S-8

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As filed with the Securities and Exchange Commission on March            , 2004

Registration No. 333-            

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

CORNERSTONE BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)

Tennessee (State or other jurisdiction of incorporation or organization)	62-1175427 (I.R.S. Employer Identification No.)
5319 Highway 153, Chattanooga, Tennessee 37343 (Address of principal executive offices and zip code)

CORNERSTONE BANCSHARES, INC. 2002 LONG-TERM INCENTIVE PLAN,
CORNERSTONE BANCSHARES, INC. STATUTORY-NONSTATUTORY STOCK OPTION PLAN, AND
CORNERSTONE BANCSHARES, INC. 2004 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
(Full Title of the Plans)

Gregory B. Jones
Cornerstone Bancshares, Inc.
5319 Highway 153
Chattanooga, Tennessee 37343
(Name and address of agent for service)

(423) 385-3000
(Telephone number, including area code, of agent for service)

Copy to:
W. Scott McGinness, Jr., Esq.
Miller & Martin PLLC
832 Georgia Avenue, Suite 1000
Chattanooga, Tennessee 37402
(423) 756-6600

CALCULATION OF REGISTRATION FEE

Title of Each Class Securities To be Registered	Amount To be Registered	Proposed Maximum Offering Price Per Share	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee
Common Stock, $1.00 par value	515,000 shares(1)	$21.75(2)	$1,120,250(3)	$142.00

(1)

Representing 300,000 shares to be issued and sold by the Registrant under the Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan, 195,000 shares to be issued and sold under the Cornerstone Bancshares, Inc. Statutory-Nonstatutory Stock Option Plan, and 20,000 shares to be issued and sold under the Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan (collectively, the "Plans"). The Registration Statement also covers such indeterminable number of additional shares as may become issuable to prevent dilution in the event of a stock split, stock dividend, reclassification or other similar transaction pursuant to the terms of the Plans.

(2)

The per share sales price of the Registrant's Common Stock based on a sale that occurred on March 1, 2004, which is the sale closest to March 4, 2004 known to the Registrant.

(3)

The aggregate offering price is calculated solely for the purpose of determining the registration fee pursuant to Rule 457(h)(l) under the Securities Act of 1933, as amended.

PART I

INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS

Item 1    Plan Information.

        The documents containing the information specified in Part I of the Instructions to the Registration Statement on Form S-8 will be sent or given to participants in the Plans as required by Rule 428(b)(1) promulgated under the Securities Act of 1933, as amended (the "Securities Act").

Item 2    Registrant Information and Employee Plan Annual Information

        The participants under the Plans, upon written or oral request, may obtain without charge the documents incorporated by reference in Item 3 of Part II of this Registration Statement. These documents are incorporated by reference in the Section 10(a) prospectus. The participants under the Plans, upon written or oral request, may without charge obtain other documents required to be delivered to employees pursuant to Rule 428(b). Such a request for information can be directed to Frank Hughes at 6401 Lee Highway, Suite B, Chattanooga, Tennessee 37421 or at 423/385-3000.

PART II

INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3.    Incorporation of Documents by Reference.

        The following documents filed with the Securities and Exchange Commission are incorporated herein by reference:

(1)

The Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002 (File No. 000-30497);



(2)

The Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003 (File No. 000-30497);



(3)

The Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003 (File No. 000-30497);



(4)

The Registrant's Quarterly Report on Form 10-QSB, as amended by Form 10-QSB-A, for the quarter ended September 30, 2003 (File No. 000-30497);



(5)

All other reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and



(6)

Description of the Registrant's common stock contained in the Registration Statement on Form S-1 filed on February 4, 2000, as amended (File No. 333-96185).

        All documents subsequently filed by the Registrant pursuant to Sections 13(a), 13(e), 14 and 15(d) of the Exchange Act prior to the filing of a post-effective amendment that indicates that all securities offered hereby have been sold or that deregisters all such securities then remaining unsold, shall be deemed to be incorporated by reference in this Registration Statement and to be a part hereof from the date of filing of such documents.

Item 4.    Description of the Securities.

        Not applicable.

Item 5.    Interests of Named Experts and Counsel.

        Not applicable.

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Item 6.    Indemnification of Directors and Officers.

        The Tennessee Business Corporation Act provides that a corporation may indemnify any of its directors and officers against liability incurred in connection with a proceeding if (i) the director or officer acted in good faith, (ii) in the case of conduct in his or her official capacity with the corporation, the director or officer reasonably believed such conduct was in the corporation's best interest, (iii) in all other cases, the director or officer reasonably believed that his or her conduct was not opposed to the best interest of the corporation, and (iv) in connection with any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the Tennessee Business Corporation Act provides that no indemnification may be made if the director or officer was adjudged to be liable to the corporation. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as an officer or director of a corporation, the Tennessee Business Corporation Act mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. The Tennessee Business Corporation Act also provides that in connection with any proceeding charging improper personal benefit to an officer or director, no indemnification may be made if such officer or director is adjudged liable on the basis that personal benefit was improperly received. Notwithstanding the foregoing, the Tennessee Business Corporation Act provides that a court of competent jurisdiction, upon application, may order that an officer or director be indemnified for reasonable expenses if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, notwithstanding the fact that (i) such officer or director was adjudged liable to the corporation in a proceeding by or in right of the corporation, (ii) such officer or director was adjudged liable on the basis that personal benefit was improperly received by him; or (iii) such officer or director breached his duty of care to the corporation.

        The Registrant's Charter provides that:

        (a)   except as provided in Sections (b) and (c) hereof, the Registrant shall have the power to indemnify its directors, officers, employees and agents (each an "indemnitee") to the fullest extent permitted by the Tennessee Business Corporation Act (the "Act") and the Registrant's bylaws, as each may from time to time be amended.

        (b)   Notwithstanding anything contained in this Charter and the Registrant's bylaws to the contrary, the Registrant shall indemnify permitted indemnities only if all of the following conditions are met: (i) the Registrant's board of directors determines in writing that the indemnitee acted in good faith and in the best interest on the Registrant; (ii) the board of directors determines that the payment will not materially affect the safety and soundness of the Registrant; (iii) the payment does not fall within a prohibited indemnification under state or federal law or regulation; (iv) the indemnitee agrees in writing to reimburse the Registrant to the extent not covered by permissible insurance, for payments made in the event that an administrative action brought by a state or federal banking regulator results in a final order or settlement in which the indemnitee is assessed a civil money penalty, is removed or prohibited from banking or is required, under a final order, to cease any action or take any affirmative action.

        (c)   If any provision of this charter is found to be in conflict with any state or federal banking laws or regulations or the Act, the provisions of governing law and regulation shall govern the conduct of the Registrant's business and board governance.

Item 7.    Exemption from Registration Claimed.

        Not applicable.

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Item 8.    Exhibits.

        The following exhibits are filed with or incorporated by reference into this Registration Statement pursuant to Item 601 of Regulation S-B:

Exhibit No.	Description
5.1	Opinion of Miller & Martin PLLC with respect to the securities being registered, including consent.
23.1	Consent of counsel (included in Exhibit 5.1).
23.2	Consent of Hazlett, Lewis & Bieter PLLC, independent auditors.
99.1	Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan
99.2	Cornerstone Bancshares, Inc. Statutory and Nonstatutory Stock Option Plan.[1]
99.3	Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan

[1]

Incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-1 filed on February 4, 2000, as amended (File No. 333-96185).

Item 9.    Undertakings.

        (a)   The undersigned Registrant hereby undertakes:

        (1)   To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

          (i)  To include any prospectus required by Section 10(a)(3) of the Securities Act;

         (ii)  To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;

        (iii)  To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement;

provided, however, that paragraphs (a)(I)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement.

        (2)   That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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        (3)   To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

        (b)   The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

        (c)   Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

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SIGNATURES

        Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chattanooga, State of Tennessee, on this 26 day of January, 2004.

CORNERSTONE BANCSHARES, INC.
By:	/s/  GREGORY B. JONES Gregory B. Jones Chairman and Chief Executive Officer

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/  GREGORY B. JONES Gregory B. Jones	Chairman and Chief Executive Officer (Principal Executive Officer)	January 26, 2004
/s/  NATHANIEL F. HUGHES Nathaniel F. Hughes	President and Chief Financial Officer (Principal Financial and Accounting Officer)	January 26, 2004
/s/  RANDY BROOKS Randy Brooks	Director	January 26, 2004
/s/  B. KENNETH DRIVER B. Kenneth Driver	Director	January 26, 2004
/s/  KARL FILLAUER Karl Fillauer	Director	January 26, 2004
/s/  JAMES H. LARGE James H. Large	Director	January 26, 2004
/s/  LAWRENCE D. LEVINE Lawrence D. Levine	Director	January 26, 2004

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/s/  RUSSELL W. LLOYD Russell W. Lloyd	Director	January 26, 2004
/s/  EARL A. MARLER, JR. Earl A. Marler, Jr.	Director	January 26, 2004
/s/  DOYCE G. PAYNE M.D. Doyce G. Payne, M.D.	Director	January 26, 2004
/s/  TURNER SMITH Turner Smith	Director	January 26, 2004
/s/  BILLY O. WIGGINS Billy O. Wiggins	Director	January 26, 2004
/s/  MARSHA YESSICK Marsha Yessick	Director	January 26, 2004

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EXHIBIT INDEX

Exhibit No.	Description
5.1	Opinion of Miller & Martin PLLC with respect to the securities being registered, including consent.
23.1	Consent of counsel (included in Exhibit 5.1).
23.2	Consent of Hazlett, Lewis & Bieter PLLC, independent auditors.
99.1	Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan
99.2	Cornerstone Bancshares, Inc. Statutory and Nonstatutory Stock Option Plan.[1]
99.3	Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan

[1]

Incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-1 filed on February 4, 2000, as amended (File No. 333-96185).

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PART I INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS

Item 1 Plan Information.
Item 2 Registrant Information and Employee Plan Annual Information

PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3. Incorporation of Documents by Reference.
Item 4. Description of the Securities.
Item 5. Interests of Named Experts and Counsel.
Item 6. Indemnification of Directors and Officers.
Item 7. Exemption from Registration Claimed.
Item 8. Exhibits.
Item 9. Undertakings.

SIGNATURES
EXHIBIT INDEX

EX-5.1

Exhibit 5.1

[LETTERHEAD]

March 2, 2004

Cornerstone Bancshares, Inc.
5319 Highway 153
Chattanooga, Tennessee 37343

Re:

Registration Statement on Form S-8

Ladies and Gentlemen:

        This opinion is given in connection with the filing by Cornerstone Bancshares, Inc., a Tennessee corporation (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-8 (the "Registration Statement"), of an aggregate of 515,000 shares (the "Shares") of common stock, $1.00 par value, of the Company, to be offered and sold by the Company pursuant to the following Plans:

•

Cornerstone Bancshares, Inc. Long-Term Incentive Plan

•

Cornerstone Banchares, Inc. Statutory-Nonstatutory Stock Option Plan

•

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

        We have examined and are familiar with originals or copies (certified, photostatic or otherwise identified to our satisfaction) of such documents, corporate records and other instruments relating to the incorporation of the Company and the authorization of the shares to be issued pursuant to the Plans as we have deemed necessary and advisable. In such examinations, we have assumed the genuineness of all signatures on all originals and copies of documents we have examined, the authenticity of all documents submitted to us as originals and the conformity to original documents of all certified, conformed or photostatic copies. As to questions of fact material and relevant to this opinion, we have relied upon certificates or representations of Company official s and of appropriate governmental officials.

        We express no opinion as to mattes under or involving the laws of any jurisdiction other than the corporate law of the State of Tennessee.

        Based upon and subject to the foregoing and having regard for such legal considerations as we have deemed relevant, it is our opinion that:

1.

The Shares have been duly authorized; and



2.

Upon the issuance and delivery of the Shares and payment therefore as provided in the Plans and as contemplated by the Registration Statement, the Shares will be legally and validly issues, fully paid and non-assessable.

        We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement.

Very truly yours,

/s/  MILLER & MARTIN PLLC MILLER & MARTIN PLLC

EX-23.2

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Exhibit 23.2

         [LETTERHEAD]

Independent Auditors' Consent

To the Stockholders and
    Board of Directors
Cornerstone Bancshares, Inc.
Chattanooga, Tennessee

        We consent to the incorporation by reference in this Registration Statement of Cornerstone Bancshares, Inc. on Form S-8 of our report dated January 16, 2003, appearing in the Annual Report on Form 10-KSB of Cornerstone Bancshares, Inc. for the year ended December 31, 2002.

/s/  HAZLETT, LEWIS & BIETER, PLLC

Chattanooga, Tennessee
January 26, 2004

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Independent Auditors' Consent

EX-99.1

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Exhibit 99.1

CORNERSTONE BANCSHARES, INC.
2002 LONG-TERM INCENTIVE PLAN

SECTION 1. General Purpose of Plan

        The name of this plan is the Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan (the "Plan"). The purpose of the Plan is to enable Cornerstone Bancshares, Inc. (the "Corporation") and its Subsidiaries to attract, retain, motivate, and reward employees who make a significant contribution to the Corporation's long-term success and to enable such employees to acquire and maintain an equity interest in Cornerstone Bancshares, Inc.

SECTION 2. Definitions

        For purposes of the Plan, the following terms shall be defined as set forth below:

a.

"Award" means any award of Stock Options, Stock Appreciation Rights, Restricted Stock, or Performance Awards, whether in cash or stock or a combination thereof, authorized by the Board under this Plan.



b.

"Board" means the Board of Directors of the Corporation.



c.

"Cause" means a felony conviction of a Participant or the failure of a Participant to contest prosecution for a felony, or a Participant's willful misconduct, dishonesty, embezzlement, fraud, deceit or civil rights violations, any of which acts cause the Corporation or any Subsidiary liability or loss, as determined by the Board.



d.

"Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto.



e.

"Committee" means the Human Resource Committee, or any other committee of the Board appointed for the purpose of administering the Plan, which committee shall consist of at least two or more Disinterested Persons, at least two of whom are directors of the Corporation.



f.

"Commission" means the Securities and Exchange Commission.



g.

"Corporation" means Cornerstone Bancshares, Inc.



h.

"Covered Participant" means a Participant who is or the Committee reasonably believes will be the Chief Executive Officer of the Company, will be acting in such capacity, or will have total compensation reported to the shareholders pursuant to the Securities and Exchange Act of 1934 by virtue of being one of the four highest compensated officers of the Company (i.e., a "covered employee," as defined in Section 162(m) of the Code and the regulations thereunder), and may have remuneration in excess of $1,000,000 for any taxable year during the life of the Award.



i.

"Disability" or "Disabled" means total and permanent physical or mental disability or incapacity of an employee to fulfill at any time or from time to time his normal duties as an employee, as certified in writing by two competent physicians, one of which shall be selected by the Committee and the other of which shall be selected by the employee or his duly appointed guardian or legal or personal representative. In addition, for purposes of determining Disability as it applies to any Incentive Stock Option, the term "Disability" shall be interpreted consistently with Code Sections 421-424



j.

"Disinterested Person" is a person who meets both (i) the definition of "disinterested person" as set forth in Rule 16b-3 as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission, and (ii) the definition of "outside director" as set forth in Code Section 162(m), as amended from time to time.

k.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto.



l.

"Fair Market Value" means (i) if the stock is listed on a securities exchange or is traded over the NASDAQ National Market, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the stock is not listed on a securities exchange or traded over the NASDAQ National Market, the mean between the bid and offered prices as quoted by NASDAQ for such date, provided that if it is determined that, the fair market value is not properly reflected by such NASDAQ quotations, or if the stock is not quoted on NASDAQ, Fair Market Value will be determined by such other method as the Board determines in good faith to be reasonable, except that, with respect to grants of Restricted Stock, "Fair Market Value" for Restricted Stock on the date of grant shall be determined as of the time and date of the Restricted Stock grant.



m.

"Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code.



n.

"Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option.



o.

"Participant" means any employee or director of the Corporation and its Subsidiaries designated by the Board to receive an Award under the Plan.



p.

"Performance Award" means an award of shares of Stock or cash to a Participant pursuant to Section 9 contingent upon achieving certain performance goals. Any Performance Award made to a Covered Participant shall meet the conditions of Section 9, such that it will not result in or give rise to "applicable employee remuneration" within the meaning of Section 162(m) of the Code.



q.

"Plan" means this Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan.



r.

"Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 8.



s.

"Retirement" means retirement from active employment with the Corporation or any Subsidiary on or after the normal retirement date.



t.

"Stock" means the common stock of the Corporation or any successor corporation.



u.

"Stock Appreciation Right" means a right granted under Section 7, which entitles the holder to receive a cash payment or an award of Stock or, if applicable, as a credit against the purchase price of a related Stock Option, in an amount equal to the difference between (i) the Fair Market Value of the Stock covered by such right at the date the right is granted and (ii) the Fair Market Value of the Stock covered by such right at the date the right is exercised, unless otherwise determined by the Board pursuant to Section 7, multiplied by the number of shares covered by the right.



v.

"Stock Option" means any option to purchase shares of Stock granted pursuant to Section 6.



w.

"Subsidiary" means any corporation (other than Cornerstone Bancshares, Inc.) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

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SECTION 3. Administration

        The Plan shall be administered by the Committee which shall at all times consist of not less than two Disinterested Persons, at least two of whom are directors of the Corporation.

        The Committee, with subsequent Board approval, shall have the power and authority to grant to eligible employees, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock; or (iv) Performance Awards.

        In particular, the Board shall have the authority:

(i)

to (A) select the participants of the Corporation and its Subsidiaries to whom Stock Options, Stock Appreciation Rights, Restricted Stock, or Performance Awards or a combination of the foregoing from time to time will be granted hereunder; (B) to grant Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, or Performance Awards, or a combination of the foregoing, hereunder; (C) to determine the number of shares of Stock to be covered by each such Award granted hereunder;



(ii)

to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder including, but not limited to, any restriction on any Award and/or the shares of Stock relating thereto based on performance and/or such other factors as the Board may determine, in its sole discretion, and any vesting acceleration features based on performance and/or such other factors as the Board may determine, in its sole discretion;



(iii)

to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of a Participant, including the provision for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period.

        Subject to Section 10, the Board shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.

        All decisions made by the Board pursuant to the provisions of the Plan shall be final and binding on all persons, including the Corporation and all Plan Participants.

SECTION 4. Stock Subject to Plan

        The total number of shares of Stock reserved and available for distribution under the Plan shall be 300,000. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares.

        If any shares of Stock that have been subject to option cease to be subject to option without having been exercised, or if any shares subject to any Restricted Stock, Stock Appreciation Rights, or Performance Awards granted hereunder are forfeited or such Awards are otherwise terminated without having been exercised, such shares shall again be available for distribution in connection with future Awards under the Plan in each case to the full extent available pursuant to the rules and interpretations of the Commission under Section 16 of the Exchange Act. In the event that prior to the Award's cancellation, termination, expiration, or lapse, the holder of the Award at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Commission, pursuant to any rule or interpretation promulgated under Section 16 of the Exchange Act), the Stock subject to such Award shall not be available for regrant under the Plan.

        In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment shall be made in the

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aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan and in the number of shares subject to Stock Appreciation Rights, Restricted Stock or Performance Awards granted under the Plan as may be determined to be appropriate by the Board, in its sole discretion, in order to preserve each Participant's rights substantially proportionate to the Participant's rights existing prior to such event, provided that the number of shares subject to any Award shall always be a whole number. The Corporation upon the exercise of any Stock Appreciation Rights shall also use such adjusted option price to determine the amount payable associated with any Stock Option the price of which is adjusted.

        Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Stock with respect to one or more Awards that may be granted to any one Participant in any calendar year shall be 30,000.

SECTION 5. Eligibility

        Any Participant of the Corporation or any of its Subsidiaries is eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Performance Awards. The Participants under the Plan shall be selected from time to time by the Committee, with subsequent Board approval, from among those eligible, and the Committee shall determine, with subsequent Board approval, the number of shares covered by each Award or grant.

SECTION 6. Stock Options

        Stock Options may be granted either alone or in addition to other Awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Board may from time to time approve, and the provisions of Stock Option Awards need not be the same with respect to each optionee.

        The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options (subject to the provisions of Section 15 of the Plan) and (ii) Non-Qualified Stock Options.

        The Committee, with subsequent Board approval, shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option.

        Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. All of the provisions of Sections 421, 422 and 424 of the Code and the regulations thereunder as in effect from time to time are hereby incorporated by reference herein with respect to Incentive Stock Options to the extent that their inclusion in this Plan is necessary from time to time to preserve their status as Incentive Stock Options within the meaning of Section 422. Each provision of the Plan and each Award Agreement relating to an Incentive Stock Option shall be construed so that it shall be an Incentive Stock Option for purposes of Section 422, and any provisions thereof which cannot be so construed shall be disregarded.

        Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Board shall deem desirable:

(a)

Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee, with subsequent Board approval, at the time of grant. The option price per share of Stock may be equal to or more or less than the Fair Market Value of the Stock on the date of grant, except that the option price for any Incentive Stock Option

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shall be not less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option (determined without regard to any Stock Appreciation Rights). If the option is an Incentive Stock Option and if the employee to whom the Incentive Stock Option is granted owns directly or indirectly more than 10% of the total combined voting power of all classes of Stock immediately before the grant of the option, then the option price per share of Stock must be at least 110% of the Fair Market Value of the Stock on the date of grant.

(b)

Option Term. The term of each Stock Option shall be fixed by the Committee, with subsequent Board approval, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted. If the option is an Incentive Stock Option and if the employee to whom the Incentive Stock Option is granted owns directly or indirectly more than 10% of the total combined voting power of all classes of Stock immediately before the grant of the option, then the term of the option may not exceed five years.



(c)

Exercisability. Subject to paragraph (j) of this Section 6 with respect to Incentive Stock Options, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee, with subsequent Board approval, at grant, provided, however, that except as provided in paragraphs (f) and (g) of Section 6, unless a longer vesting period is otherwise determined by the Board at grant, no Stock Option shall be exercisable for a period of six months after the date of the grant of the option. If the Committee provides, with subsequent Board approval, that any Stock Option is exercisable only in installments, the Board may waive such installment exercise provision at any time in whole or in part based on performance and/or such other factors as the Board may determine in its sole discretion.



(d)

Method of Exercise. Stock Options may be exercised in whole or in part at any time during the exercise period described in Section 6(c) by giving written notice of exercise to the Corporation specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Corporation. Payment of the exercise price of a Stock Option and any withholding tax due at exercise also may be made through any program or procedure (including but not limited to a broker-dealer cashless exercise program) if approved by the Board. No shares of Stock resulting from the exercise of a Stock Option shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares.



(e)

Transferability of Options.



(1)

Incentive Stock Options. No Incentive Stock Option shall be transferable by the optionee, otherwise than by will or by the laws of descent and distribution, or be subject to attachment, execution or similar process. All Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee.



(2)

Non-Qualified Stock Options. Non-Qualified Stock Options shall likewise be non-transferable by the optionee, otherwise than by will or by the laws of descent and distribution, and not subject to attachment, execution or similar process; provided, however, that the Board may by resolution or after grant designate existing or future Non-Qualified Stock Options as "transferable," meaning that the optionee may sign an agreement which transfers all or a portion of such Non-Qualified Stock Option (either exercisable or non-exercisable) to (A) a member of the optionee's Immediate Family, (B) any trust or trusts in which members of the optionee's Immediate Family have more than a fifty percent (50%) beneficial interest, (C) any entity in which optionee and/or members of the optionee's Immediate Family own more than fifty percent (50%) of the

5

voting interests, or (D) any foundation in which optionee and/or optionee's Immediate Family members control the management of the foundation's assets, subject to such terms and conditions as the Board may establish. The form of agreement pursuant to which such options are transferred must be approved by the Board and executed by the optionee, transferee and the Corporation. Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, except that the term "optionee" shall be deemed to refer to the transferee subject to any terms and conditions established by the Board. Subsequent transfers of such transferred options shall be prohibited, except by will or the laws of descent and distribution. For purposes of this Subsection, "Immediate Family" means the optionee's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, nephew or niece of the optionee (including by adoption), and any person sharing the optionee's household (other than a tenant or employee).

(f)

Termination by Death (other than by suicide). Unless otherwise determined by the Board at or after grant, if any optionee dies (other than by suicide), the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Board shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter.



(g)

Termination by Reason of Disability. Unless otherwise determined by the Board at or after grant, if any optionee becomes Disabled, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after one year from the date of such Disability or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such one year period, any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or for the stated term of such Stock Option, whichever period is the shorter. In the event of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option.



(h)

Termination by Reason of Retirement. Unless otherwise determined by the Board at or after grant, if any optionee's termination with the Corporation or any Subsidiary terminates by reason of Retirement, any Stock Option held by such optionee must thereafter be exercised within ninety days after the date of Retirement to the extent it was exercisable at the time of such Retirement (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after the expiration of the stated term of such Stock Option (if less than such ninety day period); and, provided that if the optionee dies within such period any unexercised Stock Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option.



(i)

Other Termination. Unless otherwise determined by the Board at or after grant, if an optionee's termination with the Corporation or any Subsidiary is for Cause or for death by

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reason of suicide or for any reason other than Disability or Retirement or death other than by suicide, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised to the extent such Stock Option could have been exercised on the date of cessation for the lesser of three months from the date of termination or the balance of such Stock Option's term if the optionee's termination with the Corporation or any Subsidiary is involuntary and without Cause.

(j)

Limit on Value of Incentive Stock Options First Exercisable Annually. The aggregate Fair Market Value (determined at the time of grant) of the Stock for which "incentive stock options" within the meaning of Section 422 of the Code are exercisable for the first time by an optionee during any calendar year under the Plan (and/or any other stock option plans of the Corporation or any Subsidiary) shall not exceed $100,000.

SECTION 7. Stock Appreciation Rights

(a)

Grant and Exercise When Granted in Conjunction With Stock Options. Stock Appreciation Rights may be granted alone or in conjunction with all or part of any Stock Option granted under the Plan and may contain terms and conditions different from those of the related Stock Option, except as otherwise provided below. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option.






A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right.






A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (c) of this Section 7, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (c) of this Section 7. Stock Options, which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised.



(b)

Grant and Exercise When Granted Alone. Stock Appreciation Rights may be granted in a manner not related to an award of a Stock Option. The Board shall have the discretion to determine the terms and conditions of any Stock Appreciation Rights not related to a Stock Option Award. A Stock Appreciation Right granted under this Section 7(b) is not exercisable for a period of six months from the date of grant, unless the Board otherwise determines a longer period. The Stock Appreciation Right, granted under Section 7(b), shall be exercisable in accordance with Section 7(c) over a period not to exceed ten years. Any Stock Appreciation Right which is outstanding on the last day of the exercisable period shall be automatically exercised on such date for cash or Common Stock, as determined by the Board, without any action by the holder if, on that date, the Fair Market Value of the Stock exceeds the exercise price of the Stock Appreciation Right.

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(c)

Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Board, including the following:



(i)

Stock Appreciation Rights granted pursuant to Section 7(a) shall be exercisable only at such time or times and to the extent that the Stock Options to which the Stock Appreciation Rights relate shall be exercisable in accordance with the provisions of Section 6 and this Section 7 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of the Stock Appreciation Right, except that this additional limitation shall not apply in the event of death other than by suicide or Disability of the optionee prior to the expiration of the six-month period.



(ii)

Upon the exercise of a Stock Appreciation Right granted pursuant to Section 7(a), an optionee shall be entitled to receive an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option, multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Board having the right to determine the form of payment. Upon the exercise of a Stock Appreciation Right granted pursuant to Section 7 (b), the holder shall be entitled to receive an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the Fair Market Value of one share of Stock at the date the Stock Appreciation Right was granted multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Board having the right to determine the form of payment.



(iii)

No Stock Appreciation Right shall be transferable by the holder, other than by will or the laws of descent and distribution, or be subject to attachment, execution or similar process. All Stock Appreciation Rights shall be exercisable, during the holder's lifetime, only by the holder.



(iv)

Upon the exercise of a Stock Appreciation Right granted pursuant to Section 7(a), the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 4 of the Plan on the number of shares of Stock to be issued under the Plan.



(v)

A Stock Appreciation Right granted in connection with an Incentive Stock Option pursuant to Section 7(a), may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option.



(vi)

In its sole discretion, the Board may provide, at the time of grant of a Stock Appreciation Right under this Section 7, that such Stock Appreciation Right can be exercised only in the event of a "Change of Control" (as defined in Section 11 below). Furthermore, the Board may provide, at the time of grant of any Stock Appreciation Right, that such Stock Appreciation Right can be exercised only upon the attainment of specified performance goals or other such criteria as the Board may determine in its sole discretion.



(vii)

In the discretion of the Board, if the Plan is approved by the shareholders of the Corporation a Stock Appreciation Right may provide that any exercise by a Participant of all or a portion of a Stock Appreciation Right for cash, may only be made during the period beginning on the third business day following the date of the Corporation's release of its quarterly or annual summary statements of earnings to the public and ending on the twelfth business day following such date; provided, however, that the foregoing shall not apply to any exercise by a Participant of a Stock Appreciation Right for cash where the

8

date of exercise is automatic or fixed in advance under the Plan and is outside the control of the Participant.

SECTION 8. Restricted Stock

(a)

Administration. Shares of Restricted Stock may be issued either alone or in addition to other Awards granted under the Plan. The Board shall determine the participants of the Corporation and its Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof), the time or times within which such Awards may be subject to forfeiture, the nature of the restrictions, including any performance requirements, the circumstances under which restrictions will lapse and all other conditions of the Awards. The Board may also condition the grant of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Board may determine, in its sole discretion. The provisions of Restricted Stock Awards need not be the same with respect to each recipient.



(b)

Awards and Certificates. The prospective recipient of an Award of shares of Restricted Stock shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award (a "Restricted Stock Award Agreement") and has delivered a fully executed copy thereof to the Corporation, and has otherwise complied with the then applicable terms and conditions.



(i)

Awards of Restricted Stock must be accepted within a period of thirty days (or such shorter period as the Board may specify) after the Award date by executing a Restricted Stock Award Agreement and paying whatever price, if any, is required.



(ii)

Each Participant who is awarded Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock to be held in escrow as described below.






Such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form:






"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Cornerstone Bancshares, Inc. 2002 Long-Term Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Cornerstone Bancshares, Inc. Copies of such Plan and Agreement are on file in the offices of Cornerstone Bancshares, Inc., 6401 Lee Highway Suite B, Chattanooga, TN 37421."



(iii)

The Board shall require that the stock certificate evidencing such shares be held in escrow by any other escrow agent designated by the Board until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award. In the event the Participant has obtained a loan to purchase the Restricted Stock or to pay any taxes due with respect to the Restricted Stock, escrow agent shall have the right to require that the shares continue to be held in escrow until such loan is repaid.



(c)

Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 8 shall be subject to the following restrictions and conditions:



(i)

Subject to the provisions of this Plan and Restricted Stock Award Agreements, during the period of six months after the Award or such longer period as may be set by the Board

9

commencing on the grant date (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Board may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part based on performance and/or such other factors as the Board may determine, in its sole discretion.

(ii)

Except as provided in paragraph (c) (i) of this Section 8, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Corporation, including the right to receive any dividends, unless the Board shall declare otherwise at the time of the Award.






Dividends paid in cash with respect to shares of Restricted Stock shall not be subject to any restrictions or subject to forfeiture. Dividends paid in Stock of the Corporation or Stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates for shares of unrestricted Stock shall be delivered to the Participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock and the repayment of any loans obtained to purchase the Restricted Stock or to pay any taxes due with respect to the Restricted Stock.



(iii)

Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction (together with any price paid for such shares by the Participant) shall be forfeited by the Participant, unless otherwise determined by the Board.



(iv)

The Board may, in its sole discretion, waive in whole or in part any or all restrictions with respect to any Participant's shares of Restricted Stock.

SECTION 9. Performance Awards

(a)

Administration. Shares of Stock and/or a payment in cash may be distributed under the Plan to an employee upon the attainment of performance objectives, as a Performance Award. The Board shall determine the participants of the Corporation and its Subsidiaries to whom Performance Awards are granted, the terms and conditions of the performance objectives, the term of the performance period and the value and form of the payment of the Performance Award. For a Performance Award made to any Covered Participant, the performance goals shall be disclosed to and approved by the shareholders of the Company in accordance with Section 162(m) of the Code and the regulations thereunder.



(b)

Performance Objectives. The Board, in its sole discretion may establish, under this Section 9, performance objectives either in terms of Corporation-wide objectives or in terms of objectives that are related to the specific performance of an employee, director, a bank, a group, a division, a department, or Subsidiary within the Corporation in which the Participant is employed. A minimum level of performance, at the discretion of the Board, may be established.






If, at the end of the performance period, the specified objectives have been attained, the Participant is deemed to have fully earned the Performance Award. If such performance objectives are only partially attained, the Participant may be deemed by the Board to have partly earned the Performance Award and would become eligible to receive a portion of the total Award, as determined by the Board. If a required minimum level of achievement has not been met, as determined by the Board, the Participant is entitled to no portion of the

10

Performance Award. If, at the end of the performance period, performance exceeds the target, the Participant, at the Board's discretion, may receive a multiple of the Performance Award. The Board may adjust the payment of Awards or the performance objectives if events occur or circumstances arise which would cause a particular payment or set of performance objectives to be inappropriate as a measure of performance.




Performance Awards to any Covered Participant must be granted no later than ninety (90) days from the beginning of the performance period specified in the Performance Award. A Performance Award to a Covered Participant shall not allow for any discretion by the Committee to increase the amount payable under the Award, although the Committee may have discretion to decrease the amount paid. With respect to any Covered Participant, the Committee shall certify in writing prior to payment of a Performance Award that the Covered Participant has satisfied such performance goals and complied with all material terms of the Performance Award and this Plan. For this purpose, approved minutes of the Committee meeting at which certification is made shall be treated as a written certification. All the provisions of Section 162(m) of the Code and the regulations thereunder as in effect from time to time are hereby incorporated by reference herein with respect to any Performance Award to a Covered Participant to the extent that their inclusion in this Plan is necessary from time to time to preserve the deductibility of the remuneration paid to the Covered Participant by the Company in any tax year. Each provision of the Plan and each Performance Award shall be construed so that it does not give rise to "Applicable Employee Remuneration" within the meaning of Section 162(m), and any provisions thereof which cannot be so construed shall be disregarded.



(c)

Terms and Conditions. A Participant to whom a Performance Award has been granted is given performance objectives to be reached over a specified period, the "performance period." Generally this period shall be not less than one year.






Any Participant granted a Performance Award pursuant to this Section 9 who by reason of death (other than by suicide), Disability or Retirement is terminated before the end of the performance period the participant will be entitled to receive a portion of any earned Performance Award. The Board, in its discretion, will determine the amount of the Performance Award earned, if any, and the time at which payment will be made.






A Participant, who is terminated for any other reason, including death by suicide, forfeits all rights under the Performance Award.

SECTION 10. Amendments and Termination

        The Board may amend, alter, or discontinue the Plan at any time, but no amendment, alteration, or discontinuation shall be made which affects an existing Award under the Plan without the optionee's or Participant's consent. If stockholder approval of this Plan is obtained, no amendment, alteration or discontinuation shall be made by the Board which, without the approval of the stockholders, would:

(a)

increase the total number of shares reserved for the purpose of the Plan, except as provided for in accordance with Section 4 of the Plan;



(b)

decrease the option price of any Stock Option to less than 100% of the Fair Market Value on the date of the granting of the option, except as provided for in accordance with Section 4 of the Plan;



(c)

change the Participants or class of Participants eligible to participate in the Plan;



(d)

extend the maximum option period under paragraph (b) of Section 6 of the Plan; or



(e)

materially increase in any other way the benefits accruing to Participants.

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        The Board may amend the terms of any Award or option theretofore granted, prospectively or retroactively, but no such amendment shall affect an existing Award under the Plan without the Participant's consent. The Board may also substitute new Stock Options for previously granted Stock Options, including options granted under other plans applicable to the Participant, and previously granted Stock Options having higher option prices.

SECTION 11. Change of Control

        The following provisions shall apply in the event of a "Change of Control," as defined in this Section 11:

(a)

In the event of a "Change of Control" as defined in paragraph (c) of this Section 11, the vesting of any outstanding Stock Options, Stock Appreciation Rights, Restricted Stock or Performance Awards shall be accelerated so that all Awards not previously exercisable and vested are fully exercisable and vested.



(b)

If the employment of a Participant is terminated for any reason following a Change of Control, any outstanding Stock Options, Stock Appreciation Rights, Restricted Stock or Performance Awards granted to the Participant that are not fully exercisable and vested shall become fully exercisable and vested as of the date of such termination and any obligations to pay amounts to the Corporation or any Subsidiary in connection with an Award shall be terminated as of the date when such termination occurs.



(c)

For purposes of this Section 11, a "Change of Control" means the happening of any of the following:



(i)

when any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Corporation or a Subsidiary or any Corporation employee benefit plan (including its trustee)), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Corporation representing 51% or more of the combined voting power of the Corporation's then outstanding securities;



(ii)

the occurrence of a transaction requiring stockholder approval for the acquisition of the Corporation by an entity other than the Corporation or a Subsidiary through purchase of assets, or by merger, or otherwise; or



(iii)

the filing of an application with any regulatory authority having jurisdiction over the ownership of the Corporation by any "person," as defined in the preceding paragraph, to acquire 51% or more of the combined voting power of the Corporation's then outstanding securities.



(d)

For purposes of this Section 11, a "Change of Control" shall not result from any transaction precipitated by the Corporation's insolvency, appointment of a conservator, or determination by a regulatory agency that the Corporation is insolvent, nor from any transaction initiated by the Corporation in regard to creating a holding company of which the Corporation would be a primary entity, nor from any transaction initiated by the Corporation in regard to converting from a publicly traded company to a privately held company.

SECTION 12. General Provisions

(a)

All certificates for shares of Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Board may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities or other laws, and the

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Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(b)

Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The Corporation and its Subsidiaries specifically reserve the right to terminate (whether by dismissal, discharge, retirement or otherwise) any Participant with the Company or a Subsidiary at any time at will. Neither the granting of an Award nor the adoption of the Plan shall confer upon any participant of the Corporation or its Subsidiaries any right to continued employment with the Corporation or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Corporation or a Subsidiary to terminate any of its participants at any time.



(c)

Each Participant shall, no later than the date as of which the value of an Award first becomes includable in the gross income of the Participant for Federal income tax purposes, pay to the Corporation, or make arrangements satisfactory to the Corporation regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the Award. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements and the Corporation (and, where applicable, its Subsidiaries), shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. A Participant may irrevocably elect to have the withholding tax obligations or, in the case of all Awards hereunder except Stock Options which have related Stock Appreciation Rights, if the Board so determines, any additional tax obligation with respect to any Awards hereunder satisfied by (1) having the Corporation withhold shares of Stock otherwise deliverable to the Participant with respect to the Award or (2) delivering to the Corporation shares of unrestricted Stock; provided, however, that if the Participant is an "officer" of the Corporation within the meaning of Section 16 of the Exchange Act, no such election shall be made (i) unless the Plan has been approved by shareholders in accordance with Section 15 of the Plan and (ii) such election is made either (A) during one of the "window" periods described in Rule 16b-3 promulgated under the Exchange Act, or (B) at least six months prior to the date income is recognized with respect to the Award.



(d)

No members of the Board or the Committee, nor any officer or employee of the Corporation acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Corporation acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Corporation in respect of any such action, determination or interpretation provided such individual first gives the Corporation an opportunity, at its own expense, to handle and defend any legal action before such individual undertakes to handle and defend such legal action.



(e)

The existence of Stock Options, Stock Appreciation Rights, Restricted Stock and Performance Awards shall not affect the right or power of the Corporation and its shareholders to make adjustments, recapitalizations, reorganizations, or other changes to the Corporation's capital structure or its business; issue bonds, debentures, preferred or prior preference stocks affecting the Corporation's Common Stock or the rights thereof; dissolve or liquidate the Corporation, or sell or transfer any part of its assets or business; or any other corporate act, whether of a similar character or otherwise.

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(f)

The validity, interpretation, and administration of the Plan and of any rules, regulations, determinations, or decisions made thereunder, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with the laws of the State of Tennessee, except where those laws may be superseded by the laws of the United States of America. Without limiting the generality of the foregoing, the period within which any action in connection with the Plan must be commenced shall be governed by the laws of the State of Tennessee.



(g)

The obligation of the Corporation to make payment of Awards in Stock shall be subject to all applicable laws, rules and regulations and to such approvals by government agencies as may be required. The Corporation shall be under no obligation to register under the Securities Act of 1933, as amended from time to time ("1993 Act"); any of the shares of Stock paid under the Plan. If the Stock paid under the Plan may in certain circumstances be exempt from registration under the 1933 Act, the Corporation may restrict the transfer of such Stock in such manner, as it deems advisable to ensure the availability of any such exemption.

SECTION 13. Cash Awards and Loans

        The Board, in its sole discretion, at any time may authorize special cash Awards to Participants to enable them to fund the exercise price of a Stock Option or any taxes that must be paid or withheld upon the exercise of a Stock Option, or Stock Appreciation Right, to fund the purchase price (if any) of Restricted Stock or any taxes that must be paid or withheld with respect to Restricted Stock, or to fund any taxes that must be paid or withheld with respect to any Performance Award. The Board in its sole discretion, at any time, may assist a Participant in obtaining a loan for any funds required in connection with any aspect of the Plan, including without limitation the exercise or purchase price of any Award and any taxes that must be paid or withheld in connection with any Award.

SECTION 14. Accounting

        It is the intent of the Board that the accounting expenses for any Awards under this Plan to the participants of Subsidiaries be charged to the Subsidiaries employing such participants and not to the Corporation. The Board of Directors and the Committee shall have the right to adopt any policies and procedures required in order to carry out this intent.

SECTION 15. Effective Date of Plan

        The Plan shall become effective upon the adoption by the Corporation's shareholders.

SECTION 16. Term of Plan

        No Stock Option, Stock Appreciation Right, Restricted Stock or Performance Award shall be granted pursuant to the Plan on or after the tenth anniversary of the effective date of the Plan, but Awards theretofore granted may extend beyond that date.

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SECTION 17. Execution

        IN WITNESS WHEREOF, the Corporation has caused this Plan to be signed by its duly authorized officers effective as of this                        day of                        , 2002.

CORNERSTONE BANCSHARES, INC.
By:	Edward L. Burris
Title:	Vice President & Secretary

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CORNERSTONE BANCSHARES, INC. 2002 LONG-TERM INCENTIVE PLAN

EX-99.3

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Exhibit 99.3

CORNERSTONE BANCSHARES, INC.

2004 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN

(Effective January 26, 2004)

        1.    Purpose.    The purpose of the Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan (the "Plan") is to provide Non-Employee Directors of Cornerstone Bancshares, Inc. (the "Company") the option to receive all or part of their compensation for serving on the Board of Directors of the Company and on any committees of the Board of Directors in shares of common stock of the Company.

        2.    Effective Date.    The Plan shall become effective as of January 26, 2004.

        3.    Eligibility.    All Directors of the Company who are not employees of the Company or of any subsidiary of the Company shall be entitled to participate in the Plan (each such person is referred to herein as a "Participant").

        4.    Shares Reserved Under the Plan.    There is hereby reserved for issuance under the Plan an aggregate of 20,000 shares of the Company's common stock, which may be authorized but unissued treasury shares.

        5.    Election to Receive Director Compensation in Common Stock.

        (a)    Election.    A Participant may elect to receive all or part of his or her compensation for service as a Director of the Company ("Director Compensation") in common stock, but not any other compensation or expense reimbursement. An election to receive Director Compensation in common stock under this paragraph 4 shall be referred to as a "Compensation Election."

        (b)    Qualifying Director.    There shall be no Compensation Elections during any calendar year with respect to any Director having direct or indirect beneficial ownership of the Company's shares representing five percent (5%) or more of the Company's issued and outstanding shares of common stock (a "Qualifying Director") as of the first trading day of that year. The percentage will be determined by information set forth in the Company's most recent quarterly report, and any current report subsequent thereto, filed with the Securities and Exchange Commission most immediately prior to December 31 of the preceding calendar year.

        (c)    Manner of Making Compensation Elections.    A Participant shall make a Compensation Election by giving written notice to the Company on the election form attached hereto as Exhibit A (the "Election Form"), specifying the amount of the Compensation Election as a percentage of Director Compensation.

        (d)    Time of Election.    Elections with respect to Compensation Elections may be made at the following times:

          (i)  A nominee for election for Director (who is not at the time of nomination a sitting Director) may make a Compensation Election any time before election to the Board and before being entitled to receive any compensation for service on the Board or a committee. The Compensation Election shall be effective upon such person's election to the Board.

         (ii)  A sitting Director who has never made a Compensation Election may make a Compensation Election at any time during the year. Such Compensation Election shall not, however, be effective until the last day of the calendar quarter in which such election was made.

        (iii)  A sitting Director who has discontinued a Compensation Election under subparagraph 4(d), may again make a Compensation Election at any time during the year, but the election will not be effective until January 1 of the following year.

        (d)    Change in, or Discontinuance of, Compensation Election.    A Participant may elect to change a prior election with respect to his or her Compensation Election by completing a new Election Form, but such election shall not, however, be effective until January 1 of the following year. A Participant may elect to discontinue a Compensation Election at any time, but such election shall not be effective until the first day of the next calendar quarter.

        (e)    Term of Compensation Election.    Unless discontinued pursuant to subparagraph (d) above, a Compensation Election shall continue in effect until the end of the Participant's service as a Director.

        6.    Payment.    The Company shall deliver, or cause to be delivered, to each Director who has made a Compensation Election, stock certificates evidencing the Director Compensation for which a Compensation Election has been made. The stock certificates shall be delivered at such times and for such time periods of service as the Compensation Committee of the Board of Directors shall from time to time determine; provided, however, such deliveries shall be made within 45 days after the end of each calendar quarter to the extent applicable. Payment for service as a Director for any period during which a Compensation Election is not in effect shall be made in cash.

        7.    Stock Value.    The number of stock certificates delivered pursuant to a Compensation Election for any period shall equal the amount of the Director Compensation for which a Compensation Election has been made divided by the average closing price for the common stock of the Company for the five trading days immediately preceding the date on which such Director Compensation was earned. The value of any fractional share, based on the formula in the preceding sentence, shall be paid in cash to the Director.

        8.    Taxation.    Director Compensation paid in the form of common stock under this Plan generally will be subject to taxation at the time paid, as provided in the Internal Revenue Code and applicable rules and regulations.

        9.    Administration.    This Plan shall be administered by the Compensation Committee of the Board of Directors of the Company, which shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions thereof.

        10.    Adjustment Provision.    If the Company shall at any time change the number of issued shares of common stock without new consideration to the Company (by stock dividend, stock split or similar transaction) (a "Stock Issuance"), the total number of shares reserved for issuance under the Plan prior to the Stock Issuance shall automatically be adjusted so that the number of shares of common stock reserved under the Plan after the Stock Issuance shall equal the same percentage of all shares of common stock of the Company.

        11.    Amendment and Termination.    This Plan may be amended, modified or terminated at any time by the Board of Directors of the Company; provided, however, that no such amendment, modification or termination shall, without the consent of a Participant, materially adversely affect such Participant's rights hereunder.

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CORNERSTONE BANCSHARES, INC.

2004 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN

ELECTION FORM

TO THE SECRETARY OF CORNERSTONE BANCSHARES, INC. (the "Company"):

        Pursuant to the Cornerstone Bancshares, Inc. 2004 Non-Employee Director Compensation Plan (the "Plan"), I hereby elect to receive    % of all compensation for service as a Director of the Company in shares of common stock of the Company. I acknowledge that any remaining compensation for service as a Director of the Company will be paid to me in cash at such times and for such periods as are determined by the Compensation Committee of the Board of Directors of the Company.

Signature of Director

Name:

Date:

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CORNERSTONE BANCSHARES, INC. 2004 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN (Effective January 26, 2004)
CORNERSTONE BANCSHARES, INC. 2004 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN ELECTION FORM