SECURITIES AND EXCHANGE COMMISSION

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ü No     

     The aggregate market value (average of the bid and asked prices) of the voting stock held by nonaffiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $144,969,256.

     There were 8,550,442 shares of the registrant’s common stock outstanding of March 8, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2003 are incorporated by reference into Parts I and II of this report. Portions of the registrant’s Proxy Statement for the Annual Meeting of shareholders to be held April 21, 2004 are incorporated by reference into part III of this report.

41

Form 10-K Cross-Reference Index

This 2003 Annual Report and Form 10-K of the registrant incorporates into a single document the 2003 Annual Report to Shareholders and the Annual Report on Form 10-K for the year ended December 31, 2003 filed by the registrant with the Securities and Exchange Commission. This Form 10-K Annual Report incorporates by reference certain information contained in the Annual Report to Shareholders and portions of the registrant’s Proxy Statement relating to the 2004 Annual Meeting of Shareholders as is reflected in the following Cross-Reference Index.

42

Form 10-K Cross-Reference Index (cont’d)

     Incorporated by Reference into the Following Items of Form 10-K

	(b)		Reports on Form 8-K:
			The corporation filed an 8-K on October 30, 2003 to announce earnings for the third quarter of 2003.
			The corporation filed an 8-K on December 15, 2003 to announce a write-down of two problem credits.
			The corporation filed an 8-K on December 22, 2003 to announce the opening of LSB Professional Mortgage Office in Raleigh, NC.

*Indicates a management contract or compensatory plan, contract or arrangement.

43

	ANNUAL REPORT & FORM 10 - K | 2003

First-rate banking. On a first-name basis.

Our Vision

To achieve excellence as

a financial institution

in the execution of our

commitment to the

constituencies that we

serve... our shareholders,

employees, customers,

and communities.

CONTENTS

“When you look for a bank, you’re looking for values.”

—Robert F. Lowe, CEO                  

To our shareholders:

Spend a few moments in the lobby of any of our offices and you’ll notice something that makes banking at LSB unique–and we think better. When a customer steps up to a teller window, or sits down with a loan officer, they typically are greeted by their first name. It’s not a part of our employee handbook. We don’t have a policy that requires it. At LSB, banking on a first-name basis just happens.

     Our employees enjoy getting to know their customers. They take the time to make friends and care enough to listen. It’s a way of doing business that reflects well on the people we like to employ and it bodes well for the communities we serve.

     In the competitive banking industry, service is often a defining factor. And providing great service has long been a priority at LSB. As you will see in this report, customer satisfaction plays an important role in our continued success. “First-rate banking on a first-name basis” helps ensure that satisfaction. And the warm and friendly atmosphere makes a career at LSB more satisfying, too.

     As we look forward, we will continue with our unique style of banking–earning trust, offering respect, expressing support, and knowing the value of a customer’s first name.

2

Financial Results As reported to you previously, the soft economy continues to pose distinct challenges to many businesses and individuals. As a result of the difficult economic environment of the past year, net income for 2003 was $8,578,000 or $1.00 per diluted share compared to $10,214,000 or $1.20 per diluted share in 2002. The decline in earnings was primarily due to the previously announced fourth quarter pre-tax charge of $2.9 million ($1.8 million after taxes) related to the write down of two specific credits. For the year 2003, net interest income increased 5% relative to 2002 while noninterest income increased 21% and noninterest expense grew 14%. The provision for loan losses was $5,215,000 for 2003 compared to $2,480,000 in 2002. In 2003, return on assets was 0.98% and return on average shareholders’ equity was 9.66%.

     Year over year balance sheet growth was generally in the low single digits. The allowance for loan losses strengthened on an aggregate basis due to the higher provisions. Specifically, the allowance for loan losses was $7,846,000 or 1.18% of gross loans at December 31, 2003, versus $7,284,000, or 1.13% of gross loans at December 31, 2002. Nonperforming assets, including nonaccrual loans, accruing loans more than 90 days past due, renegotiated troubled debt and other real estate owned, totaled $5,815,000 at December 31, 2003, down from $6,997,000 at December 31, 2002.

Shareholder Value Shareholders received cash dividends of $.64 per share in 2003, an increase of 6.7% compared to those received the prior year. Shareholders may enhance value by depositing their dividends in an account with LSB or participating in our Direct Stock Purchase Plan.

Offices During 2003, we continued to execute the bank’s strategic plan with new products and services and an expanded market area. In April, we opened an additional office in Winston-Salem followed in May by our first location in the Randolph County community of Archdale. Recently, we announced a mortgage production office in Raleigh that opened in January as well as a full-service office in the Guilford County community of Jamestown to open in the second quarter, pending regulatory approval. Our expansion into new and growing markets continues to provide many opportunities to build our customer base.

Expanded Services With our new web site, we provide an expanded menu of banking services online that allows easier transactions, better navigation, and additional information. We invite you to visit us at www.lsbnc.com.

     Again in 2003, we expanded our LSB Investment Services, Inc. subsidiary. Assets under management grew steadily reflecting the needs of customers for comprehensive financial planning. This was reflected in a fee revenue increase for 2003 of 99.8%

     The new office of People’s Finance in the High Point/Archdale market has allowed that subsidiary to continue to grow its service area and profitability.

Additional Convenience We expanded our network of ATMs in Arcadia as well as Archdale, the Davidson County Court House, the Reynolda Office in Winston-Salem and in Welcome at the RCR Racing Museum.

3

Technology Enhancements We invested significantly in new technology to enhance our delivery of services and to increase our efficiency.

•

We upgraded our telephonic software to enable us to handle the growing volume of phone calls.

•

We installed new software for tellers that enables them to serve customers more rapidly.

•

We acquired an automated loan approval system that has equipped us to provide better service to retail loan customers.

•

Sales and service software to be installed soon will allow us to track how and why customers contact us and how well we fulfill their requests.

•

New database software allows us to analyze product profitability as measured against our customer base and target customers for additional relationships.

Human Resources Balancing the investment in technology is our investment in attracting and retaining a staff that is dedicated to providing quality customer service. Our employee training capabilities were expanded this year to support our constant objective of providing superior customer service. We are fortunate to have hired a number of experienced bankers, to complement those already on staff, who are helping to grow our business in new and existing markets.

Marketing After two full years, the LSB Beeline Banking^SM brand now is widely recognized throughout the Piedmont Triad. Surveys indicate increasing and positive awareness of LSB as our sales and marketing programs have proven to be effective in meeting the goals and objectives of our business plan.

Corporate Governance While much has been written about the issue of corporate governance and best practices of public companies, at LSB the new requirements have simply reinforced what we have considered all along to be priorities; specifically, full and fair disclosure while exercising the fiduciary duties of care, loyalty and good faith. Our focus in this area continues to be the execution of good judgment in the pursuit of business excellence or in other words—Doing the Right Thing.

Outlook As we have stated, the Piedmont Triad continues to face challenging economic conditions. Our expansion into new and growing markets continues to provide many opportunities to build our customer base as we believe that a satisfied customer base creates franchise value and ultimately shareholder value. Thanks to our dedicated employees, Board of Directors and Advisory Boards, we will continue to offer the benefits of Beeline Banking^SM to our expanding customer base and ask that you recommend the services of LSB TheBank to your friends and acquaintances. Thank you for your continued confidence and support and for the opportunity of serving your financial needs.

4

Financial Highlights

(Dollars in thousands, except per share)

5

Officers of Lexington State Bank

Officers of
LSB Bancshares, Inc.

Robert F. Lowe
Chairman, President & Chief Executive Officer

H. Franklin Sherron, Jr.
Vice President

Monty J. Oliver
Secretary & Treasurer

Robin A. Huneycutt
Assistant Secretary

6

Board of Directors

7

Description of Business

REGISTRANT LSB Bancshares, Inc. (“Bancshares”) is a bank holding company headquartered in Lexington, North Carolina and registered under the Bank Holding Company Act of 1956, as amended. Bancshares’ principal business is providing banking and other financial services through its banking subsidiary. Incorporated on July 1, 1983, Bancshares is the parent holding company of Lexington State Bank (“LSB”), a North Carolina chartered commercial bank. The principal assets of Bancshares are all outstanding shares of LSB common stock. At December 31, 2003, Bancshares and its subsidiary had consolidated assets of $868 million and 429 employees.

SUBSIDIARY BANK LSB is chartered under the laws of the State of North Carolina to engage in the business of general banking. Founded in 1949, LSB offers a complete array of services in commercial banking including accepting deposits, corporate cash management, discount brokerage, IRA plans, secured and unsecured loans and trust functions through twenty-six offices in sixteen communities located in Davidson, Forsyth, Stokes, Guilford and Randolph counties in North Carolina. LSB operates the only independent trust department in Davidson County, providing estate planning, estate and trust administration, IRA trusts, personal investment accounts and pension and profit-sharing trusts.

NON-BANK SUBSIDIARIES LSB has two wholly-owned non-bank subsidiaries: Peoples Finance Company of Lexington, Inc. (“Peoples Finance”) and LSB Investment Services, Inc. (“LSB Investment Services”). Peoples Finance was acquired by LSB on January 1, 1984 and operates as a finance company licensed under the laws of the State of North Carolina. Peoples Finance operates from three offices located in Lexington, King and Archdale, North Carolina with nine employees. As a finance company, Peoples Finance offers secured and unsecured loans to individuals up to a maximum of $10,000, as well as dealer originated loans.

LSB Investment Services was incorporated under the laws of the State of North Carolina in 1994 and began operations on December 1, 1994. It offers a full range of uninsured, nondeposit investment products, including mutual funds, annuities, stocks and bonds and insurance services. LSB Investment Services operates from offices located within LSB’s home office as well as Welcome, Stratford, King and Wallburg offices, with ten employees. LSB Investment Services offers products through Uvest Investment Services, an independent broker-dealer, which is a member of the National Association of Securities Dealers and the Securities Investor Protection Corporation. Investments are neither deposits nor obligations of Lexington State Bank, nor are they guaranteed or insured by any depository institution, the FDIC, or any other government agency.

COMPETITION Commercial banking in LSB’s service area is highly competitive. LSB actively competes with national and state banks, thrift institutions, credit unions, investment brokers, mortgage and finance companies. Competition of community banks with regional and national banks has intensified significantly as a result of deregulation of the financial industry.

REGULATION As a bank holding company, Bancshares is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System. LSB is chartered by the State of North Carolina and as such is subject to supervision, examination and regulation by the North Carolina State Banking Commission. LSB is also a member of the Federal Deposit Insurance Corporation and is therefore subject to supervision and examination by that agency.

PROPERTIES Bancshares’ principal executive offices are located at One LSB Plaza, Lexington, North Carolina. This five-story office building totals 74,800 square feet and also serves as the home office of LSB. A majority of the major staff functions are located within this office complex, which is owned by LSB.

LSB operates twenty-six offices and ten off-premise automated teller locations. Twelve branches are owned by LSB, while fourteen branches and the off-premise ATM locations are leased. LSB’s leased properties are subject to leases that expire on various dates from February 1, 2004 to February 28, 2010. Peoples Finance operates from a 1,800 square foot, one-story building located at 203 East Center Street in Lexington, which it owns, a 500 square foot, one-story building located at 607 South Main Street in King, which it leases and a 1,200 square foot one-story building located at 11246 North Main Street in Archdale which it leases. LSB Investment Services leases 800 square feet within the principal office building of LSB. Except as described herein, Bancshares, LSB, Peoples Finance and LSB Investment Services own all properties free and clear of encumbrances.

14

Summary of Selected Financial Data

15

Average Balances and Net Interest Income Analysis

[TABLE 1]

Fully taxable equivalent basis¹ (In thousands)