ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below details the financial results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank's subsidiary, the Mortgage Company, through June 30, 2008 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at June 30, 2008 to that at December 31, 2007. The part labeled Results of Operations discusses the three month and six month periods ended June 30, 2008 as compared to the same periods of 2007. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of

This discussion and analysis and other sections of this Form 10-Q contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company and Community Shores Financial Services. Words such as "anticipates", "believes", "estimates", "expects", "forecasts", "intends", "is likely", "plans", "projects", variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economy; the ability of the Company to borrow money or raise additional capital when desired to support future growth and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

FINANCIAL CONDITION

Total assets decreased by $8.1 million to $265.3 million at June 30, 2008 from $273.5 million at December 31, 2007. This is a 3.0% decrease in assets during the first six months of 2008. Balance sheet changes consisted of loan paydowns and decreases in deposits. Since year-

end 2007 loan decreases have been greater than that of deposits resulting in a $3.9 million increase in federal funds sold.

Cash and cash equivalents increased by $4.8 million to $12.7 million at June 30, 2008 from $7.9 million at December 31, 2007. This change was mostly reflective of increases in federal funds sold between the above two periods.

The Bank's investment portfolio was $19.2 million at June 30, 2008 compared to $19.8 million at December 31, 2007. There have been very few security transactions in the first six months of the year. In general, the Bank has a simplistic portfolio consisting of municipals, government agencies and some mortgage backed securities. As a result of the lack of liquidity in the capital markets, the fair value of securities has declined since year-end. The Company evaluates securities for other-than-temporary impairment on a quarterly basis. No unrealized losses have been recognized into income as a result. At June 30, 2008, twenty debt securities had unrealized losses with aggregate depreciation of 1.52% from the Company's amortized cost basis. Eight of the twenty securities are issued by government agencies. As the Company has the ability to hold these debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

Total loans (held for investment) decreased $11.9 million and were $218.3 million at June 30, 2008 down from $230.2 million at December 31, 2007. The decrease is evidenced by a decline of $12.3 million in the commercial, commercial real estate, construction and consumer loan portfolios partially offset by a $.4 million growth in the residential real estate portfolio. During the first six months of 2008, two customers made large pay downs on lines of credit; a home equity customer paid $1.5 million and a commercial customer paid $2.4 million. One commercial participation note for $2.8 million was bought back by the lead financial institution. Four commercial real estate notes totaling $6.0 million were refinanced with other financial institutions. There were collected prepayment fees totaling $65,000 on three of the notes. The Bank's underwriting standards include pricing for risk and profitability which does not always result in the lowest market rate. Although the loss of loan volume is unfortunate, management feels that adhering to high underwriting standards will be the most prudent tactic, particularly in this economic environment.

Other lending activity during the first half of 2008 included the origination of $15.8 million of residential mortgage and Small Business Administration ("SBA") loans and the sale of $17.0 million of residential mortgage and SBA loans. The associated gain on the loan sales was $255,000. These results compare favorably to originations of $11.2 million, sales of $11.1 million and gains of $205,000 occurring in the first half of 2007. A majority of the lending activity in 2008 is the result of the successes of the Bank's mortgage origination team that was hired in the second quarter of 2007.

Presently, the commercial and commercial real estate categories of loans comprise 78% of the Bank's total loan portfolio, the same as year-end 2007. There are six experienced commercial lenders on staff devoted to pursuing and originating these types of loans. The Bank's strategic plan includes tactics aimed at diversifying its loan portfolio. In the spring of 2007, five mortgage originators were hired to help increase the Bank's retail presence in it's defined market area

utilizing the enhanced branch network. Since March 2007, portfolio retail loans have increased by over $6.3 million with total originations exceeding $48 million. A majority of the loans originated are residential mortgages and are sold in the secondary market. So although the second quarter resulted in a net decline in total loans, management remains optimistic about its portfolio diversification tactics and about future retail opportunities in the market place.

The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition to product diversification, two other methods used are to balance the rate sensitivity of the portfolio and avoid extension risk(1). The loan maturities and rate sensitivity of the loan portfolio at June 30, 2008 are set forth below:

                                     Within       Three to       One to         After
                                     Three         Twelve         Five          Five
                                     Months        Months         Years         Years          Total
                                  -----------   -----------   ------------   -----------   ------------
Commercial, financial and other   $24,021,683   $24,969,581   $ 29,405,013   $ 4,775,365   $ 83,171,642
Real estate:
   commercial                      13,531,534    13,355,916     58,269,157     1,824,667     86,981,274
   construction                       586,137     1,105,042         42,789       811,915      2,545,883
   mortgages                          209,624       401,418      2,491,921    13,276,524     16,379,487
Consumer                            2,371,683     4,111,972     17,798,389     4,966,920     29,248,964
                                  -----------   -----------   ------------   -----------   ------------
                                  $40,720,661   $43,943,929   $108,007,269   $25,655,391   $218,327,250
                                  ===========   ===========   ============   ===========   ============

Loans at fixed rates                3,540,713    15,007,990     95,104,064    22,360,943    136,013,710
Loans at variable rates            37,179,948    28,935,939     12,903,205     3,294,448     82,313,540
                                  -----------   -----------   ------------   -----------   ------------
                                  $40,720,661   $43,943,929   $108,007,269   $25,655,391   $218,327,250
                                  ===========   ===========   ============   ===========   ============

At June 30, 2008, there were 62% of the loan balances carrying a fixed rate and 38% a floating rate, and only 12% of the entire portfolio had a contractual maturity longer than five years. During 2007 there was an increase in the concentration of fixed rate loans. Some of the shift is a factor of the types of loans added to the portfolio and some is customer preference. The maturity distribution of the loan portfolio has lengthened with the current focus on the mortgage business line, however the focus is on sale into the secondary market. Management only expects to retain 10-15% of residential mortgages originated because of the longer contractual terms generally involved in mortgage products. Having a larger concentration of fixed rate loans is helpful in a declining rate environment but both types of loans are useful to protect interest income during periods of interest rate fluctuations.

In addition to the Bank's risk management program, there is a need to maintain an allowance for loan losses. The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable incurred credit losses. The analysis of the allowance for loan losses is comprised of two portions: general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit

allocation includes a detailed review of a credit resulting in an allocation being made to the allowance. The allowance for loan losses is adjusted accordingly to maintain an adequate level based on the conclusion of the analysis. There are occasions when an impaired loan requires no allocated allowance for loan losses. At June 30, 2008 there were $10.1 million in outstanding loans with no allocated allowance for loans losses. As customers remit their 2007 financial statements and they are analyzed by the lending staff, many relationships have been deemed impaired. Approximately, 90 percent of the increase in impaired loans with no allocated allowance is a result of poor financial performance last year. The identified loans are well secured and the corresponding collateral analysis supports a loan loss reserve allocation of zero.

During the first half of 2008, $384,000 was added to the allowance through the provision expense. At June 30, 2008, the allowance totaled $3.4 million or approximately 1.56% of gross loans outstanding, compared to 1.57% at December 31, 2007.

The allocation of the allowance at June 30, 2008 was as follows:

                                                 June 30, 2008              December 31, 2007
                                          --------------------------   --------------------------
                                                         Percent of                   Percent of
                                                         Allowance                    Allowance
                                                         Related to                   Related to
Balance at End of Period Applicable to:     Amount     Loan Category     Amount     Loan Category
                                          ----------   -------------   ----------   -------------
Commercial                                $1,807,053        53.3%      $1,687,805       46.9%
Real estate:
   Commercial                              1,081,672        31.8        1,331,132       36.9
   Residential                               118,928         3.5          129,906        3.6
   Construction                               35,133         1.0           89,672        2.5
Consumer                                     354,383        10.4          364,433       10.1
                                          ----------       -----       ----------      -----
Total                                     $3,397,169       100.0%      $3,602,948      100.0%
                                          ==========       =====       ==========      =====

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. Below is a table, which details the past due balances at June 30, 2008 compared to those at year-end 2007 and the corresponding change related to those two periods.

                                                            Increase
Loans Past Due:       June 30, 2008   December 31, 2007    (Decrease)
-------------------   -------------   -----------------   -----------
30-59 days              $2,326,674        $2,155,411      $   171,263
60-89 days                 287,956           825,107         (537,151)
90 days and greater        108,349         1,484,451       (1,376,102)
Non accrual loans        4,155,965         4,532,120         (376,155)

From year-end 2007 to June 30, 2008, overall past due and non-accrual loans have decreased by $2.1 million. A majority of the activity is related to reductions in 60 days or more past due and non-accrual loans being partially offset by an increase in loans past due 30-59 days.

Loans past due sixty to eighty-nine days and ninety days past due and greater and non-accrual loans decreased $2.3 million from December 31, 2007 to June 30, 2008. Six loans charged off in the first half of 2008 comprise over 70% of the decrease. Most of the notes were collateralized by real estate. One loan was collateralized by a high end boat. The collateral from the former notes is currently being carried in other assets at market value less costs to sell. At the time of charge off there was $221,000 in previously allocated reserves on the commercial real estate notes.

Including the charge off activity above, net charge-offs for the second quarter and first half of 2008 were $281,000 and $590,000 which was an increase of $221,000 over net charge-offs of $60,000 recorded for the second quarter of 2007 and $442,000 more than the $148,000 charged off in the first six months of 2007. The corresponding ratio of net charge-offs to average loans was 0.51% and 0.52% for the second quarter and first half of 2008 compared to levels of 0.11% and 0.14% for the similar periods in 2007. Given the rise in non performing assets over the past year, it is likely that charge off ratios may remain elevated for a period of time. Even though the allowance balance has decreased, the overall coverage remains consistent from December 31, 2007 to June 30, 2008 due to the decrease in loan balances.

Other assets rose $872,000 since December 31, 2007. When the collateral supporting a borrowing is relinquished by customers through the collection process; the assets are written down to market value based on a professional appraisal or other common means of valuation and held until they can be sold. At June 30, 2008 there were nine properties and one high end boat being held for sale. If any relinquished asset is sold for less than it is being held or experiences a decline in market value during the holding period, further losses could result.

Deposit balances were $230.2 million at June 30, 2008 down from $237.9 million at December 31, 2007. Total deposit erosion since year-end was $7.7 million or 3%. Non interest bearing deposits grew $1.4 million since year-end 2007. Interest bearing checking accounts, money market and savings balances rose $15.8 million. Growth is due to several of the Bank's large public fund customers increasing their holdings since year-end. The growth in the above products was more than offset by a $24.9 million decline in time deposits since December 31, 2007. Local time deposits made up $14.1 million of the total decline and $10.8 million was brokered deposit maturities. The concentration of brokered deposits to total deposits was reduced to 35% at June 30, 2008 from 39% at December 31, 2007. The Bank strives to continue decreasing its dependency on brokered funds and begin to rely more on local deposits gathered as a result of its expanded branch network.

The shareholders' equity totaled $15.6 million at both June 30, 2008 and December 31, 2007. The earnings recorded in the first half of the year were offset by a negative change in accumulated other comprehensive income (security market value adjustments).

RESULTS OF OPERATIONS

The net income for the first six months of 2008 was $43,000 which was $204,000 less than the similar period in 2007. The corresponding basic and diluted earnings per share for the first six months of 2008 were $0.03 compared to $0.17 for 2007. Year to date 2008 earnings were

impacted by a lower net interest income coupled with higher depreciation costs associated with the new branch building in the Grand Haven market.

The Company recorded net income of $11,000 for the second quarter of 2008 while the same period in 2007 netted earnings of $18,000. The corresponding basic and diluted earnings per share were $.01 for both 2007 and 2008.

For the first six months and second quarter of 2008, the annualized return on the Company's average total assets was 0.03% and 0.02%, respectively, which is down from 0.20% and 0.03% annualized return for the same periods in 2007. The Company's annualized return on average equity was 0.55% and 0.28% for the first six months and second quarter of 2008 and 3.01% and 0.44% for the first six months and second quarter of 2007. The ratio of average equity to average assets was 5.69% and 5.77% for the first six months and second quarter of 2008 and 6.52% and 6.48% for the same periods in 2007.

As mentioned above, significant differences between the operating results of the first six months of 2007 and 2008 are the net interest income and the corresponding net interest margin. The following table sets forth certain information relating to the Company's consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented.

                        COMMUNITY SHORES BANK CORPORATION
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                                                                   Six months ended June 30,
                                            --------------------------------------------------------------------
                                                           2008                               2007
                                            ---------------------------------  ---------------------------------
                                               Average                Average     Average                Average
                                               Balance      Interest    Rate      Balance     Interest     Rate
                                            ------------  ----------  -------  ------------  ----------  -------
Assets
   Federal funds sold and interest-
      bearing deposits with other
      financial institutions                $ 12,229,117  $  151,355    2.48%  $  4,549,622  $  118,340    5.20%
   Securities                                 20,206,816     503,665    4.99     19,498,116     477,577    4.90
   Loans (including held for sale and
      non accrual)                           225,799,177   7,814,750    6.92    210,442,056   8,325,841    7.91
                                            ------------  ----------  ------   ------------  ----------  ------
                                             258,235,110   8,469,770    6.56    234,489,794   8,921,758    7.61
   Other assets                               16,840,158                         16,136,163
                                            ------------                       ------------
                                            $275,075,268                       $250,625,957
                                            ============                       ============
Liabilities and Shareholders' Equity
   Interest-bearing deposits                $221,553,070  $4,414,159    3.98   $197,416,818  $4,321,375    4.38
   Federal funds purchased,
      repurchase agreements and Federal
      Reserve Bank borrowings                  4,383,266      36,564    1.67      7,108,569     140,507    3.95
   Subordinated Debentures, Note
   Payable and Federal Home Loan
   Bank Advances                              14,701,029     404,847    5.51     10,904,396     356,907    6.55
                                            ------------  ----------  ------   ------------  ----------  ------
                                             240,637,365   4,855,570    4.04    215,429,783   4,818,789    4.47
                                                          ----------                         ----------
   Non-interest bearing deposits              18,109,919                         17,869,184
   Other liabilities                             679,573                            984,419
   Shareholders' Equity                       15,648,411                         16,342,571
                                            ------------                       ------------
                                            $275,075,268                       $250,625,957
                                            ============                       ============
Net interest income (tax equivalent
   basis)                                                  3,614,200                          4,102,969
Net interest spread on earning assets
   (tax equivalent basis)                                               2.52%                              3.14%
                                                                      ======                             ======
Net interest margin on earning assets
   (tax equivalent basis)                                               2.80%                              3.50%
                                                                      ======                             ======
Average interest-earning assets to average
   interest-bearing liabilities                                       107.31%                            108.85%
                                                                      ======                             ======
Tax equivalent adjustment                                     75,097                             57,773
                                                          ----------                         ----------
Net interest income                                       $3,539,103                         $4,045,196
                                                          ==========                         ==========

The tax equivalent net interest spread on average earning assets decreased 62 basis points to 2.52% since June 30, 2007. The tax equivalent net interest margin decreased by 70 basis points from 3.50% at June 30, 2007 to 2.80% at June 30, 2008. The tax equivalent net interest income for the first six months of 2008 was $3.6 million compared to a figure of $4.1 million for the same six months in 2007. The Company recorded $489,000 less net interest income although there were $23.7 million more average earning assets on the books. The net interest margin compression between the two periods was mostly a result of significant decreases in the Bank's average prime lending rate between the first six months of 2007 compared to the similar period in 2008.

The average rate earned on interest earning assets was 6.56% for the six months ended June 30, 2008 compared to 7.61% for the same period in 2007. The main contributing factor was the 99 basis point decrease in the yield on loans, the Bank's largest earning asset category. The Bank's average internal prime rate was 259 basis points lower between the first six months of

2008 and that of 2007. The drastic decrease in the prime lending rate was somewhat offset by the fact that the Bank's concentration of variable rate loans has decreased over the last twelve months from 43% at June 30, 2007 to 38% at June 30, 2008 but the speed at which the lending rates fell over the last twelve months was not fully offset by rate reductions on the funding side.

Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable decreased by 43 basis points for the first six months of 2008 compared to the first six months of 2007. A majority of the Bank's deposits have structured maturities which makes it harder to affect the same level of deposits by the same magnitude during periods of rapid rate decline. As shown in the interest sensitivity table on page 24, from July 1, 2008 through June 30, 2009, $87.1 million of time deposits will mature and potentially reprice to current market rates. The weighted average rate on these deposits is over 70 basis points higher than current market rates. Based on the current financial environment and local . . .