ThZeal - The Zeal

CORNERSTONE BANCSHARES, INC.

835 Georgia Avenue

Chattanooga, Tennessee 37402

NOTICE OF MEETING OF SHAREHOLDERS

TO BE HELD ON APRIL 17, 2008

Notice is hereby given that the Annual Meeting of Shareholders (the “Shareholders Meeting”) of Cornerstone Bancshares, Inc., a Tennessee corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Company”), will be held at the Ooltewah branch of the Company located at 8966 Old Lee Highway, Ooltewah, Tennessee, on April 17, 2008, beginning at 6:00 p.m. local time, for the following purposes:

1. Elect Directors. To elect eleven (11) individuals to the Board of Directors;

2. Ratification of Appointment of Independent Auditors. To ratify the appointment of Hazlett, Lewis & Bieter, PLLC as independent auditors of the Company for the fiscal year ending December 31, 2008; and

3. Other Business. To transact such other or further business as may properly come before the Shareholders Meeting or any adjournment or postponement thereof.

Information regarding the matters to be acted upon at the Shareholders Meeting is contained in the Proxy Statement attached to this Notice.

Only shareholders of record at the close of business on February 29, 2008 are entitled to notice of, and to vote at, the Shareholders Meeting or any adjournment(s) thereof.

All shareholders, whether or not they expect to attend the Shareholders Meeting in person, are requested to complete, date, sign and return the enclosed proxy in the accompanying envelope. The proxy may be revoked by the person executing the proxy at any time before it is exercised by filing with the President of the Company an instrument of revocation or a duly executed proxy bearing a later date, or by electing to vote in person at the Shareholders Meeting.

		BY ORDER OF THE BOARD OF DIRECTORS


Chattanooga, Tennessee		Gregory B. Jones
March 21, 2008		Chairman of the Board of Directors and
		Chief Executive Officer

YOU ARE ENCOURAGED TO ATTEND THE SHAREHOLDERS MEETING IN PERSON. IF YOU ARE UNABLE TO ATTEND THE SHAREHOLDERS MEETING, THE BOARD OF DIRECTORS REQUESTS THAT YOU, AT YOUR EARLIEST CONVENIENCE, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED REPLY ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES.

PROXY STATEMENT

FOR

ANNUAL MEETING OF SHAREHOLDERS

CORNERSTONE BANCSHARES, INC.

TO BE HELD ON

APRIL 17, 2008

SOLICITATION OF PROXIES

This Proxy Statement is being furnished to the shareholders (the “Shareholders”) of Cornerstone Bancshares, Inc., a Tennessee corporation (the “Company”) in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) from holders of the outstanding shares of the common stock, $1.00 par value per share, of the Company (the “Common Stock”) for use at the annual meeting of the Shareholders to be held at the Company’s Ooltewah branch located at 8966 Old Lee Highway, Ooltewah, Tennessee, on Thursday, April 17, 2008, beginning at 6:00p.m. local time, and at any adjournment or postponement thereof (the “Shareholders Meeting”).

The Board has fixed the close of business on February 29, 2008 as the record date for the determination of Shareholders entitled to notice of, and to vote at, the Shareholders Meeting. Each share of the Common Stock entitles the holder thereof to one vote. As of February 29, 2008 there were issued and outstanding 6,319,718 shares of Common Stock.

Proxies for the Shareholders Meeting are hereby being solicited on behalf of the Company. In connection with the solicitation of proxies, the Board has designated Mr. Gregory B. Jones or Doyce G. Payne, M.D. as their proxies. Shares represented by all properly executed proxy cards received in time for the meeting (the “Proxy Shares”) will be voted at the Shareholders Meeting in accordance with the directions on such proxies. If no directions are specified, the Proxy Shares will be voted (a) “FOR” the election of the eleven (11) persons specified as nominees for directors of the Company; (b) “FOR” the ratification of the Audit Committee’s appointment of Hazlett, Lewis & Bieter, PLLC as independent auditors; and (c) in the best judgment of the person named in the enclosed proxy in connection with the transaction of such other business as may properly come before the Shareholders Meeting. The Board knows of no other business that will be presented for consideration at the Shareholders Meeting other than the matters described in this Proxy Statement. Should any director nominee named herein become unable or unwilling to serve if elected, it is intended that the Proxy Shares will be voted for the election, in his or her stead, of such other person as the Board may recommend.

The proxy is revocable by you by providing written notice to the President of the Company at any time prior to the exercise of the authority granted thereby or by attending the Shareholders Meeting and electing to vote in person.

This Proxy Statement is dated March 21, 2008 and it and the accompanying notice and form of proxy are first being mailed to the Shareholders on or about March 21, 2008. All costs of preparing, printing, assembling and mailing the form of proxy and the material used in the solicitation will be paid by the Company.

The presence in person or by proxy of the holders of a majority of the shares of the Common Stock will constitute a quorum for the transaction of business at the Shareholders Meeting. Votes cast by proxy or in person at the Shareholders Meeting will be counted by the persons appointed by the Company to act as election inspectors for the meeting. The election inspectors will treat Proxy Shares that reflect abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum. Abstentions will not be counted as votes for or against any proposal. In those instances where shares are held by brokers who are prohibited from exercising discretionary authority for beneficial owners who have not given voting instructions (“broker nonvotes”), those shares will be counted as present for quorum purposes. Broker nonvotes will not be counted as votes for or against any proposal.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT

Set forth below is information, as of February 29, 2008, with respect to beneficial ownership by (a) each person who is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each director and nominee of the Company, (c) each named executive officer (as such term is defined under Item 402(a)(3) of Regulation S-K, referred to herein collectively as the “named executive officers”) for fiscal 2007, and (d) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the Company’s knowledge, all persons listed below have the sole voting and investment power with respect to their shares of Common Stock (except to the extent that authority is shared by spouses under applicable law).

Directors, Nominees and Named Executive Officers

Name and Address of Beneficial Owner	Description	Amount and Nature of Beneficial Ownership	Percent of Outstanding Common Stock (1)
B. Kenneth Driver 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	114,844 (2)(7)	1.81%
Karl Fillauer 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	150,260 (2)(8)	2.37%
Nathaniel F. Hughes 835 Georgia Avenue Chattanooga, Tennessee 37402	President, Chief Financial Officer and Director	245,100 (4)(9)	3.79%
Gregory B. Jones 835 Georgia Avenue Chattanooga, Tennessee 37402	Chairman of the Board, Chief Executive Officer and Director	239,900 (5)(10)	3.71%
Jerry D. Lee 835 Georgia Avenue Chattanooga, Tennessee 37402	Executive Vice President Senior Loan Officer and Director	240,600 (6)(11)	3.72%
Lawrence D. Levine 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	49,810 (2)(12)	*
Frank S. McDonald 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	12,500 (3)	*
Doyce G. Payne, M.D. 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	173,860 (2)(13)	2.74%
Wesley M. Welborn 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	19,500 (3)	*
Billy O. Wiggins 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	162,470 (2)(14)	2.56%
Marsha Yessick 835 Georgia Avenue Chattanooga, Tennessee 37402	Director	118,100 (2)(15)	1.86%
Robert B. Watson 835 Georgia Avenue Chattanooga, Tennessee 37402	Executive Vice President	24,600 (16)	*

All directors and executive officers as a group (12) persons

1,551,544

22.71%

* Signifies less than one percent

Notes

(1)

Unless otherwise indicated, beneficial ownership consists of sole voting and investing power based on 6,319,718 shares issued and outstanding on February 29, 2008. For the purpose of computing the percentage of outstanding shares owned by each beneficial owner, the shares issuable pursuant to stock options held by such beneficial owner that are exercisable or will become exercisable within 60 days of February 29, 2008 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person.

(2)	Includes 7,500 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan.

(3)	Includes 4,500 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan.

(4)	Includes 147,100 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan and the Cornerstone 2002 Long Term Incentive Plan.

(5)	Includes 139,900 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan and the Cornerstone 2002 Long Term Incentive Plan.

(6)	Includes 144,700 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan and the Cornerstone 2002 Long Term Incentive Plan.

(7)	Includes 107,344 shares held jointly with Mr. Driver’s spouse, as to which Mr. Driver disclaims beneficial ownership.

(8)	Includes 142,760 shares held by Fillauer Partners a Limited Partnership, as to which Mr. Fillauer disclaims beneficial ownership.

(9)	Includes 3,000 shares held as custodian for Mr. Hughes’ children, as to which Mr. Hughes disclaims beneficial ownership.

(10)	Includes 29,000 shares held jointly with Mr. Jones’ spouse, and 5,600 shares held in an IRA account by Mr. Jones’ spouse, as to which Mr. Jones disclaims beneficial ownership.

(11)	Includes 38,000 shares held in an IRA account by Mr. Lee’s spouse and 2,400 shares held as custodian for a child, as to which Mr. Lee disclaims beneficial ownership.

(12)	Includes 800 shares held by Mr. Levine’s spouse and 35,610 shares held in a Charitable Remainder Trust as to which Mr. Levine disclaims beneficial ownership.

(13)	Includes 53,360 shares held jointly with Dr. Payne’s spouse and 12,000 shares held individually by Mr. Payne’s spouse, as to which Dr. Payne disclaims beneficial ownership.

(14)	Includes 12,000 shares held as custodian for a child, as to which Mr. Wiggins disclaims beneficial ownership.

(15)	Includes 50,000 shares held by Ms. Yessick’s spouse as to which Ms. Yessick disclaims beneficial ownership.

(16)	Includes 24,400 shares issuable within 60 days of February 29, 2008 upon exercise of options issued pursuant to the Cornerstone 2002 Long Term Incentive Plan.

Greater than 5% Beneficial Owners

The Company is not aware of any person (including any “group” as that term is used in the Securities Exchange Act of 1934, as amended) who is the beneficial owner of more than 5% of the outstanding shares of Common Stock, as of February 29, 2008.

PROPOSALS

I. ELECTION OF DIRECTORS

Pursuant to the Company’s bylaws, the Board has set the number of directors of the Company to be between nine and fifteen. The Board has nominated B. Kenneth Driver, Karl Fillauer, Nathaniel F. Hughes, Gregory B. Jones, Jerry D. Lee, Lawrence D. Levine, Frank S. McDonald, Doyce G. Payne, M.D., Wesley M. Welborn, Billy O. Wiggins and Marsha Yessick to stand for election as directors at the Shareholders Meeting. Should any nominee become unable to serve for any reason, or choose not to serve, the Board may designate a substitute nominee or nominees (in which event the persons named in the enclosed proxy card will vote all valid proxy cards for the election of such substitute nominee or nominees), allow the vacancy or vacancies to remain open until a suitable candidate or candidates are located or by resolution provide for a lesser number of directors.

Each director elected at the Shareholders Meeting will serve until the next Annual Meeting of Shareholders and until his or her successor has been duly elected and qualified or until his or her earlier resignation or removal.

Information about Director Nominees

Set forth below with respect to the nominees for director of the Company is information regarding their business experience during the past five years and other information.

Name	Age	Principal Occupation
B. Kenneth Driver	72	Vice Chairman and Co-Chief Executive Officer of Fillauer Companies, Inc., since January 2007, and President and Chief Operations Officer, from 1996 to 2007. Fillauer Companies, Inc. is a Chattanooga based prosthetic manufacturer. He has been a director of the Company since 1997.
Karl Fillauer	60	Chairman of Fillauer Companies, Inc., since 1996. Fillauer Companies, Inc. is a Chattanooga based prosthetic manufacturer. He has been a director of the Company since 1997.
Nathaniel F. Hughes	49	President and Chief Financial Officer of the Company and President and Chief Operating Officer of Cornerstone Community Bank since June 2004. Mr. Hughes was President and Chief Financial Officer of the Company and Cornerstone Community Bank from April 2003 to June 2004. Mr. Hughes was Executive Vice President and Chief Financial Officer of the Company and Cornerstone Community Bank from February 1999 to April 2003. Mr. Hughes has been a director of the Company since April 2003.
Gregory B. Jones	55	Chairman of the Board and Chief Executive Officer of the Company and Cornerstone Community Bank since April 2003. President and Chief Executive Officer of the Company and Cornerstone Community Bank from January 1999 to April 2003. He has been a director of the Company since 1999.
Jerry D. Lee	46	Executive Vice President and Senior Loan Officer of Cornerstone Community Bank since April 1999. Mr. Lee has been a director of the Company since April 2003.
Lawrence D. Levine	78	Retired insurance executive since 2002. Prior to 2002 he was President of Financial Management Corp. for over twenty years. Financial Management Corp. was a Chattanooga based insurance and financial management company. He has been a director of the Company since 1997.
Frank S. McDonald	56	President of FMA Architects, PLLC, for more than ten years. FMA Architects, PLLC is a locally based architectural firm. He has been a director of the Company since September 2005.
Doyce G. Payne, M.D.	57	Retired physician of obstetrics and gynecology in the Chattanooga area. He practiced obstetrics and gynecology in the Chattanooga area for more than ten years prior to his retirement in 2004. He has been a director of the Company since 1997.
Wesley M. Welborn	49	President of Welborn & Associates, Inc. for more that ten years. Welborn & Associates, Inc. is a locally based consulting firm specializing in transportation logistics. He has been a director of the Company since September 2005.
Billy O. Wiggins	65	President of Checks, Inc., for more than ten years. Checks, Inc. is a Chattanooga based specialty check printing company. He has been a director of the Company since 1997.
Marsha Yessick	60	Owner of Yessick’s Design Center for more than ten years. Yessick’s Design Center is a Chattanooga based interior design company. She has been a director of the Company since 1997.

Voting for Directors

Directors will be elected by a plurality of the votes cast at the Shareholders Meeting at which a quorum is present. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES AS DIRECTORS OF THE COMPANY.

II. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Audit Committee of the Board has appointed Hazlett, Lewis & Bieter, PLLC ("HLB") to serve as the independent certified public auditors for the Company and its subsidiaries for the fiscal year ending December 31, 2008 (sometimes referred to herein as “fiscal 2008”). HLB has served as the independent auditors for the Company since 1997 and for Cornerstone Community Bank, the Company’s only bank subsidiary (the “Bank”), since 1996. HLB has advised the Company that neither HLB nor any of its partners have any direct or material interest in the Company and its subsidiaries except as auditors and independent certified public accountants of the Company and its subsidiaries.

The Company is asking the shareholders to ratify the Audit Committee’s appointment for fiscal 2008. In the event the Shareholders fail to ratify the appointment, the Audit Committee will consider it a direction to consider other auditors after fiscal 2008. A representative of HLB will be present at the Shareholders Meeting and will be given the opportunity to make a statement on behalf of HLB if he or she so desires. The HLB representative is also expected to respond to appropriate questions from the shareholders.

The affirmative vote by holders of a majority of the shares of Common Stock represented at the Shareholders Meeting, at which a quorum is present, is required to ratify the appointment of HLB as the Company’s independent auditors for fiscal 2008.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF HAZLETT, LEWIS & BIETER, PLLC AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2008.

CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS

The Company’s business is managed by its employees under the direction and oversight of the Board of Directors. Board members are kept informed of the Company’s business through discussions with management, materials provided to them by management and their participation in Board and Board Committee meetings.

Board Composition and Director Independence

The Board is comprised of three employee directors, Messrs. Hughes, Jones and Lee, and eight non-employee directors, Messrs. Driver, Fillauer, Levine, McDonald, Payne, Welborn, Wiggins and Ms. Yessick. Each of the non-employee directors is an “independent director,” as defined by the rules of the National Association of Securities Dealers, Inc. (“NASD”). The Board has four standing committees: the Audit Committee, the Asset/Liability Management and Strategic Planning Committee, the Human Resource/Compensation Committee (sometimes referred to herein as the “Compensation Committee”) and the Nominating/Board Governance Committee. The Board limits membership on the Audit Committee, the Compensation Committee and the Nominating/Board Governance Committee to independent directors as defined by rules of the NASD and the Securities and Exchange Commission (“SEC”). These committees advise the Board on policy origination and plan administrative strategy and assure policy compliance through management reporting from areas under their supervision. These same four committees also serve the Company's only bank subsidiary, Cornerstone Community Bank (the “Bank”). In addition, the Bank has a Directors Loan Committee. The Company’s wholly owned subsidiary, Eagle Financial, Inc. (“Eagle”), has a Board of Directors of four (4) independent non-management directors and four (4) management directors. The Company’s Board selects the non-management directors from the Company’s independent directors.

Code of Conduct

The Company has adopted a code of conduct, which contains provisions consistent with the SEC’s description of a code of ethics, which applies to its directors, officers and employees, including its principal executive officers, principal financial officer, principal accounting officer, controller or persons performing similar functions. The purpose of the code of conduct is, among other things, to provide written standards that are reasonably designed to deter wrongdoing and to: (1) promote honest and ethical conduct; (2) provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission and other public communications by the Company; (3) be in compliance with applicable governmental laws, rules and regulations; (4) promptly report any violations of the code of conduct; and, (5) establish accountability for adherence to the code of conduct. Each director is required to read and certify annually that he or she has read, understands and will comply with the code of conduct.

Meetings of the Board of Directors

The Board of Directors held twelve meetings during 2007 and all of the directors, with the exception of Mr. Smith, attended at least 75% of the aggregate total number of meetings of the Board and meetings of the Board committees on which they served. Mr. Smith suffered a stroke in August 2007 and has subsequently been under medical care and rehabilitation. Mr. Smith resigned from the Board in January 2008. During 2007, Mr. Smith attended 40% of the Board and meetings of the Board committees on which he served. The Company does not have a policy for director attendance at annual meetings.

Audit Committee

The Audit Committee historically has recommended annually to the Board the accounting firm to be engaged as independent auditors for the Company for the next fiscal year and after the enactment of the Sarbanes-Oxley Act of 2002 now selects and engages the Company’s independent auditors. Pursuant to its Amended and Restated Audit Committee Charter, the Audit Committee, among other things, reviews financial statements, plans and reviews the results of internal auditing, financial reporting procedures, reports of regulatory authorities, compliance with internal controls required by the Federal Deposit Insurance Corporation Improvement Act and periodically reports to the Board. The charter of the Audit Committee is not available on the Company’s website but is included as Exhibit A to this proxy statement. Mr. Levine, Dr. Payne and Mr. McDonald constitute the members of this Committee. This Committee held five meetings for the Company and the Bank during 2007.

Policies and Procedures for the Approval of Related Person Transactions

The charter of the Audit Committee provides that it must approve all transactions between the Company and related parties, as defined by applicable SEC and NASD rules and regulations. In accordance with this responsibility, the Audit Committee on a timely basis reviews and, if appropriate, approves all related party transactions. At any time in which an executive officer, director or nominee for director becomes aware of any contemplated or existing transaction that, in that person’s judgment may be a related party transaction, such person is expected to notify the Chairperson of the Audit Committee of the transaction. Generally, the Chairperson of the Audit Committee reviews any reported transaction and may consult with outside legal counsel regarding whether the transaction is, in fact, a related party transaction requiring approval by the Audit Committee. If the transaction is considered to be a related party transaction, then the Audit Committee will review the transaction and, in deciding whether to approve the transaction, will consider the factors it deems appropriate under the circumstances, including, but not limited to, the following:

the approximate dollar amount involved in the transaction, including the amount payable to the related person;

the nature of the interest of the related person in the transaction;

whether the transaction may involve a conflict of interest;

whether the transaction involves the provision of goods or services to the Company that are available from unaffiliated third parties and, if so, whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; and,

the purpose of the transaction and any potential benefits to the Company.

In addition to the Audit Committee’s written responsibility, as mandated by the Audit Committee’s charter, to approve related party transactions, the Company also has other written policies and procedures for approving and monitoring related third party transactions.

Asset/Liability Management and Strategic Planning Committee

The Asset/Liability Management and Strategic Planning Committee oversees and reviews the Company's investment portfolio, risk management process, development and implementation of the Company’s strategic plan and interest risk positions. The members of this Committee are Mr. Driver, Mr. Welborn and Mr. Wiggins. This Committee held four meetings for the Company and the Bank during 2007.

Human Resource/Compensation Committee

The Human Resource/Compensation Committee makes recommendations to the Board with respect to the compensation of executive officers and employees of the Company and the Bank. The Company's Human Resource/Compensation Committee administers the 401(k) plan, the Employee Stock Ownership Plan (“ESOP”), the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan, the 2002 Long Term Incentive Plan and the 2004 Non-Employee Director Compensation Plan. In addition, the Human Resource/Compensation Committee oversees the Company's employee benefit and salary administration functions. The Board has adopted a written charter for this Committee, which is not available on the Company’s website but is included as Exhibit B to this proxy statement. The Human Resource/Compensation Committee is comprised of three independent directors chosen annually by the Board. Mr. Fillauer, Mr. Levine and Ms. Yessick, who is the Committee Chairperson, constitute the members of the Human Resource/Compensation Committee. The Human Resource/Compensation Committee held five meetings for the Company and the Bank during 2007.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee during fiscal year 2007 were Mr. Fillauer, Mr. Levine and Ms. Yessick. No member of the Compensation Committee was an officer or employee of the Company or any of its subsidiaries at the time of such member’s service on the Compensation Committee during fiscal year 2007. None of the executive officers of the Company during fiscal year 2007: (a) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served on the Compensation Committee of the Company, (b) served as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company, or; (c) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served as a director of the Company.

Nominating/Board Governance Committee

The Nominating/Board Governance Committee identifies, investigates and recommends prospective directors to the Board with the goal of creating a balance of knowledge, experience and diversity. Candidates for director nominees are reviewed in the context of the current composition of the Board, the operating requirements of the Company and the Bank and the long-term interest of the Company’s shareholders. The Nominating/Board Governance Committee develops and maintains a list of potential candidates for the Board. In conducting this assessment, the Nominating/Board Governance Committee considers diversity, age, skills and such other factors as it deems appropriate given the current needs of the Board, the Company and the Bank, to maintain a balance of knowledge, experience and capability. The Nominating/Board Governance Committee also reviews the performance and contribution of independent members of the Board and determines the need for any corporate officer to be considered a candidate for nomination. The Nominating/ Board Governance Committee will not consider nominees for directors recommended by shareholders. The Board has adopted a written charter for the Nominating/Board Governance Committee, which is not available on the Company’s website but is included as Exhibit C to this proxy statement. Each member of the Nominating/Board Governance Committee would be independent as required by Nasdaq or the New York Stock Exchange. Mr. Fillauer, Mr. Driver and Ms. Yessick constitute the members of the Nominating/Board Governance Committee. The Nominating/Board Governance Committee held one meeting in 2007.

Communications with Directors

Shareholders are encouraged to communicate with directors either in person or in writing at any time. Communications are not screened and written communications are passed on to the Board for their review and consideration. Written communications should be sent to Cornerstone Bancshares, Inc., Attention: Chairman of the Audit Committee, 6401 Lee Highway, Suite B, Chattanooga, Tennessee 37421.

COMPENSATION DISCUSSION AND ANALYSIS

Introduction

The Compensation Committee (the “Committee”) carries out the Board’s overall responsibilities with respect to executive compensation, director compensation and review of the Company Chief Executive Officer’s (the “CEO”) performance. The Committee also oversees administration of the Company’s employee benefit plans, including the Company’s 401(k) plan and the Company’s ESOP. The Committee operates under a written charter (see Exhibit B) that is approved annually by the Board. The Committee Chairperson sets the agenda and calendar for the Committee. The Committee has the authority to hire independent consultants to advise the Committee on compensation matters. For fiscal year 2007 the Committee did not hire an independent consultant to advise the Committee on compensation matters. The CEO reviews the performance of the other named executive officers and recommends to the Committee compensation packages for each of them.

Total compensation of the Company’s named executive officers is determined primarily by the Company’s size in earning assets, the Company’s financial performance and the individual executive’s performance. In determining what types and levels of total compensation to offer the named executive officers, the Committee has written an “Executive Compensation Policy” (“Policy”), including guidelines, using predetermined Company financial parameters for the distribution of the particular components of total compensation to the named executive officers.

Identification of Named Executive Officers

This Compensation Discussion and Analysis and the narrative, tables and footnotes below describe the total compensation paid for fiscal 2007 to the Company’s named executive officers, who are:

Designation	Name	Title
Principal Executive Officer Principal Financial Officer	Gregory B. Jones Nathaniel F. Hughes Jerry D. Lee Robert B. Watson	Chairman and CEO President and CFO Executive Vice President and Senior Loan Officer Executive Vice President and Senior loan Officer for Asset Based Lending

Because the named executive officers are the only officers of the Company who had been designated as executive officers for fiscal 2007, as determined by the Board of Directors, no other person has been included as a named executive officer in this proxy statement.

Philosophy

The Company’s overall executive compensation philosophy is to align its compensation program with optimizing shareholder value. To that end, the program is designed to recognize superior operating performance and to attract, retain and motivate the executive talent essential to the Company’s financial success. Consistent with this philosophy, the Committee is guided by the following objectives when administering the Company’s overall compensation program:

Objectives

Attract and retain highly qualified executives that portray the Company’s culture and values;

Motivate executives to provide excellent leadership and achieve the Company’s goals;

Provide substantial performance-related incentive compensation that is aligned to the Company’s strategy and directly tied to meeting specific Company objectives;

Strongly link the interests of the executives to the value derived by the Company’s shareholders from owning the Company’s Common Stock; and,

Be fair, ethical, transparent and accountable in setting and disclosing executive compensation.

In furtherance of these objectives, the following considerations underlie the Committee’s determination with respect to the following principal elements of compensation for the named executive officers:

Base Salary - Individual salary determinations should be based upon incumbent qualifications, behaviors, cultural adherence and performance.

Annual Cash Incentives - Executives should have a portion of their total cash compensation at risk, contingent upon meeting Company objectives.

Long-Term Equity-Based Awards - Executives who are critical to the Company’s long-term success should participate in long-term incentive opportunities that link a portion of their total compensation to increasing shareholder value.

Retirement Plans and Other Benefits - Executives participate in the Company’s benefit programs, such as health insurance, 401(k) plan, ESOP, vacation and life insurance, at a level consistent with policy, prevailing law and current regulation.

The Elements of Executive Officer Compensation

Compensation for the named executive officers consists principally of four elements: (1) base salary, (2) annual cash incentives, (3) long-term equity-based awards, and; (4) retirement plans and other benefits. Total compensation is intended to correlate to the Company’s ability to grow earning assets which in turn enhances the Company’s growth in shareholder value. The Committee did not use competitive salary surveys to determine or measure the total compensation of the named executive officers. A portion of each named executive officer’s total compensation consists of cash payments, including base salary and/or annual cash incentive awards. In addition a portion of each named executive officer’s total compensation consists of equity awards designed to align the interests of the named executive officers with the interests of the Company’s stakeholders, who include the shareholders, employees, directors and community interests.

Base Salary

In establishing executive officer base salaries and increases, the Committee considers individual annual performance and the relationship of individual total compensation to the Company’s overall performance. It is deductive to assume that as the size and complexity of the Company increases, the skill sets of the executive officer’s must also increase to manage effectively the complexities facing the Company. Therefore the executive officer’s base salary must change, relative to size and complexity of the Company, to recruit and retain the best people possessing the required skill sets.

The Committee’s first step in this process is to determine the CEO’s base salary. The Committee then reviews the CEO’s recommendations for the base salaries of the other named executive officers’ relative to the Company’s overall performance and Policy guidelines.

The Committee believes that a justification for the CEO’s base salary must have a primary basis in the size and complexity of the Company relative to the stakeholders’ interests. To this end the Committee follows a mathematical approach in establishing the CEO’s base salary and adjusts the calculated results to incorporate the intangible attributes of an effective CEO. This approach is scalable to size and complexity, but is also flexible to accommodate the uniqueness of the CEO’s skill sets and leadership attributes. This mathematical approach ties base salary to the growth rate of the Company’s earning assets as that growth rate compares to the banking industry’s growth rate of earning assets. By establishing a base year to measure the change in earning asset growth, the Committee believes that its determination as to the CEO’s base salary and increases thereto are better aligned to the stakeholders’ interests. Growth of the Company’s earning assets in fiscal year 2007 will translate into growth of shareholder value in future years.

For fiscal 2007, the mathematical approach followed by the Committee used a formula where the square root of the ratio of the banking industry’s earning assets growth rate from the base year ended on December 31, 2004 and the Company’s earning assets growth rate from the base year ended on December 31, 2005 was multiplied by a December 31, 2004 baseline net interest income. The result of that calculation was then adjusted by a proportionate factor to determine the CEO’s base salary. The Committee used publicly available data from 2005 and 2006 to select a sample of 100 federally insured banking institutions to build the baseline model. The sample reflects the structure of the banking industry in which relatively few large banks control a disproportionately large dollar amount of the banking industry’s earning assets. Following testing and verification to determine the reliability of the model for various sizes of banking institutions, the Committee concluded that the model was statistically accurate in determining the CEO’s base salary.

In summary the Committee attempted to correlate the Company’s earning assets growth level to the CEO’s base salary. Having established a statistical correlation, the Committee then established each of the other named executive officer’s base salary within a reasonable range of the CEO’s base salary. The Committee may increase or decrease a named executive officer’s calculated base salary by up to ten percent (10%) based on its evaluation of the following six intangible leadership attributes of the named executive officer:

Advocating a vision and direction for the Company’s long term success;

Building and sustaining effective and focused teams;

Effective strategic planning by meeting or exceeding the goals approved by the Board of Directors;

Supporting staff in accomplishing the strategic objectives through delegation and mentoring;

Executing strong stewardship practices by managing the Company in a safe, sound and ethical manner; and,

Communicating effectively with the Company’s stakeholders.

Using the mathematical model the Committee calculated a median base salary for the CEO of $217,345 for fiscal 2007. The Committee determined the CEO’s personal leadership attribute rating (subjectively scoring the six attributes listed above) was above average, and therefore awarded the CEO a base salary of $225,000, or 67.6% of the 50% median, for fiscal 2007. It is important to note that even though the Company did not use competition salary surveys in determining the CEO’s base salary, the mathematical comparisons to other industry banks includes a bias to the extent the other banking institutions used competitive salary surveys in determining their CEOs’ base salaries. However over time the original bias, included in the banking industry’s 2006 CEO base salaries, is reduced because the mathematical approach does not incorporate any subsequent year’s salary survey bias into the model.

As determined by the Committee the other executive officer’s base salaries are established within percentage ranges of the CEO’s base salary as follows:

	Range as a % of CEO Base Pay
President & COO	65% to 85%
Executive Vice Presidents	50% to 80%
Senior Vice Presidents	40% to 75%

All of the executive officers’ base salaries for fiscal 2007 are within the parameters set by the Committee. (See the “Summary Compensation Table” below)

Annual Cash Incentive Award

The annual cash incentive award program consists of four parts:

Methodology for determining the amounts paid under the annual cash incentive award program and the long-term equity-based award program;

Calculation of the Company’s 2007 Total Performance Score;

Named executive officer personal performance evaluations; and,

Calculating the payment amounts.

Part1 - Methodology for Determining the 2007 Annual Cash Incentive Award and the Long-Term Equity Based Award

The Committee believes the higher the level of employee participation in the Company’s annual cash incentive award program and the long-term equity-based award program the greater shareholder value will be improved. All annual cash incentive awards are designed to optimize the operating performance of the Company and the business units operating within the Company. Every employee in the Company is eligible to earn an annual cash incentive award. The long-term equity-based awards are designed to reward the employees for long-term consistent improvement in the Company’s financial performance. All Company employees with an officer designation participate in the long-term equity-based award program. With such a large group participating in both employee performance award programs, the Committee selected the following methodology for participation in both award programs:

Determine a Company-wide pool size, given a particular “Total Criteria Score,” based on the Company’s total base salary expense (“Company-wide pool”);

Determine the percentage of the Company-wide pool the named executive officers will participate (“executive pool”);

Based on the named executive officers’ base salary, determine the minimum and maximum opportunity each named executive officer could receive from the executive pool;

Determine the percentage each named executive officer would receive, within the minimum and maximum limits, from the executive pool;

Based on each named executive officer’s performance evaluation adjust the final amount paid to each named executive officer;

Determine if the Company’s financial performance can accommodate the expenditure for the award program without adversely affecting the Company’s financial performance; and,

Use appropriate discretion by the Committee to accommodate for any unforeseen events to optimize shareholder value.

Part 2 - Calculation of the Company’s 2007 Total Performance Criteria Score Used in the Calculation of the Annual Incentive Cash Award and the Long-Term Equity-Base Award

The Committee recognizes that the Company’s business is complicated, but wanted to capture the essence of the Company’s performance, relative to shareholder value, with as few components as possible. The weighting of the “Performance Criteria” was accomplished by considering which component contributed the most to increasing shareholder value. The weighting combined both subjective and objective information consistent with the Company’s strategy and financial budget for fiscal 2007. In choosing the five components the Committee believes that the most critical functions of the Company’s business have been included. Performance targets are established in February each fiscal year based on the Company’s strategic plan, the financial budgeting process and the December 31^st data from the banking industry’s “Uniform Bank Performance Report.” As shown below in Table 1 the fiscal 2007 performance criteria were:

TABLE 1

Calculation for the Company’s 2007 Total Criteria Score

2007 Performance Criteria	Weight			Target			Actual			% of Goal			Score
EPS		25.00	%	$	1.00		$	0.13			13.00	%		3.25	%
ROE		20.00	%		16.00	%		2.13	%		13.31	%		2.66	%
Efficiency ratio		20.00	%		65.00	%		49.51	%		100.00	%		20.00	%
Non-performing asset ratio		25.00	%		0.75	%		0.46	%		100.00	%		25.00	%
Non-interest expense ratio		10.00	%		2.75	%		2.64	%		100.00	%		10.00	%
TOTAL CRITERIA SCORE														60.91	%

The business criteria and the Committee’s basis for selecting these criteria are as follows:

Earnings per Share (“EPS”) - EPS reflects the overall profitability of the Company divided by the number of outstanding shares of Common Stock. Sustained profitability will provide increased equity in the form of retained earnings. Retained earnings can be used for shareholder dividends and continued growth of earning assets. The growth in earning assets, within the regulatory equity limits, will provide for future growth in profitability and thereby providing increases in dividends. Also EPS is the primary determinate for establishing the Company’s Common Stock share price, as reflected in the open market. All things remaining equal, as EPS increases the share price increases, thus improving shareholder value. In summary the two main determinates of shareholder value are the Common Stock share price and dividend payout. The Company’s fiscal 2007 target EPS was established through the budgetary process.

Return on Equity (“ROE”) - The Company’s earnings divided by the Company’s average equity determines the Company’s ROE. The Company can grow earning assets by a multiple of its equity. Too much equity is an indication that the growth in earning assts is too slow. Too little equity might not provide a sufficient cushion in the event of an unforeseen loss. Equity management is critical to earning asset growth and future profitability. Optimizing ROE, while remaining well capitalized, demonstrates management’s ability to effectively use the shareholders equity for the growth of the Company. The fiscal 2007 target is a result of the annual budgetary process adopted, reviewed and approved by the Board.

Efficiency Ratio - This ratio balances several banking components together. Simply stated it is a ratio of how much the Company spends to attain $1 of revenue. The lower the efficiency ratio the better the Company performs at achieving its profitability target. The first feature of the efficiency ratio is the net interest margin (“NIM”). The Company must allocate its total earning assets among different earning asset choices with differing interest rates. Simultaneously the Company must fund those earning assets with different choices of liabilities with similarly differing interest rates. The NIM is the positive difference between the average rates earned on all earning assets less the average rates paid on all liabilities. This is commonly referred to as “Asset/Liability Management.” Asset/Liability Management is critical to profitability. The second feature of the efficiency ratio is non-interest income. The higher non-interest income is the better the efficiency ratio becomes. The last component in non-interest expense. Expense controls are vital to maintaining a low efficiency ratio. Therefore management is tied again to shareholder value by achieving an efficiency ratio target that is lower than its peer group. The fiscal 2007 target efficiency ratio was equal to the Company’s peer group median ratio as reported on December 31, 2006 by the industry’s “Uniform Bank Performance Report.”

Non-Performing Asset Ratio - This is an asset quality ratio. As earning assets deteriorate in value they become non-interest earning. Therefore the lower this ratio is the better the profitability. This ratio is directly linked to making the right choices among the various kinds of earning assets. The Company’s fiscal 2007 target for this ratio was equal to the Company’s peer group median ratio as reported on December 31, 2006 by the industry’s “Uniform Bank Performance Report.”

Non-Interest Expense Ratio - This ratio is an expense control measurement based on asset size. As the Company grows, expenses will grow as well. However controlling expenses while growing earning assets must be managed properly. Over-control might lead to high employee turnover and weak internal controls. Under-control might lead to over spending for routine business functions. Efficiently controlling expenses while growing the Company’s earning assets improves shareholder value. The Company’s fiscal 2007 target for this ratio was equal to the Company’s peer group median ratio as reported on December 31, 2006 by the industry’s “Uniform Bank Performance Report.”

The Company’s financial performance is graded against the targets and a “Total Criteria Score” is determined. The Total Criteria Score for fiscal 2007 was 60.91%.

Part 3 - Named Executive Officer Performance Evaluation

In February of each fiscal year the Committee designates the percentage adjustment to the final payment calculated for each named executive officer’s annual cash incentive award and long-term equity-based award based on each named executive officer’s personal performance evaluation grade. The personal evaluation, conducted in December of each fiscal year, is a combination of subjective and objective criteria specifically related to the named executive being graded. The Committee strongly feels that the final annual cash incentive award and long-term equity-based award paid to a named executive officer should be adjusted by a multiplier based on the named executive officer’s personal performance. Therefore the following percentages in Table 2 below would be multiplied by the named executive officer’s annual cash incentive award and long-term equity-based award calculated to determine the final annual cash incentive award and long-term equity-based award payments to each named executive officer.

TABLE 2

Performance Grade Multiplier for Determining the Final

2007 Executive Officer’s Cash Incentive Award Payment

Executive’s Performance Grade	Maximum Allocation Multiplier			Minimum Allocation Multiplier
(A) Above Average		100	%		100	%
(B) Average		75	%		75	%
(C) Below Average		10	%		0	%

Part 4 - Calculation for the 2007 Annual Cash Incentive Award

The following Table 3, as established by the Committee in February of each fiscal year, establishes the range of percentages the Committee used in establishing the fiscal 2007 Company-wide annual cash incentive award pool (the “Company-wide pool”). Based on the “Total Criteria Score,” the Committee may select a percentage within the applicable range and multiply that percentage by the Company’s total base salary expense, thereby creating the Company-wide pool.

TABLE 3

Calculation for the Company’s 2007 Cash Incentive Award Pool

Total Criteria Score

=100% or more

>=80% <100%

>=50% < 80%

<50%

% of salary expense available to create the

Company’s cash incentive award pool

10% to 4%

8% to 2%

4% to 0%

In selecting an exact percentage within the applicable range the Committee weighs the Company’s ability to adequately accrue sufficient funds into the Company-wide pool while still achieving the Company’s overall financial performance goals.

The Company’s total base salary expense for fiscal 2007 was $5,086,580. The Company’s performance score for fiscal 2007 was 60.91%. The range for the creation of a Company-wide pool for fiscal 2007, based on the Company’s performance, was 4% to 0%. The Committee, using its discretion, determined that the Company’s fiscal 2007 financial performance and the Company’s ability to accrue sufficient funds into the Company-wide pool were not sufficient to create a Company-wide pool for fiscal 2007. Therefore no annual cash incentive awards were distributed to any Company employee for fiscal 2007.

Assuming that a Company-wide pool will be funded, the Committee, in February of each fiscal year, sets a percentage of the Company-wide pool to be allocated to the named executive officers’ annual cash incentive award pool (the “executive pool”). In February 2007 the Committee set this percentage at 25%, thereby allocating 25% of the Company-wide pool to the executive pool for potential awards to the named executive officers, based on its belief that the percentage provided the named executive officers was an adequate executive pool size relative to any level of the “Total Criteria Score.” Because all of the Company’s employees participate in the Company-wide pool, the Committee strongly believes the majority of the Company-wide pool should be distributed to the non-executive employees. In February of each fiscal year, the Committee establishes the named executive officer’s minimum and maximum percentages (See Table 4) of base salary that would be eligible for payment from the executive pool. Those maximum and minimum percentages are based on the Company’s achievement of the target financial performance goals, as measured by the “Total Criteria Score” shown in Table 1:

TABLE 4

Maximum and Minimum Percentages of Each Executive Officer’s Base Pay

Allowed for a 2007 Cash Incentive Award Payment

Total Criteria Score	=100% or more			>=80% <100%			>=50% < 80%			<50%
Maximum Percentage		50	%		25	%		10	%		0	%
Minimum Percentage		0	%		0	%		0	%		0	%

In December of each fiscal year, the Committee establishes a percentage each named executive officer would receive from the executive pool. The Committee would make their decision on each named executive officer’s allocation percentage based on the Committee’s evaluation of the named executive officer’s level of contribution (See Table 2 above) to the Company’s attaining, or exceeding, the financial performance targets as shown in Table 1.

Long-Term Equity-Based Stock Awards

The long-term equity-based award program consists of four parts:

Methodology for determining the amounts paid under the annual cash incentive award program;

Calculation of the Company’s 2007 Total Performance Score;

Named executive personal performance evaluations; and,

Calculating the payment amounts.

The first three parts are discussed in the Annual Cash Incentive Award section above. The fourth part is the calculation of the Company’s fiscal 2007 long-term equity-based award, and is discussed below.

Long-term equity-based awards, in the form of incentive stock options, are designed to reward employees for the long-term consistent improvement in the Company’s financial performance. All officers of the Company are eligible to participate in the incentive stock option award program. The Committee establishes, in February of each fiscal year, the financial targets (See Table 1 above) to be used in determining the pool size for the total Company-wide incentive stock option awards. The following Table 5 describes, based on the “Total Criteria Score,” the applicable range of percentages multiplied by the total Company base salary expense that will create the fiscal 2007 Company-wide incentive stock option award pool (the “Company-wide option pool”).

TABLE 5

Calculation for the Company’s 2007 Incentive Stock Option Award Pool

Total Criteria Score	=100% or more			>=80% <100%			>=50% < 80%			<50%
Maximum Percentage		5	%		6	%		7	%		10	%
Minimum Percentage		3	%		3	%		3	%		3	%

The Committee chose to increase the percentage allocation of the Company-wide option pool as the “Total Criteria Score” decreased, because a longer term reward program for successful improvement in financial performance would mitigate the employees’ loss in short-term annual cash incentive awards. The Company’s total base salary expense for fiscal 2007 was $5,086,580. The Company’s performance score for fiscal 2007 was 60.91%. The applicable range for the creation of the Company-wide option pool for fiscal 2007, based on the Company’s performance, was 7% to 3% (See Table 5 above). The Committee, using its discretion, chose to create a Company-wide option pool of 3.25% of the total Company base salary expense, or approximately $165,000. The Committee chose 3.25% based on the Company’s fiscal 2007 financial performance and the Company’s ability to accrue sufficient funds into the Company-wide option pool.

In February of each fiscal year, the Committee, using its discretion, sets a percentage of the Company-wide option pool to be allocated to the named executive officer’s incentive stock option pool (the “executive option pool”). In February 2007 the Committee set this percentage at 43%, thereby allocating 43% of the Company-wide option pool to the executive option pool. Because all Company officers participate in the Company-wide option pool, the Committee strongly believes the majority of the Company-wide option pool should be distributed to the non-executive officers. The Committee also believed the executive option pool size of 43% provided the named executive officers with an adequate executive option pool relative to any level of the “Total Criteria Score.” In December, of each fiscal year, the Committee establishes the percentages each named executive officer would receive from the executive option pool. The Committee would make their decision on each named executive officer’s allocation percentage based on the Committee’s evaluation of the named executive officer’s skill sets and level of contribution to the Company’s attaining, or exceeding, the financial performance targets into the future. In Table 6 below, the listing describes how the Committee allocated the executive option pool to each named executive officer for fiscal 2007:

TABLE 6

Allocation of the 2007 Executive Incentive Stock Option Award Pool to Each Executive Officer

Named Executive	Percentage of Executive Cash Incentive Pool Allocated to Each Executive Officer
Greg Jones		21.00	%
Frank Hughes		28.00	%
Jerry Lee		28.00	%
Barry Watson		23.00	%
TOTAL		100.00	%

Also in February 2007 the Committee established the named executive officer’s minimum and maximum percentages of base salary that would be eligible for payment from the executive option pool. Those maximum and minimum percentages are based on the Company’s achievement of the targeted financial performance, as measured by the “Total Criteria Score” as shown in Table 1:

TABLE 7

Maximum and Minimum Percentages of Each Executive Officer’s Base Pay

Allowed for the 2007 Incentive Stock Option Award Payment

Total Criteria Score	=100% or more			>=80% <100%			>=50% < 80%			<50%
Maximum Percentage		25	%		35	%		50	%		50	%
Minimum Percentage		0	%		0	%		0	%		0	%

Finally in February of each fiscal year the Committee designates the percentage adjustment to the final payment calculated for each named executive officer’s incentive stock option award based on each named executive officer’s personal performance evaluation grade (See Table 2).

Because the Committee allocated 43% of the $165,000 Company-wide option pool to the executive option pool, the named executive officers were eligible to participate in an executive option pool of approximately $71,000 for fiscal 2007. All of the named executive officers’ performance evaluations were rated above average. Therefore the total of all incentive stock option awards to the named executive officers could not exceed $71,000, and the value of each grant had to be less than 50% of each named executive officer’s base salary. Table 8 below shows the calculation for the fiscal 2007 allocation of the named executive officer’s incentive stock option pool among the named executive officers.

TABLE 8

Calculation of the Executive Officer’s

2007 Incentive Stock Option Award

Executive Name	Base Pay		Executive Incentive Stock Option Award Pool		Executive Allocation Percentage			Individual Performance Grade %			Incentive Stock Option Award		Maximum Incentive Stock Option Award Allowed
Greg Jones	$	225,000	$	71,000		21.00	%		100.00	%	$	14,900	$	112,500
Frank Hughes		168,000		71,000		28.00	%		100.00	%		19,900		84,000
Jerry Lee		160,000		71,000		28.00	%		100.00	%		19,900		80,000
Barry Watson		137,000		71,000		23.00	%		100.00	%		16,300		68,500
TOTALS											$	71,000

The Committee has chosen March 1^st of each year as the grant date of incentive stock options to eliminate any suspicion of timing the stock option grant date. Because March 1, 2008 was a Saturday, the Committee used the Company’s closing stock price as of February 29, 2008 to set the exercise price of the incentive stock options. The Black-Scholes stock option pricing model was used to calculate the Company’s incentive stock option price. As calculated, the Company’s stock option price as of March 1, 2008 was $2.33. The Company’s stock option price of $2.33 was then divided into the calculated value assigned to each named each executive officer to determine the number of stock option awards each named executive officer received. Committee discretion was used to round the calculated number of stock option awards to the actual number of issued stock option awards. The stock option awards issued are for a fixed number of stock options as of grant date, therefore there are no opportunities to either increase or decrease the number of stock options as of this grant date. Table 9 below details the summary of the fiscal 2007 executive officer’s incentive stock option awards as approved by the Committee.

TABLE 9

Allocation of 2007 Incentive Stock Option Awards

To the Executive Officers

Named Executive	Base Salary		Value of Incentive Stock Award		Percentage of Base Salary			Maximum Percentage of Base Salary Allowed			# of Incentive Stock Options Awarded
Greg Jones	$	225,000	$	14,700		6.53	%		50	%		6,300
Frank Hughes		168,000		19,800		11.67	%		50	%		8,500
Jerry Lee		160,000		19,800		12.25	%		50	%		8,500
Barry Watson		137,000		16,300		11.75	%		50	%		7,000
Totals				70,600								30,300

In February 2008 the Committee recommended and the Board approved the issuance of 71,500 incentive stock options to the Company and subsidiary officers, including the incentive stock options issued to the named executive officers, at an exercise price of $7.99 per share, the closing stock price on February 29, 2008. These incentive stock options have a grant date of March 1, 2008 and an expiration date of March 1, 2018. All employee incentive stock options vest 30% after the second anniversary date, 60% after the third anniversary date and 100% after the fourth anniversary date. The Committee does not support the timing of granting stock options with the release of material non-public information. Instead the Committee has chosen March 1^st of each year as the grant date of stock options to eliminate any suspicion of timing the stock option grant date. The Committee does not seek to time equity grants to take advantage of information, either positive or negative, about the Company that has not been publicly disclosed. The Company’s stock option grants are effective on the date the award determination is made by the Committee and the exercise price of options is the closing market price of Common Stock on the business day prior to the date of the grant. The Company has recognized the compensation expense related to the shares subject to the awards.

Retirement Plans and Other Benefits

The Company’s compensation for its named executive officers also includes the opportunity to participate in two separate retirement qualified retirement plans. These plans are also available to all employees of the Company and its subsidiaries. The Company does not provide for any non-qualified or defined benefit retirement plans for its named executive officers or employees. The Company’s 401(k) plan provides a maximum employer match of 100% of an employees’ contribution up to 6% of the employees’ compensation. The 401(k) plan does not provide any contributor the opportunity to purchase the Company’s stock. In fact the employee’s only opportunity to purchase the Company’s stock is through the execution of an open market transaction to buy. The 401(k) benefit is provided to all Company and subsidiary employees. In December 2007 the Committee recommended, and the Company provided, a 100% match of each employee’s contribution to their 401(k) plan, with a maximum of 6% of each contributing employee’s base pay. The Company’s total expense in fiscal 2007 for the 401(k) plan was $230,733.

The second plan is a Company-only contribution into an ESOP. This Company-only contribution is limited to an annual maximum contribution of 9% of the employee’s base salary including the non-equity incentive cash award, if any. The Committee, based on the financial performance of the Company, recommended to the Board in December 2007 not to provide a fiscal 2007 contribution to the Company’s ESOP. The Committee recommends to the Board in December of each fiscal year the amount, and or percentages, the Company will contribute for both qualified retirement plans.

Compensation Committee Report for 2007

The Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” contained in this proxy statement. Based on this review and discussion the Committee recommended to the Board that the “Compensation Discussion and Analysis” be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and this proxy statement.

This concludes the report of the Human Resource Committee/ Compensation Committee.

Lawrence D. Levine

Marsha Yessick

Karl Fillauer

EXECUTIVE COMPENSATION INFORMATION

Under rules established by the SEC, the Company is required to provide certain data and information regarding the compensation and benefits provided to its chief executive officer, chief financial officer and certain other executive officers, including the three other most highly compensated executive officers whose total compensation exceeded $100,000 (the “named executive officers”). The disclosure requirements include the use of tables and a report explaining the rationale and considerations that led to fundamental executive compensation decisions affecting these individuals. The table below sets forth certain elements of compensation for the named executive officers of the Company and the Bank for the periods indicated.

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year		Salary ( $ )		Bonus ( $ )(1)		Stock Awards ( $ )(2)		Option Awards ( $ )(3)		Non- equity Incentive Plan Compen- sation ( $ )(1)		Change in Pension Value in Non-qualified Deferred Compensation Earnings ($)		All Other Compen- sation ($)(4)		Total ( $ )
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)		(i)		(j)

Gregory B. Jones		2007	$	225,000		0		0	$	14,680	$	0		0	$	13,500	$	253,180
Chairman & CEO		2006		210,000		0		0		24,300		60,000		0		29,949		324,249
Company & Bank		2005		190,000		0		0		26,650		50,000		0		18,300		284,950

Nathaniel F. Hughes		2007	$	168,000		0		0	$	19,800	$	0		0	$	11,956	$	199,756
President & CFO		2006		150,000		0		0		21,060		43,000		0		24,088		238,148
Company; President		2005		133,500		0		0		26,650		35,000		0		12,551		207,701
& COO Bank

Jerry D. Lee		2007	$	160,000		0		0	$	19,800	$	0		0	$	11,404	$	191,204
Ex. Vice President		2006		145,000		0		0		21,060		43,000		0		23,470		232,530
Sr. Loan Officer		2005		133,500		0		0		26,650		35,000		0		13,773		208,923
Bank

Robert B. Watson		2007	$	137,000		0		0	$	16,300	$	0		0	$	9,670	$	162,970
Sr. Vice President		2006		130,000		0		0		16,200		45,000		0		20,403		211,603
Bank		2005		102,800		0		0		16,400		38,000		0		10,666		167,866

(1)

Current SEC rules require cash payments contingent on achievement of performance measured over any period (including, as in the case of the reported incentives, a period equal to the Company’s fiscal year) shall be treated as non-equity incentive plan compensation, rather than as bonus. For 2005-2007, the amount of the cash incentive award was contingent on achievement of certain levels of Company performance as set by the Board. Accordingly, all amounts earned in cash under the Company’s incentive plans for 2005-2007 are reported in “Column (g).” Cash incentives earned are based on results for each year presented, but paid in the following year. All awards were paid pursuant to the Company’s incentive plans in effect for the years presented.

(2)

The Company maintains a “1996 Cornerstone Statutory and Non-statutory Stock Option Plan” which was approved by the shareholders in 1996 and a “2002 Long Term Incentive Plan” which was approved by the shareholders in 2002. There were no shares of restricted stock held by any executive officers on December 31, 2007.

(3)

The value of the option awards shown is the grant date fair value of such options determined in accordance with FAS 123R. For a description of the valuation model used and the assumptions applied, please refer to footnote 15 in the Company’s financial statements filed with the Company’s “Annual Report on Form-10-K” for the fiscal year ended December 31, 2007. Options acquired pursuant to option grants must generally be held at least two years before partial vesting is possible. The Company has not granted any Stock Appreciation Rights, and stock option grants have been adjusted for the 2 for 1 stock splits effective September 2004 and December 2006.

(4)	The following “Table of All Other Compensation” is a summary and quantification of all amounts included in “Column (i).”

ALL OTHER COMPENSATION

Name	Year		Registrant Contributions To Qualified 401(k) Contribution Plans ($)		Registrant Contributions To Qualified ESOP Contribution Plans ($)		Total Perquisites and Other Benefits ($)
(a)	(b)		(c)		(d)		(e)
Gregory B. Jones		2007	$	13,500	$	0.00	$	13,500
		2006		12,800		17,149		29,949
		2005		12,000		6,300		18,300

Nathaniel F. Hughes		2007	$	11,956	$	0.00	$	11,956
		2006		10,477		13,611		24,088
		2005		8,010		4,541		12,551

Jerry D. Lee		2007	$	11,404	$	0.00	$	11,404
		2006		10,208		13,262		23,470
		2005		9,182		4,591		13,773

Robert B. Watson		2007	$	9,670	$	0.00	$	9,670
		2006		8,874		11,529		20,403
		2005		7,466		3,200		10,666

The following table presents information concerning all grants from the stock equity award plans to the named executive officers for 2007. All awards are granted in the year following the fiscal year-end of the Company. Therefore the equity stock awards presented in this table are based on 2007 financial performance, but are granted to the named executive officers in 2008. The Company did not issue to any employee or director any Stock Appreciation Rights (“SARs”), restricted stock or performance stock awards for 2007.

GRANTS OF PLAN BASED AWARDS

Estimated Future Payouts Under

Non-Equity Incentive Plan

Awards(1)

Estimated Future Payouts Under

Equity Incentive Plan Awards

All Other

Stock

Awards:

Number of Shares

of Stock

All Other

Option

Awards:

Number

Securities

Underlying

Exercise

or Base

Price

Grant Date Fair Value of Stock and

Option

Grant

Threshold

Target

Maximum

Threshold

Target

Maximum

or Units

Options

Option

Awards

Name

Date

(#)

($)

(a)

(b)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

Gregory B. Jones

3/01/08

N/A

6,300

N/A

7.99

14,680

Nathaniel F. Hughes

3/01/08

N/A

8,500

N/A

7.99

19,800

Jerry D. Lee

3/01/08

N/A

8,500

N/A

7.99

19,800

Robert B. Watson

3/01/08

N/A

7,000

N/A

7.99

16,300

(1)	All cash incentive awards earned for 2007 by the named executive officers are disclosed in “Column (g)” of the “Summary Compensation Table.” All such amounts were paid in 2008, based on financial results for 2007.

The following table sets forth information concerning outstanding equity based awards for each of the named executive officers at fiscal year-end 2007.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

	Option Awards(1)										Stock Awards (2)
	Number of Securities Underlying Unexercised Options (3)				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned		Option Exercise		Option Expiration		Number of Shares or Units of Stock That Have Not		Market Value of Shares or Units of Stock Held That Have Not		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not		Equity Incentive Plan Awards: Market of Payout Value or Unearned Shares, Units or Other Rights That Have Not
	Exercisable		Unexercisable		Options		Price		Date		Vested		Vested		Vested		Vested
Name	(#)		(#)		(#)		($)				(#)		($)		(#)		($)
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)		(i)		(j)
Gregory B. Jones		4,000				0	$	3.250		3/01/2010		0		0		0		0
		20,400				0		3.250		3/01/2011		0		0		0		0
		32,000				0		3.625		5/01/2012		0		0		0		0
		34,000				0		3.625		3/01/2013		0		0		0		0
		20,880		13,920		0		5.438		3/01/2014		0		0		0		0
		5,400		12,600		0		9.225		3/01/2015		0		0		0		0
		0		13,000		0		13.250		3/01/2016		0		0		0		0
		0		7,500		0		15.240		3/01/2017		0		0		0		0

Nathaniel F. Hughes		22,000				0	$	3.750		3/01/2009		0		0		0		0
		22,000				0		3.250		3/01/2010		0		0		0		0
		20,400				0		3.250		3/01/2011		0		0		0		0
		20,000				0		3.625		5/01/2012		0		0		0		0
		22,000				0		3.625		3/01/2013		0		0		0		0
		15,600		10,400		0		5.438		3/01/2014		0		0		0		0
		5,400		12,600		0		9.225		3/01/2015		0		0		0		0
		0		13,000		0		13.250		3/01/2016		0		0		0		0
		0		6,500		0		15.240		3/01/2017		0		0		0		0

Jerry D. Lee		22,000				0	$	3.750		3/01/2009		0		0		0		0
		22,000				0		3.250		3/01/2010		0		0		0		0
		20,400				0		3.250		3/01/2011		0		0		0		0
		20,000				0		3.625		5/01/2012		0		0		0		0
		22,000				0		3.625		3/01/2013		0		0		0		0
		15,600		10,400		0		5.438		3/01/2014		0		0		0		0
		4,200		9,800		0		9.225		3/01/2015		0		0		0		0
		0		13,000		0		13.250		3/01/2016		0		0		0		0
		0		6,500		0		15.240		3/01/2017		0		0		0		0

Robert B. Watson		8,000				0	$	3.625		3/01/2013		0		0		0		0
		6,000		4,000		0		5.438		3/01/2014		0		0		0		0
		2,000		4,000		0		9.225		3/01/2015		0		0		0		0
		0		8,000		0		13.250		3/01/2016		0		0		0		0
		0		5,000		0		15.240		3/01/2017		0		0		0		0

(1)	The Company maintains a “1996 Cornerstone Statutory and Non-statutory Stock Option Plan” which was approved by the shareholders in 1996 and a “2002 Long Term Incentive Plan” which was approved by the shareholders in 2002. All unexercised stock options have been adjusted for the 2 for 1 stock splits of September 2004 and December 2006.
(2)	The Company has never issued any stock awards in the form of SARs, restricted stock or stock performance awards.
(3)	All employee stock options vest 30% after the second anniversary date, 60% after the third anniversary date and 100% after the fourth anniversary date.

The following table sets forth information as to all stock option exercises and restricted stock vested for the named executive officers for the fiscal year ending December 31, 2007.

OPTION EXERCISES AND STOCK VESTED

	Option Awards				Stock Awards (1)
Name	Number of Shares Acquired on Exercise		Value Realized on Exercise		Number of Shares Acquired on Vesting		Value Realized on Vesting
	(#)		($)		(#)		($)
(a)	(b)		(c)		(d)		(e)
Gregory B. Jones		0	$	0		0	$	0

Jerry D. Lee		0		0		0		0

Nathaniel F. Hughes		0		0		0		0

Robert B. Watson		0		0		0		0

(1) The Company has never issued any stock awards in the form of SAR’s, restricted stock or stock performance awards.

DIRECTOR TOTAL COMPENSATION

The table below sets forth information with respect to the compensation of the members of the Company’s Board of Directors. The Company’s three employee directors, Mr. Jones, Mr. Hughes and Mr. Lee, do not receive committee attendance fees or participate in any independent director benefit, other than to receive regular Board meeting fees. The non-employee directors (also referred to herein as the “independent directors”) of the Company are eligible to receive an annual cash incentive award if the Company meets certain financial performance goals set forth in the company’s annual profit plan, as from time to time amended. These payments may be paid in cash or, at the election of each non-employee director under the 2004 Non-Employee Director Compensation Plan, in shares of Common Stock. Performance targets are established at the beginning of the fiscal year through the financial budgeting process. The Company’s financial performance is graded against these performance targets, and a “Total Criteria Score” is calculated. (See “Compensation Discussion and Analysis” Table 1) Therefore the independent directors’ cash incentive awards are determined based on the Company’s overall financial performance. The opportunity to earn a cash incentive award payment ranges from 0% to 100% of the average independent directors’ compensation received in Board, subsidiary Board and committee fees (“total fees”). The average independent director compensation received from total fees for fiscal 2007 was $11,947. The independent directors’ cash incentive award pool is further limited to not be greater than the executive officers’ cash incentive award pool. Therefore the independent directors’ incentive cash award pool is the smaller of the average compensation of the independent directors times the number of independent directors or the executive officers’ cash incentive award pool. Because the Company has eight (8) independent directors the first limit to the independent directors’ cash incentive award pool was $95,576. Because the Company did not provide any funds for the executive officers’ cash incentive award pool in fiscal 2007, the second limit was zero. Because the executive officers’ cash incentive award pool was not funded, the directors’ cash incentive award pool was not funded. Therefore the independent directors did not receive any cash incentive awards for fiscal 2007.

Board and Committee Fee Compensation of Directors’ Service on Subsidiary Boards

The directors of the Company’s wholly owned subsidiary Bank in 2007, Cornerstone Community Bank, received $750 for each Board meeting of the Bank. Each non-management director received $250 for each Bank Audit Committee meeting attended. Each non-management director received $200 for all other committee meetings attended. The Chairperson of the Bank Audit Committee received $275 for each meeting attended. The Chairpersons of all other Bank committees received $225 for each meeting attended. Total director fees paid by the Bank for services rendered on behalf of the Bank in 2007 were $130,375.

The directors for the Company’s wholly owned subsidiary in 2007, Eagle Financial, Inc., received $400 for each Board meeting. Eagle held four Board meetings during 2007. There are no other fees or compensation earned for being on Eagle’s Board, and Eagle does not have any standing committees. Total director fees paid by the Company for services rendered on behalf of Eagle in 2007 were $5,600.

DIRECTOR TOTAL COMPENSATIONFOR FISCAL 2007

Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards (1)		Non-Stock Incentive Plan Compensation		All Other Compensation		Total
	($)		($)		($)		($)		($)		($)
(a)	(b)		(c)		(d)		(e)		(f)		(g)
B Kenneth Driver	$	9,800		0	$	3,728	$	0		0	$	13,528

Karl Fillauer		10,225		0		3,728		0		0		13,953

Nathaniel F. Hughes		9,000		0		0		0		0		9,000

Gregory B. Jones		9,000		0		0		0		0		9,000

Jerry D. Lee		9,000		0		0		0		0		9,000

Lawrence D. Levine		11,250		0		3,728		0		0		14,978

Frank S. McDonald		12,150		0		3,728		0		0		15,878

Doyce G. Payne, M.D.		12,300		0		3,728		0		0		16,028

Wesley M. Welborn		14,025		0		3,728		0		0		17,753

Billy O. Wiggins		13,900		0		3,728		0		0		17,628

Marsha Yessick		11,925		0		3,728		0		0		15,653

(1)

The value presented for stock options awarded to non-employee directors, under the “1996 Cornerstone Statutory and Non-statutory Stock Option Plan” which was approved by the shareholders in 1996 and the “2002 Long Term Incentive Plan” which was approved by the shareholders in 2002, is the grant date fair value of such awards.

Director Long-Term Equity-Base Awards

The Company’s independent directors are also eligible to participate in the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan and the 2002 Long Term Incentive Plan, each of which was previously approved by the Company and its shareholders. The Compensation Committee establishes, in February of each fiscal year, based on financial targets described above, the value of the Company’s incentive stock options that will be issued the following calendar year. Based on the market value of the incentive stock options issued to all Company employees, the independent directors as a group will participate at a level of 15% of the total market value of all stock options granted to both employees and independent directors. As described in the section entitled “Compensation Discussion and Analysis” above the Company’s employees received 71,500 incentive stock option grant awards. Therefore, by policy, the directors, as a group, were to receive 12,800 non-qualified stock options for fiscal 2007. Using the Black-Scholes stock option pricing model, the market value of each non-qualified stock option issued was $2.33 per share. In February 2008 the Committee recommended and the Board approved the issuance to the independent directors 12,800 non-qualified stock options of Company Common Stock at an exercise price of $7.99 per share. Because March 1, 2008 was a Saturday, the Committee used the Company’s closing stock price as of February 29, 2008 to set the exercise price of the incentive stock options. Each of the eight independent directors received 1,600 non-qualified stock options valued at $3,728. These non-qualified stock options have a grant date of March 1, 2008 and an expiration date of March 1, 2018. All independent director non-qualified stock options have a vesting period of 50% after the first anniversary date, 100% after the second anniversary date. The Committee does not support the timing of granting stock options with the release of material non-public information. Instead the Committee has chosen March 1^st of each year as the grant date of stock options to eliminate any suspicion of timing the stock option grant date. The Committee has never, and has no plans to ever, time the stock option grant dates to the release of material non-public information for the purpose of affecting the value of executive compensation. The Company has recognized the compensation expense related to the shares subject to the awards.

The following table sets forth information with respect to the outstanding equity awards of the Company’s Board of Directors as of December 31, 2007.

OUTSTANDING DIRECTOR EQUITY AWARDS AT FISCAL 2007 YEAR-END

Name	Number of Securities Underlying Options (1)		Option Exercise Price		Option Expiration Date
	(#)		($)
(a)	(b)		(c)		(d)
B Kenneth Driver		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

Karl Fillauer		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

Nathaniel F. Hughes		0	$	0		0

Gregory B. Jones		0	$	0		0

Jerry D. Lee		0	$	0		0

Lawrence D. Levine		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

Frank S. McDonald		4,000	$	13.250		3/01/2016
		1,000		15.240		3/01/2017

Doyce G. Payne, M.D.		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

G. Turner Smith		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

Wesley M. Welborn		4,000	$	13.250		3/01/2016
		1,000		15.240		3/01/2017

Billy O. Wiggins		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

Marsha Yessick		2,000	$	5.438		3/01/2014
		1,000		9.225		3/01/2015
		4,000		13.250		3/01/2016
		1,000		15.240		3/01/2017

(1)

Non-qualified stock options are granted to independent directors at market price upon grant date, and are vested 50% after the first anniversary date and 100% after the second anniversary date. All unexercised stock options have been adjusted for the 2 for 1 stock splits of September 2004 and December 2006.

THE COMPANY’S LONG-TERM EQUITY AND QUALIFIED RETIREMENT PLANS

401(k) Plan

The Company has a 401(k) plan covering employees meeting certain age requirements and service date requirements. The plan is structured such that employees can contribute to the plan on a tax-deductible basis and have their contributions invested in various investment funds offered under the plan. The plan permits, but does not require, the Company to make an employer matching contribution during the plan year. Employer contributions, which represent 100% of the first 6% of an employee's salary contributed to the plan, totaled $230,733 in 2007.

Employee Stock Ownership Plan

The Company has an “Employee Stock Ownership Plan” (“ESOP”) to which the Company contributes 100% of the contribution toward purchasing the Company’s Common Stock, and allocating the contribution among the participants based on regulatory guidelines. The Company has set a maximum guideline of 9% of base pay, including cash incentive performance awards, as a maximum contribution limit. However, the Company will only provide a contribution to the ESOP when the Compensation Committee, upon approval of Board, recommends a Company contribution. The Company’s contribution is determined by the financial performance of the Company on a year-to-year basis, and the benchmarks are established by the Compensation Committee. Employer contributions are available to all employees who complete more than 1,000 hours of service per year. There are certain age and years-of-service requirements before contributions can be made for the benefit of the employee. The ESOP plan also provides for a three year 100% vesting requirement; therefore employees terminating employment before their third anniversary date will forfeit their accrued benefit under the ESOP. The forfeiture will be re-allocated among the remaining ESOP participants. The Company contributed $0.00 to the ESOP for 2007.

1996 Cornerstone Statutory and Non-statutory Stock Option Plan

The Company established the 1996 Cornerstone Statutory and Non-statutory Stock Option Plan (the "Plan") during 1996 as a long-term incentive for eligible employees and directors. The total number of shares that may be issued under the plan, as adjusted for the 2 for 1 stock split effective September 2004 and the 2 for 1 stock split effective December 2006, may not exceed 820,000. Of such shares, 220,000 may be incentive stock options and the remaining 600,000 shares of stock may be nonqualified stock options. The persons eligible to receive incentive stock options under the plan are key Company employees and officers selected by the Compensation Committee. Persons designated by the Compensation Committee who are eligible to receive nonqualified options need not be employees of the Company and generally will be non-management directors of the Company. The nonqualified stock options are issued at the market value of the Company's stock and are exercisable upon issue. The term of all options issued under the Plan is for 10 years. As of December 31, 2007 there has been 218,400 incentive stock options issued with 1,600 incentive stock options available for issue. There are 163,200 incentive stock options exercisable, none unexercisable and 55,200 incentive stock options have been exercised. There have been 595,000 nonqualified stock options granted under the Plan with 5,000 non-management stock options available for issue. There are 42,000 nonqualified stock options exercisable, 27,000 un-exercisable and 526,000 nonqualified stock options have been exercised.

Cornerstone 2002 Long Term Incentive Plan

The Company established the 2002 Long Term Incentive Plan (the "Incentive Plan") with shareholder approval in April 2002 as long-term incentive for eligible employees and directors. The total number of shares, as adjusted for the 2 for 1 stock splits effective September 2004 and December 2006, that may be issued under the Incentive Plan may not exceed 1,200,000. The Incentive Plan allows for the issuance of restricted stock, stock appreciation rights, performance awards, non-qualified stock options and incentive stock options. The persons eligible to receive grants under the Incentive Plan are key Company officers, employees and directors selected by the Compensation Committee. The incentive stock options are issued at the market value of the Company's stock and are exercisable after two (2) years from issuance plus a three (3) year vesting period. The term of all grants are determined by the Compensation Committee, but will not exceed ten (10) years. As of December 31, 2007 there has been 558,925 incentive stock options granted only to Company employees under the Incentive Plan through December 31, 2007. There are 641,075 stock options available for issue with 7,050 incentive stock options exercised. There are 307,790 stock options exercisable and 244,085 unexercisable. There have not been any other stock awards granted under the Incentive Plan.

Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan

The Company’s Board of Directors established the 2004 Non-Employee Director Compensation Plan (the “Director Plan”) to provide to non-employee directors the option to receive all or part of their compensation for serving on the Board and on any committee of the Board in shares of THE Company’s Common Stock. The total number of shares that may be issued under the Director Plan may not exceed 80,000, as adjusted for the 2 for 1 stock splits effective September 2004 and December 2006. Shares of Common Stock payable under the Director Plan will be issued within forty-five days of the end of the calendar quarter in which they were earned. The number of shares delivered pursuant to the Director Plan will equal the amount of the applicable director compensation divided by the average closing price of the Common Stock for the five trading days immediately preceding the date on which such director compensation was earned. No shares Common Stock have been issued under the Director Plan.

Equity Compensation Plan Information as of December 31, 2007

Plan category	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance
Equity compensation plans approved by security holders:		784,075	$	6.92		647,675
Equity compensation plans not approved by security holders:		0	$	0.00		80,000
Total		784,075	$	6.92		727,675

Employment Agreements; Potential Payments Upon Termination or Change-in-Control

The Company has entered into "Key Executive Agreements" (the “agreements”) with three members of senior management: Gregory B. Jones, Chief Executive Officer and Chairman of the Board; Nathaniel F. Hughes, President and Chief Financial Officer and Jerry D. Lee, Executive Vice President and Senior Loan Officer (the “key executive(s)”). These agreements are not severance agreements, and are only activated when a change-in-control event is triggered. A change-in-control occurs when greater than 50% of the Company’s outstanding Common Stock is acquired through a merger or acquisition by an acquiring entity. The original agreements were in effect for a period of three years and expired on March 2, 2002. The expiration date of each agreement has been extended, with Board approval, until March 2, 2011.

Each agreement contains change-in-control provisions requiring a potential successor (the “acquiring entity”) to negotiate, in good faith, with the key executive as a condition to an acquisition. The only benefit triggered by a change-in-control event is the immediate vesting to 100% of the key executives’ unvested and unexercised incentive stock options, the 401(k) plan and the ESOP. The final employment agreement, if any, between the acquiring entity and the key executive must be for a period of no less than two years with a similar total compensation package, acceptable to the key executive. In the event the acquiring entity enters into a two year employment agreement with the key executive, there will be no cash payment to the key executive on the date of the change-in-control. At the end of the two year employment agreement with the acquiring entity the key executive would not receive any further benefit if the acquiring entity terminated, with or without cause, the key executive’s employment. If the key executive is terminated, without cause, on the date of the change-in-control, he will receive all compensation and accrued benefits due at the time of termination plus two years base salary. The only cash payment to the key executive is the two year base salary plus the accrued year-to-date annual cash incentive award, if any and any unpaid base salary. If the key executive is terminated without cause on the date of the change-in-control, the unexercised, but fully vested, incentive stock options must be exercised within 90-days of the change-in-control date. If such change-in-control cash payment is made, on the change-in-control date, the key executive will agree not to engage in any business or activity which is directly or indirectly in competition with the acquiring entity within the Chattanooga Standard Metropolitan Statistical Area for a period of one-year from the change-in-control date. If the key executive is terminated for cause on the date of the change-in-control no cash payment is made and the 100% vesting is not made. The key executive can be terminated, for cause, any time during the employment agreement with the acquiring entity and receive no further payment from the acquiring entity.

Death or disability prior to the change-in-control event does not accrue to the benefit of the surviving key executive beneficiary. Death or disability after the change-in-control event does accrue to the surviving beneficiary of the key executive. Assuming the change-in-control occurred on December 31, 2007, and the key executives were terminated by the acquiring entity without cause, the following Table below describes the potential payout.

Potential Payments Due the Key Executives

For a Change-in-Control Event

as of December 31, 2007

Name	Accrued and Unpaid Cash Incentive Award		Two Times Base Salary		Accrued and Unpaid Retirement Plan Payments		Value of Unexercised Stock Options		Total
Gregory B. Jones	$	0	$	450,000	$	13,500	$	789,902	$	1,253,402
Nathaniel F. Hughes		0		336,000		11,956		881,462		1,229,418
Jerry D. Lee		0		320,000		11,404		879,452		1,210,856
Totals	$	0		1,106,000		36,860		2,550,816		3,693,676

AUDIT COMMITTEE REPORT

The information contained in this report shall be deemed to be “soliciting material,” or to be “filed” with the SEC or subject to Regulation 14A or 14C of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than as provided by applicable SEC rules, or to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. In addition, such information shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Identification of Members and Functions of Committee

The Audit Committee of the Company's Board of Directors is currently comprised of three non-employee directors: Lawrence D. Levine, Doyce G. Payne and Frank S. McDonald. Each member of the Audit Committee is “independent” as defined by the rules of the NASD and the SEC. The Audit Committee does not have an “audit committee financial expert,” as defined in applicable SEC rules, because no director on the Board of Directors satisfies the criteria of an audit committee financial expert and the Company has not been able to find a suitable board member who is such an expert.

Committee Charter

The Audit Committee and the Board have approved and adopted an Amended and Restated Audit Committee Charter for the Audit Committee, a copy of which is attached to this proxy statement as Exhibit C. In accordance with the Audit Committee charter, the Audit Committee assists the Board in fulfilling its responsibility for overseeing the accounting, auditing and financial reporting processes of the Company. The Audit Committee met five times in fiscal year 2007. Prior to the release of quarterly reports in fiscal year 2007, the Audit Committee or a member of the Audit Committee also reviewed and discussed the interim financial information contained therein with HLB.

Audit Fees

The aggregate fees billed for professional services rendered by HLB for the fiscal years ended December 31, 2006 and December 31, 2007 were:

Services	Fiscal Year		Amount
Audit Fees (1):		2006 2007	$ $	82,820 122,500
Audit Related Fees (2):		2006 2007	$ $	18,520 21,150
Tax Fees (3):		2006 2007	$ $	9,300 10,250
All Other Fees (4):		2006 2007	$ $	0 8,605

(1)

Audit fees consist of services rendered for the audit of the annual financial statements, including required quarterly reviews, statutory and regulatory filings or engagements and services that generally only the auditor can reasonably be expected to provide.

(2)

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the financial statements or that are traditionally performed by the independent auditor.

(3)

Tax fees are for professional services rendered for tax compliance, tax advice and tax planning.

(4)

All other fees are for services other than those in the previous categories such as permitted corporate finance assistance and permitted advisory services.

The Audit Committee’s pre-approval policies and procedures related to products and services provided by its principal accountants are set forth in the Company’s Amended and Restated Audit Committee Charter. In fiscal years 2006 and 2007, the Audit Fees, Audit Related Fees, Tax Fees and All Other Fees were pre-approved by the Audit Committee.

Auditor Independence

The Audit Committee received from HLB written disclosures and a letter regarding its independence as required by Independence Standards Board Standard No. 1, describing all relationships between the auditors and the Company that might bear on the auditors' independence, and discussed this information with HLB. The Audit Committee also reviewed and discussed with management and with HLB the quality and adequacy of the Company's internal controls. The Audit Committee also reviewed with HLB and financial management of the Company the audit plans, audit scope and audit procedures. The discussions with HLB also included the matters required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended. The Audit Committee has also considered, and concluded, that the provision of services by HLB described under the caption “All Other Fees” are compatible with maintaining the independence of HLB.

Review of Audited Financial Statements

The Audit Committee has reviewed the audited financial statements of the Company as of and for the fiscal year ended December 31, 2007 and has discussed the audited financial statements with management and with HLB. Based on all of the foregoing reviews and discussions with management and HLB, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, to be filed with the Securities and Exchange Commission.

The foregoing report is submitted by the Audit Committee, consisting of:

Doyce G. Payne, M.D.

Lawrence D. Levine

Frank S. McDonald

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Various Company directors, executive officers and their affiliates, including corporations and firms of which they are officers or in which they and/or their families have an ownership interest, are customers of the Company and its subsidiary. These persons, corporations and firms have had transactions in the ordinary course of business with the Company and its subsidiary, including borrowings, all of which, in the opinion of management, were on substantially the same terms including interest rates and collateral as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. The Company and its subsidiary expect to have such transactions on similar terms with directors, executive officers and their affiliates in the future. The aggregate amount of loans outstanding by Cornerstone Community Bank to directors, executive officers and related parties as of December 31, 2007 was approximately $772,942 which represented 2.13% of the Company’s consolidated shareholders’ equity on that date.

OTHER MATTERS

Section 16(a) Beneficial Ownership Reporting Compliance

Under 16(a) of the Securities Exchange Act of 1934, as amended the directors and officers of the Company and any person who owns 10% or more of the Company’s Common Stock are required to report to the Securities and Exchange Commission (the “SEC”), within specified due dates, their initial beneficial ownership of the Company’s Common Stock and all subsequent changes to their beneficial ownership. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all forms they file in accordance with Section 16(a). Based solely on the Company’s review of these reports or on representations or information provided to the Company by the persons required to make such filings, the Company believes that all Section 16(a) filing requirements were complied with during the last fiscal year, with the exception of the following filings: (1) Jerry D. Lee filed one late report on Form 4 on August 20, 2007, in which he reported one late transaction related to a purchase of 2,500 shares of the Company’s Common Stock on August 15, 2007; and, (2) Lawrence D. Levine filed one late report on Form 4 on August 29, 2007, in which he reported one late transaction related to a sale of 1,100 shares of the Company’s Common Stock on August 20, 2007.

Shareholder Proposals for the 2009 Annual Meeting

Under SEC rules, proposals from the Company’s eligible shareholders for presentation for action at the 2009 Annual Meeting of Shareholders must be received by the Company at its principal executive offices no later than November 17, 2008 in order to be considered for inclusion in the Company's Proxy Statement and Proxy relating to the 2009 Annual Meeting of Shareholders.

Available Information

The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, is required to file reports, proxy statements and other information with the SEC. This information is available on the Internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy such reports, proxy statements and other information at the Public Reference Room at 100F Street, N.E., Washington, D.C. 20549. Shareholders may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330.

Annual Report on Form 10-K

A copy of the Company's Annual Report on Form 10-K is being mailed with this proxy statement to each shareholder of record.

EXHIBIT A

CORNERSTONE BANCSHARES, INC.

AMENDED AND RESTATED CHARTER OF THE AUDIT COMMITTEE

Approved By the Board of Directors January 2008

Purpose

The purpose of the Audit Committee (the “Committee”) is to assist the Board of Directors (the “Board”) of Cornerstone Bancshares, Inc. (the “Company”) in fulfilling its oversight of (1) the integrity of the Company's financial statements (2) the Company's compliance with legal and regulatory requirements (3) the independent Auditor's qualifications and independence and (4) the performance of the Company's internal audit function and independent auditors. The Committee shall also prepare the report required by the Securities and Exchange Commission for inclusion in the Company's proxy statement for the annual meeting of shareholders.

The Committee will fulfill these responsibilities by carrying out the activities enumerated in Section 3 of this Charter. The Committee shall be given full and direct access to the Company’s Internal Auditor, the Chairman of the Board, Company executives and independent accountants as necessary to carry out these responsibilities. However the Committee’s function is one of oversight only and shall not relieve the Company’s management of its responsibilities for preparing financial statements which accurately and fairly present the Company’s financial results and condition or the responsibilities of the independent accountants relating to the audit or review of financial statements. The Committee’s scope of responsibility spans all divisions and subsidiaries of the Company and encompasses all business and activities engaged in by the Company.

The independent accountants’ ultimate responsibility is to the Board and the Audit Committee, as representatives of the shareholders. The Committee has the ultimate authority to select, compensate, evaluate and, where appropriate, replace the independent accountants.

Membership of the Audit Committee

The Audit Committee shall be comprised of not less than three (3) directors, each of whom will be independent as required by Rule 10A(3) under the Securities Exchange Act of 1934, as amended (the “SEC Act”). Each appointed Committee member shall be subject to annual reconfirmation and may be removed by the Board at any time.

All members of the Committee shall be able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement. At least one member of the Committee shall have past employment experience in finance or accounting, or any other comparable experience or background which results in the individual’s financial sophistication. This person shall satisfy the requirements as defined by the Securities and Exchange Commission (the “SEC”) for qualifying as a “financial expert.”

Responsibilities and Duties

To fulfill its responsibilities and duties, the Audit Committee shall:

Review annually the Audit Committee Charter for adequacy and recommend any changes to the Board.

Review the significant accounting principles, policies and practices followed by the Company in accounting for and reporting its financial results of operations in accordance with Generally Accepted Accounting Principles (“GAAP”).

Review the financial, investment and risk management policies followed by the Company in operating its business activities.

Review the Company’s annual audited financial statements, related disclosures, including the Management Discussion and Analysis portion of the Company’s public filings, and discuss with the independent accountants the matters required to be discussed by Auditing Statement Number 61, including (i) the quality as well as acceptability of the accounting principles applied in the financial statements, and (ii) new or changed accounting policies: significant estimates, judgments, uncertainties or unusual transactions: and, accounting policies relating to significant financial statement items.

Review any management letters or internal control reports prepared by the independent accountants or the Company’s internal auditor and responses to prior management letters, and review with the independent accountants the Company’s internal financial controls, including the budget, staffing and responsibilities of the Company’s internal auditing function.

Review the effectiveness of the independent audit effort, including approval of the scope of, and fees charged in connection with, the annual audit, quarterly reviews and any non-audit services being provided.

Be responsible for the appointment, determination of the funding for and oversight of the work of the independent accountant employed to conduct the audit (including resolution of disagreements between the independent accountants and management regarding financial reporting). The independent accountants shall report directly to the Audit Committee.

Approve in advance all services that may be provided to the Company by the independent accountants whether or not related to the audit, and review the hiring policies for any employees or former employees of the independent accountants.

Obtain on an annual basis a formal written statement from the independent accountants whether all relationships between the accountants and the Company are consistent with “Independence Standards Board Standard No.1,” and review and discuss with the accountants all significant relationships the accountants have with the Company which may affect the accountants’ independence.

Be responsible for the disclosure that the Committee has reviewed and discussed the audited financial statements with management and discussed the matters required by the “Statements on Auditing Standards 61” with the Company’s independent auditors.

For each of the first three fiscal quarters and at year end, at a Committee meeting review with management the financial results and review with the independent accountants the results of their review of the interim financial information and audit of the annual financial statements.

Review management’s analysis of any significant accounting issues, changes, estimates, judgments or unusual items relating to the financial statements and the selection, application and effects of critical accounting policies applied by the Company (including an analysis of the effect of alternative GAAP methods) and review with the independent accountants the reports on such subjects delivered pursuant to Section 10A(k) of the SEC Act.

Following completion of the annual audit, review separately with the independent accountants, the internal auditor and management any significant difficulties encountered during the course of the audit.

Engage and determine funding for such independent professional advisors and counsel as the Committee determines are appropriate to carry out its function hereunder.

Report to the Board on a regular basis on the major events covered by the Audit Committee and make recommendations to the Board and management concerning these matters, including at least annually an evaluation determining the effectiveness of the Committee.

In accordance with its responsibility, the Audit Committee on a timely basis reviews and, if appropriate, approves all related party transactions.

Perform any other activities consistent with this charter, the Company’s Bylaws and governing law as the Committee or the Board deems necessary or appropriate, including but not limited to the Company’s legal and regulatory compliance.

Establish procedures for:

(i)

the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and,

(ii)

the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Audit Committee Meetings

The Audit Committee will meet on a regular basis at least 4 times each year, and will hold special meetings, as circumstances require. The timing of the meetings shall be determined by the Audit Committee. However the Committee will meet at any time that the independent accountants believe communication to the Committee is required. At each regular meeting the Committee may meet separately with the independent accountants, the internal auditor or with management.

At all Audit Committee meetings a majority of the total number of members shall constitute a quorum. A majority of the members of the Committee present at each meeting shall be empowered to act on behalf of the entire Committee. Minutes shall be kept of each meeting of the Committee.

Subcommittees

The Committee may, by resolution passed by a majority of the Committee, designate one or more subcommittees, each subcommittee to consist of one or more of the members of the Committee. The Committee may delegate such authority to a subcommittee as the committee deems appropriate.

Reporting

The Committee shall maintain written minutes of all meetings and consent actions, which shall be recorded or files with the Secretary of the Company and made available to the Board. The Chair of the Committee will make regular reports to the Board with respect to all significant matters presented at meetings of the Committee.

Assistance from Others

The Committee may engage external advisors and consultants, to the extent determined appropriate by the Committee, to facilitate the performance of the functions of the Committee. All external advisors engaged by the Committee shall report directly to the members of the Committee. Specifically, the Committee shall have the sole authority to retain and terminate any consultant and shall have the sole authority to approve the consultant’s fees and other retention terms. The Committee has the same authority to retain other experts to advise or assist it, including independent counsel, accountants, financial analysts or others. The Committee may also request reports from the Chief Executive Officer, the Chief Financial Officer or any other officer of the Company.

Performance Evaluation

Each year, the Committee shall review and assess the adequacy and appropriateness of this charter and the Committee’s own performance. The results of such evaluation and any proposed changes will be presented to the Board.

EXHIBIT B

CORNERSTONE BANCSHARES, INC.

HUMAN RESOURCES AND COMPENSATION COMMITTEE CHARTER

Approved by the Board of Directors on January 2008

Purpose

The Board of Directors (the “Board”) of Cornerstone Bancshares, Inc. has established the Human Resources and Compensation Committee (the “Committee”) of the Board to assist the Board in:

Reviewing and adopting Human Resource policies for Cornerstone Bancshares, Inc., Cornerstone Community Bank and Eagle Financial, Inc. (collectively, the “Company”)

Ensuring the overall personnel needs of the Company are being met.

Members of the Committee

The Committee must be comprised of at least three and no more than five members of the Board. The Committee must be comprised solely of independent directors. An independent director must not be an officer or employee of the Company and must not have any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment in fulfilling the responsibilities of a Committee member. In addition the Company’s incentive stock plans are intended to comply with the requirements of Section 162(m) of the Internal Revenue Code; therefore all directors who serve on the Committee must be “Outside Directors” within the meaning of Section 162(m) of the Internal Revenue Code.

No Committee member may participate in any discussion with respect to, or vote on, any matter in which the member is not independent. If there is any basis for believing a Committee member is not independent, the facts and circumstances should be reported to the Board, and the Committee member should not participate or vote on any matter until the Board has determined the Committee member is independent. No Committee member shall have an interest in the Company precluding their ability to act on behalf of the shareholders of the Company.

The Committee’s members shall be nominated for membership on the Committee by the Board and elected by the Board. Each member of the Committee shall serve a one-year term, or until such member’s earlier resignation or removal. Any member may resign their position as a member of the Committee upon notice given in writing or electronic transmission to the Board. A member may be removed from the Committee upon the majority vote of the Board. The Chair of the Committee will be chosen by the Committee members at their first annual meeting each year.

No member of the Compensation Committee shall be an officer or employee of the Company or any of its subsidiaries at the time of such member’s service on the Compensation Committee. None of the executive officers of the Company during any fiscal year shall have: (a) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served on the Compensation Committee of the Company, (b) served as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company, or; (c) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served as a director of the Company.

Responsibilities of the Committee

The Committee is responsible to the Board for the following activities:

Reviewing and adopting all Human Resource policies for the Company.

Ensuring the overall personnel needs of the Company are being met, such as, but not limited to:

Adopting succession and management development plans for appropriate Company personnel.

Reviewing future personnel needs and recruitment program results.

Adopting and monitoring the Company’s Affirmative Action Plan.

Overseeing the Company’s performance appraisal system.

Evaluating employee morale and human resource risk.

The Committee is responsible to the Board for the oversight of the following activities:

Establishing strategies and compensation practices and programs for the Company’s employees providing incentives for effectively delivering improved value to the Company’s shareholders, and ensuring all compensation arrangements comply with applicable law.

Establishing practices to hire and retain executive officers, with the objective of aligning the compensation of those executive officers with the business interests of the Company and the Company’s shareholders.

Reviewing and submitting for approval to the Board the Company’s goals and objectives relevant to the executive officer’s compensation program.

Administering and maintaining a compensation policy for executive officers containing appropriate performance incentives and equity-linked components, determining those executive officers eligible to receive such compensation and how much they are to receive based on the performance of the Company and relative to the Company’s goals and objectives.

Performing an annual survey to determine the amount and type of executive compensation paid to executive officers by comparable financial institutions.

Evaluating annually adherence to the Company’s “Code of Conduct” policy by each executive officer, and use the evaluation in determining the level of compensation for each executive officer.

Reviewing and recommending to the Board for approval any employment, non-competition, change-in-control, severance or similar agreements, including any amendments, with executive officers.

Performing annual written reviews evaluating each executive officer’s individual performance in light of the approved goals and objectives. Specifically the Committee will recommend for Board approval the CEO’s compensation, equity based incentives and non-equity based incentives. Additionally the Committee will review and approve the compensation, equity based incentives and non-equity based incentives for the other named executive officers.

Reviewing and discussing with senior management the written “Compensation Discussion and Analysis” included in the Company’s proxy statement, and providing a report disclosing this review and discussion in the Company’s proxy statement.

10.

Reviewing compensation and incentive arrangements for all other officers of the Company.

11.

Reviewing all employee benefit plans including new plans and revisions, the overall cost of those benefit plans and the regulatory compliance of those benefit plans.

12.

Reviewing and administering the Company’s equity and non-equity based incentive plans to ensure they provide proper incentives and avoid excessive ownership dilution to existing shareholders, and make recommendations to the Board and the shareholders with respect to amendments to those plans.

13.

Reviewing for submission to the Board and the Company’s shareholders all new equity based incentive plans, and any amendments to those plans.

14.

In addition to the matters listed above the Committee will perform such other functions as required by law or authorized by Board resolution.

Meetings

The Committee shall at least meet four times a year and may from time to time require specially called meetings, as deemed necessary by the Chair of the Committee. The Chair of the Committee will preside at each meeting of the Committee and shall set the length of each meeting and the agenda of items to be addressed at each meeting. The Committee shall meet in executive session when assessing the performance of and when determining the compensation, including incentives, of the CEO and at such other times as the Chair or the Committee may determine.

Subcommittees

Reporting

Committee Report on Executive Compensation

The Committee shall prepare a report, regarding executive compensation, for inclusion in the Company’s proxy statement or annual report as required by, and in accordance with, applicable rules and regulations.

Assistance from Others

The Committee may engage external advisors and compensation consultants, to the extent determined appropriate by the Committee, to facilitate the performance of the functions of the Committee. All external advisors engaged by the Committee shall report directly to the members of the Committee. Specifically, the Committee shall have the sole authority to retain and terminate any compensation consultant to be used to assist in the evaluation of the executive officers and shall have the sole authority to approve the consultant’s fees and other retention terms. The Committee has the same authority to retain other experts to advise or assist it, including independent counsel, accountants, financial analysts or others. The Committee may also request reports from the Chief Executive Officer, the Chief Financial Officer, the Director of Human Resources or any other officer of the Company.

Performance Evaluation

EXHIBIT C

CORNERSTONE BANCSHARES, INC.

NOMINATING/BOARD GOVERNANCE COMMITTEE CHARTER

Approved By the Board of Directors January 2008

Purpose

The Nominating/Board Governance Committee (the “Committee”) shall carry out the Board of Directors (the “Board”) overall responsibility with respect to:

Overseeing the Board’s committee structure

Maintaining the Board’s “Director’s Policy,” or governing rules of operation and procedures

Identifying and recommending candidates for appointment or election to the Board

Conducting searches to fill the positions of the Company’s Chief executive Officer (the “CEO”)

Overseeing the evaluation of the Board members

Membership on the Committee

Responsibilities of the Committee

Recommending to the Board a slate of nominees to be presented to the shareholders for election to the Board at each annual or special meeting of the shareholders

Considering and recommending to the Board the size of the Board on an annual basis

Conducting executive searches for the Company’s CEO

Evaluating and recommending to the Board those individuals who should be appointed or elected to fill new positions on the Board and to fill vacancies in existing Board positions

10.

Overseeing the bi-annual evaluations of the Board members

11.

Evaluate the relationship between the Board and management

12.

Monitor the orientation and continuing education of Directors

13.

Evaluate the organization and performance of the Board committees and recommend changes to the Board to consider

14.

Review and report to the Board on the Company’s corporate governance structure and policies, and to recommend changes as appropriate.

15.

Monitor the Company’s compliance with governance legislation and related regulations, and recommend changes as appropriate

16.

Review and approve the “Directors Manual” at least annually, as the operating procedural guideline for the Company’s Board conduct

Meetings

The Committee shall at least meet one time a year and may from time to time require specially called meetings, as deemed necessary by the Chair of the Committee. The Chair of the Committee will preside at each meeting of the Committee and shall set the length of each meeting and the agenda of items to be addressed at each meeting.

Subcommittees

Reporting

Assistance from Others

Performance Evaluation


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