |            |      |   |          
|Cash                                       |  | $            | 43,972     |      | $ |         
|Investment in banking subsidiary           |  |              | 17,507,212 |      |   | 8,767,300
|Nonmarketable equity securities            |  |              | 100,000    |      |   |         
|Other assets                               |  |              | 51,455     |      |   | 27,915   
|                                           |  |              |            |      |   |          
|Total assets                               |  | $            | 17,702,639 |      | $ | 8,795,215
|                                           |  |              |            |      |   |          
|Shareholders equity                       |  | $            | 17,702,639 |      | $ |         
|                                           |  |              |            |      |   |          
|Total liabilities and shareholders equity |  | $            | 17,702,639 |      | $ | 8,795,215
|                                           |  |              |            |      |   |          



Condensed Statements
of Income



|                                                                                             |  |              |           |      |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ------- | -
|                                                                                             |  | December 31, |          
|                                                                                             |  | 2003         |           | 2002 |  
|Income                                                                                       |  | $            | 339,851   |      | $ |        |  
|                                                                                             |  |             
|Expenses                                                                                     |  |              | 72,817    |      |   | 74,823  |  
|                                                                                             |  |              |           |      |   |         |  
|Income (loss) before income taxes and equity in undistributed earnings of banking subsidiary |  |              | 267,034   |      |   | (74,823 | )
|                                                                                             |  |             
|Income tax benefit                                                                           |  |              | 26,828    |      |   | (27,915 | )
|                                                                                             |  |              |           |      |   |         |  
|Loss before equity in undistributed earning of banking subsidiary                            |  |              | 293,862   |      |   | (46,908 | )
|                                                                                             |  |             
|Equity in undistributed earnings of banking subsidiary                                       |  |              | 721,937   |      |   | 941,211 |  
|                                                                                             |  |              |           |      |   |         |  
|Net income                                                                                   |  | $            | 1,015,799 |      | $ | 894,303 |  
|                                                                                             |  |              |           |      |   |         |  



-44-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 20 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY)- continued



Condensed Statement of Cash Flows



|                                                                                  |  |              |            |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | -------- | -
|                                                                                  |  | December 31, |           
|                                                                                  |  | 2003         |            |   | 2002 |  
|Cash flows from operating activities                                              |  |              |            |   |      |   |          |  
|Net income                                                                        |  | $            | 1,015,799  |   |      | $ | 894,303  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |              |            |   |      |   |          |  
|Increase in other assets                                                          |  |              | (23,539    | ) |      |   | (27,915  | )
|Increase (decrease) in other liabilities                                          |  |              | (151,037   | ) |      |   | 151,036  |  
|Equity in undistributed earnings of banking subsidiary                            |  |              |           |   |      |   | (941,211 | )
|                                                                                  |  |              |            |   |      |   |          |  
|Net cash provided by operating activities                                         |  |              | 841,223    |   |      |   | 76,213   |  
|                                                                                  |  |              |            |   |      |   |          |  
|Cash flows from investing activities                                              |  |              |            |   |      |   |          |  
|Purchase of nonmarketable equity securities                                       |  |              | (100,000   | ) |      |   |         |  
|                                                                                  |  |              |            |   |      |   |          |  
|Net cash used by investing activities                                             |  |              | (100,000   | ) |      |   |         |  
|                                                                                  |  |              |            |   |      |   |          |  
|Cash flows from financing activities                                              |  |              |            |   |      |   |          |  
|Stock issuance costs                                                              |  |              | (86,752    | ) |      |   | (76,213  | )
|Proceeds from exercise of stock options                                           |  |              | 52,000     |   |      |   |         |  
|Proceeds from stock issuance                                                      |  |              | 8,059,439  |   |      |   |         |  
|Transfer of capital to the Bank                                                   |  |              | (8,721,938 | ) |      |   |         |  
|                                                                                  |  |              |            |   |      |   |          |  
|Net cash used by financing activities                                             |  |              | (697,251   | ) |      |   | (76,213  | )
|                                                                                  |  |              |            |   |      |   |          |  
|Increase in cash                                                                  |  |              | 43,972     |   |      |   |         |  
|                                                                                  |  |             
|Cash and cash equivalents, beginning of year                                      |  |              |           |   |      |   |         |  
|                                                                                  |  |              |            |   |      |   |          |  
|Cash and cash equivalents, ending of year                                         |  | $            | 43,972     |   |      | $ |         |  
|                                                                                  |  |              |            |   |      |   |          |  



-45-



---

Corporate Data



ANNUAL MEETING:



The annual meeting of Shareholders of First Reliance Bancshares, Inc. will be held at First Reliance Bank on June 17, 2004.



|                               |  |                             
|------------------------------ |  | ----------------------------
|CORPORATE OFFICE:              |  | INDEPENDENT AUDITORS:       
|                               | 
|2170 West Palmetto Street      |  | Elliott Davis, LLC          
|Florence, South Carolina 29501 |  | 1901 Main Street, Suite 1650
|Phone (843) 662-8802           |  | P.O. Box 2227               
|Fax (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. COMMON STOCK;

PAYMENT
OF DIVIDENDS



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. Historically, the reported trading volume would indicate a lack
of activity in the secondary market for the Companys common stock. The lack of activity in the secondary market for the Companys common stock may materially impact a shareholders ability to promptly sell Company common stock at a
price acceptable to the selling shareholder.



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



|                  |  |      |       |      |   |      |  |   |      |   |  |   |      |  
|----------------- |  | ---- | ----- | ---- | - | ---- |  | - | ---- | - |  | - | ---- | -
|                  |  | 2003 |       | 2002 |  
|Applicable Period |  | High |       | Low  |   | High |  |   | Low  |  
|First Quarter     |  | $    | 8.00  |      | $ | 7.50 |  | $ | 7.50 | * |  | $ | 7.00 | *
|Second Quarter    |  | $    | 9.00  |      | $ | 7.50 |  | $ | 7.50 | * |  | $ | 7.00 | *
|Third Quarter     |  | $    | 9.50  |      | $ | 7.00 |  | $ | 8.00 |   |  | $ | 7.50 |  
|Fourth Quarter    |  | $    | 10.00 |      | $ | 9.50 |  | $ | 8.00 |   |  | $ | 8.00 |  

---

|* | Relates to share prices of First Reliance Bank (prior to formation of holding company).
|- | ---------------------------------------------------------------------------------------



-46-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



Corporate Data -continued



As of March 15, 2004, there were 2,504,460 shares of common stock outstanding, held of
record by approximately 1,270 shareholders. The Company has the discretionary authority to repurchase limited amounts of shares of its common stock consistent with regulatory, capital and other restrictions.



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-KSB for the period ended December 31, 2003. Written requests should be addressed to Jeffrey A. Paolucci, 2170 W. Palmetto Street, Florence, South Carolina 29501.



-47-



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



Corporate Data-continued



EXECUTIVE OFFICERS OF FIRST RELIANCE BANCSHARES, INC.



F. R. Saunders, Jr.

President and Chief Executive Officer



Jeffrey A. Paolucci

Senior Vice
President, Chief Financial Officer and Secretary



Thomas C. Ewart

Senior Vice President and Chief Credit Officer



Paul C. Saunders

Senior Vice President and City Executive



DIRECTORS OF FIRST RELIANCE BANCSHARES, INC.



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

Controller, First Reliance Bank



Leonard A. Hoogenboom

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



John M. Jebaily

Self-employed real
estate agent



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

President of Willis Chiromed, a chiropractic practice



-48-