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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB


                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003                File Number 000-28037

                            FIRST SOUTH BANCORP, INC.
                 (Name of Small Business Issuer in its Charter)

         South Carolina                                  57-1086258
(State or Other Jurisdiction of             (IRS Employer Identification Number)
 Incorporation or Organization)

        1450 John B. White, Sr., Blvd., Spartanburg, South Carolina 29306
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 595-0455

        Securities Registered Pursuant to Section 12(b) of the Act: None

           Securities Registered Pursuant to Section 12(g) of the Act:
                           Common Stock, No Par Value
                                (Title of Class)

         Check whether the issuer (1) has filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 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 [X]   No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will 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-KSB
or any amendment to this Form 10-KSB. [ ]

         The issuer's revenues for its most recent fiscal year were $14,137,658.

         The aggregate  market value of the Common Stock held by  non-affiliates
on March 5, 2004, was approximately $19,645,465. As of March 5, 2004, there were
1,382,040  shares of the Registrant's  Common Stock, no par value,  outstanding.
For purposes of the  foregoing  calculation  only,  all  directors and executive
officers of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
     Shareholders - Part III

Transitional Small Business Disclosure Format (check one): Yes [  ]  No [X]



<PAGE>




Prefatory Note Regarding Number of Shares

On  February  18,  2004,  the  Board of  Directors  of the  Company  approved  a
three-for-two  split of the  Company's  common  stock  effected in the form of a
stock  dividend to  shareholders  of record on March 5, 2004.  Accordingly,  all
share  and per share  information  presented  throughout  the  10-KSB  have been
restated to reflect the effect of the stock split.


                                     Part 1

Item 1.  Description of Business.

General

         First South Bancorp,  Inc.,  (the  "Company") is a bank holding company
with no operations other than those carried on by its  wholly-owned  subsidiary,
First South Bank (the "Bank").  The Company was organized in 1999 under the laws
of South  Carolina  for the purpose of becoming a holding  company for the Bank.
The Bank conducts a general banking  business under a state charter  approved by
the South Carolina State Board of Financial Institutions (the "State Board") and
granted by the Secretary of State of South  Carolina.  The Bank was organized in
1996.  The Bank  conducts  its  activities  from its main  office and one branch
office,  opened in 1997,  in  Spartanburg,  South  Carolina,  a branch opened in
March, 2000 in Columbia, South Carolina, a branch opened in July, 2003 in Hilton
Head Island,  South  Carolina,  and a loan  production  office opened in 2003 in
Asheville, North Carolina.

         The Bank's business primarily consists of accepting deposits and making
loans.  The Bank seeks deposit  accounts from  households  and businesses in its
primary  market areas by offering a full range of savings  accounts,  retirement
accounts (including Individual Retirement  Accounts),  checking accounts,  money
market accounts,  and time  certificates of deposit.  It also makes  commercial,
real estate and installment loans, primarily on a secured basis, to borrowers in
and around  Spartanburg,  Richland,  and Beaufort Counties in South Carolina and
Buncombe  County in North  Carolina.  In  addition,  The Bank also  makes  other
authorized investments. As of December 31, 2003, the Bank employed 52 persons on
a full time equivalent basis.

Competition

         The Bank competes  primarily in the South Carolina city of Spartanburg,
for which the most recent market share data available is as of June 30, 2003. At
that time, in Spartanburg,  14 banks,  savings and loans, and savings banks with
48 branch  locations  competed for aggregate  deposits of  approximately  $1.884
billion.  The Bank has a city-wide  deposit  market  share of 6.91% and a market
share rank of 6 out of the 14 competitors.  The Bank has a branch located in the
city of Columbia,  South Carolina has  approximately  1.18% of the market share.
Within  the past  year,  the Bank has opened a full  service  branch  located in
Hilton Head Island,  South Carolina and a loan  production  office in Asheville,
North Carolina.

         Banks generally compete with other financial  institutions  through the
savings  products and services  offered,  the pricing of services,  the level of
service provided,  the convenience and availability of services,  and the degree
of expertise  and  personal  concern  with which  services  are offered.  In the
conduct of certain  areas of its business,  the Bank  competes  with  commercial
banks, credit unions,  consumer finance companies,  insurance  companies,  money
market  mutual  funds and other  financial  institutions,  some of which are not
subject to the same degree of regulation and restriction  imposed upon the Bank.
Many of these  competitors  have  substantially  greater  resources  and lending
limits than the Bank and offer certain services,  such as international  banking
services and trust services, which the Bank does not provide.  Moreover, most of
these  competitors  have more numerous branch offices located  throughout  their
market areas,  a competitive  advantage  that the Bank does not have to the same
degree.

         The banking industry is significantly  affected by prevailing  economic
conditions as well as by government policies and regulations  concerning,  among
other things,  monetary and fiscal affairs,  the housing  industry and financial
institutions.  Deposits at banks are influenced by a number of economic factors,
including interest rates, competing  instruments,  levels of personal income and
savings,  and the extent to which interest on retirement savings accounts is tax
deferred.  Lending  activities  are  also  influenced  by a number  of  economic
factors,  including  demand  for  and  supply  of  housing,  conditions  in  the
construction  industry,  and availability of funds. Primary sources of funds for
lending  activities  include savings  deposits,  income from  investments,  loan
principal  repayments,   and  proceeds  from  sales  of  loans  to  conventional
participating lenders.

                                       2
<PAGE>

Effect of Government Regulation

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation  may have a material  effect on the  business  of the Company and the
Bank.


General

         As a bank holding  company under the Bank Holding Company Act ("BHCA"),
the  Company  obtained  the  approval of the Board of  Governors  of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing  services to or performing  services for its subsidiaries or engaging
in any other  activity  which the Federal  Reserve  determines  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial  holding company"  pursuant to the  Gramm-Leach-Bliley  Act, which is
described below under the caption  "Gramm-Leach-Bliley  Act." The BHCA prohibits
the Company  from  acquiring  direct or indirect  control of more than 5% of the
outstanding  voting stock or substantially all of the assets of any bank or from
merging or  consolidating  with  another  bank  holding  company  without  prior
approval of the Federal  Reserve.  Additionally,  the BHCA prohibits the Company
from engaging in or from  acquiring  ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be properly  incident  thereto.  The BHCA generally does not place
territorial   restrictions  on  the  activities  of  such  non-banking   related
activities.

         The Company is also subject to regulation and  supervision by the South
Carolina  State Board of Financial  Institutions  (the "State  Board").  A South
Carolina bank holding company must provide the State Board with information with
respect to the financial  condition,  operations,  management and  inter-company
relationships of the holding company and its subsidiaries.  The State Board also
may require such other information as is necessary to keep itself informed about
whether the  provisions  of South  Carolina law and the  regulations  and orders
issued  thereunder  by the State Board have been  complied  with,  and the State
Board may examine any bank holding company and its subsidiaries.

Obligations of the Company to its Subsidiary Bank

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policy that are designed to reduce  potential  loss  exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended
("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  shareholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision gives depositors a preference over general and subordinated  creditors
and  shareholders  in the event a receiver is appointed to distribute the assets
of the Bank.

                                       3
<PAGE>

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and State Banks

         The various federal bank regulators,  including the Federal Reserve and
the FDIC have adopted  risk-based and leverage capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.

         Failure to meet capital  guidelines could subject the Bank to a variety
of enforcement  remedies,  including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.

         The risk-based  capital standards of both the Federal Reserve Board and
the FDIC explicitly identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital  due to changes in interest  rates be  considered  by the  agencies as a
factor in evaluating a bank's capital  adequacy.  The Federal Reserve Board also
has issued additional  capital guidelines for bank holding companies that engage
in certain trading activities.

         The  Company  and  the  Bank  met  all  requirements  to be  adequately
capitalized at December 31, 2003.

Payment of Dividends

         The  Company is a legal  entity  separate  and  distinct  from its bank
subsidiary.  Most of the  revenues of the  Company  are  expected to result from
dividends  paid to the Company by the Bank.  There are statutory and  regulatory
requirements  applicable to the payment of dividends by the  subsidiary  bank as
well as by the  Company  to its  shareholders.  It is not  anticipated  that the
Company will pay cash dividends in the near future.

         In  September  2003 the Bank's  Board of  Directors  signed an informal
memorandum of  understanding  with the Bank's  banking  regulators in connection
with a deferred  presentment  (payday)  lending program that the Bank was in the
process of terminating.  Among other things, the memorandum agreed that the Bank
would not pay dividends  without prior approval of the Banking  regulators.  The
Bank completed its exit of the deferred  presentment  lending program by the end
of 2003 and the memorandum was terminated in January 2004.

Certain Transactions by the Company with its Affiliates

         Federal  law   regulates   transactions   among  the  Company  and  its
affiliates,  including  the  amount of the  Bank's  loans to or  investments  in
non-bank  affiliates and the amount of advances to third parties  collateralized
by  securities  of an  affiliate.  Further,  a  bank  holding  company  and  its
affiliates  are  prohibited  from  engaging in certain  tie-in  arrangements  in
connection with any extension of credit, lease or sale of property or furnishing
of services.

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory factors. However,  legislation enacted in
1996 requires that both  SAIF-insured  and  BIF-insured  deposits pay a pro rata
portion  of the  interest  due  on  the  obligations  issued  by  the  Financing
Corporation  ("FICO").  The FICO  assessment  is adjusted  quarterly  to reflect
changes in the assessment  bases of the respective funds based on quarterly Call
Report and Thrift Financial Report submissions.

Regulation of the Bank

         The Bank is subject to regulation  and  examination by the FDIC and the
State Board. In addition, the Bank is subject to various other state and federal
laws and regulations,  including state usury laws, laws relating to fiduciaries,
consumer  credit  laws and laws  relating  to branch  banking.  The Bank's  loan
operations  are  also  subject  to  certain  federal  consumer  credit  laws and
regulations promulgated thereunder,  including,  but not limited to: the federal
Truth-In-Lending   Act,  governing  disclosures  of  credit  terms  to  consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information  concerning their mortgage lending; the Equal Credit
Opportunity  Act and the Fair Housing  Act,  prohibiting  discrimination  on the
basis of  certain  prohibited  factors  in  extending  credit;  the Fair  Credit
Reporting  Act,  governing  the use  and  provision  of  information  to  credit

                                       4
<PAGE>
reporting agencies;  the Bank Secrecy Act, dealing with, among other things, the
reporting of certain  currency  transactions;  and the Fair Debt Collection Act,
governing  the manner in which  consumer  debts may be collected  by  collection
agencies.  The deposit  operations  of the Bank are also subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the  Expedited  Funds  Availability  Act,  which  deals with  disclosure  of the
availability  of funds  deposited in accounts and the  collection  and return of
checks by banks;  the Right to Financial  Privacy Act,  which  imposes a duty to
maintain  certain   confidentiality   of  consumer  financial  records  and  the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The  Bank  is  also  subject  to  the  requirements  of  the  Community
Reinvestment  Act (the  "CRA").  The CRA imposes on  financial  institutions  an
affirmative  and  ongoing  obligation  to meet the credit  needs of their  local
communities,  including low- and moderate-income neighborhoods,  consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
FDIA:   restricting  payment  of  capital  distributions  and  management  fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital  restoration  plan;  restricting  the growth of the bank's
assets and requiring prior approval of certain expansion proposals.  A bank that
is  "significantly   undercapitalized"   is  also  subject  to  restrictions  on
compensation  paid  to  senior  management  of  the  bank,  and a bank  that  is
"critically   undercapitalized"  is  further  subject  to  restrictions  on  the
activities of the bank and restrictions on payments of subordinated  debt of the
bank.  The  purpose  of these  provisions  is to  require  banks  with less than
adequate  capital to act quickly to restore  their  capital and to have the FDIC
move  promptly  to take over  banks  that are  unwilling  or unable to take such
steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered  deposits.  The regulations  provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the  definitions  adopted by the agencies to implement the prompt  corrective
action  provisions  described in the  previous  paragraph.  Management  does not
believe  that  these  regulations  will have a  material  adverse  effect on the
operations of the Bank.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

                                       5
<PAGE>

Gramm-Leach-Bliley Act

          The  Gramm-Leach-Bliley  Act,  which makes it easier for  affiliations
between banks,  securities firms and insurance  companies to take place,  became
effective  in March,  2000.  The Act removes  Depression-era  barriers  that had
separated  banks and  securities  firms,  and seeks to  protect  the  privacy of
consumers' financial information.

         Under  provisions of the  legislation  and  regulations  adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations  through a holding company  structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial  holding  company" which has powers much more extensive than
those of standard holding companies.  These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature;  (2)  incidental  to  activities  that are  financial in nature;  or (3)
complementary  to a  financial  activity  and that do not  impose  a safety  and
soundness risk. Significantly,  the permitted financial activities for financial
holding  companies include authority to engage in merchant banking and insurance
activities,  including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and  have  received  a  rating  of   "satisfactory"   on  their  last  Community
Reinvestment Act examination.

         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent each from becoming liable for the obligations of the other.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including   federally-chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by  financial  institutions.  The privacy  provisions  of the Act have been
implemented by adoption of regulations by various federal agencies.

         The Act and the  regulations  adopted  pursuant  to the Act  create new
opportunities  for the Company to offer  expanded  services to  customers in the
future,  though  the  Company  has not yet  determined  what the  nature  of the
expanded  services  might be or when the Company might find it feasible to offer
them. The Act has increased competition from larger financial  institutions that
are  currently  more  capable  than  the  Company  of  taking  advantage  of the
opportunity  to  provide a  broader  range of  services.  However,  the  Company
continues to believe that its commitment to providing high quality, personalized
service to customers will permit it to remain competitive in its market area.

                                       6
<PAGE>

         The  Sarbanes-Oxley  Act was  signed  into  law on July 30,  2002,  and
mandated  extensive reforms and requirements for public  companies.  The SEC has
adopted   extensive  new  regulations   pursuant  to  the  requirements  of  the
Sarbanes-Oxley  Act. The  Sarbanes-Oxley  Act and the SEC's new regulations have
increased  the  Company's  cost of  doing  business,  particularly  its fees for
internal  and  external  audit  services  and  legal  services,  and the law and
regulations  are  expected to continue to do so.  However,  the Company does not
believe that it will be affected by  Sarbanes-Oxley  and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.

Legislative Proposals

         Proposed  legislation which could significantly  affect the business of
banking is  introduced  in Congress  from time to time.  Management  of the Bank
cannot predict the future course of such  legislative  proposals or their impact
on the Company and the Bank should they be adopted.

Fiscal and Monetary Policy

         Banking is a business  which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other  borrowings,  and the interest  received by a bank on
its loans and  securities  holdings,  constitutes  the major portion of a bank's
earnings.  Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic  conditions  generally,  both domestic and foreign,
and also to the  monetary  and  fiscal  policies  of the  United  States and its
agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates the
supply of money through various means,  including open market dealings in United
States government  securities,  the discount rate at which banks may borrow from
the Federal Reserve,  and the reserve  requirements on deposits.  The nature and
timing of any changes in such  policies  and their impact on the Company and the
Bank cannot be predicted.

Further Information

         Further  information  about the business of the Company and the Bank is
set forth in Item 6 - Management's Discussion and Analysis or Plan of Operation.

Item 2.  Description of Property.

         The Bank recently  completed  building a 25,000  square foot  structure
located at 1460 John B. White,  Sr. Blvd. in Spartanburg,  SC. A portion of this
facility houses the financial services division of the Bank. The remaining space
will be used for suitable tenants and further expansion of the main office.  The
Bank also owns the real property at 1450 John B. White, Sr., Blvd., Spartanburg,
South  Carolina,  where  its main  offices  are  located.  The Bank  leases  the
properties at 1035 Fernwood  Glendale Road,  Spartanburg,  South Carolina,  1333
Main Street,  Columbia,  South Carolina,  7 Arley Way, Hilton Head Island, South
Carolina, and 30 Hendersonville Road, Asheville,  North Carolina 28813 where its
other offices are located,  under long term leases.  All properties are believed
to be well suited for the Bank's needs.

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<PAGE>

Item 3.  Legal Proceedings.

         On May 6, 2002, Lisa Lesavoy,  as successor trustee,  filed a complaint
in the United States  District Court for the District of South Carolina  against
the  Corporation  and an employee of the  Corporation's  subsidiary,  as well as
against eight other entities and individuals.  The complaint alleges that one of
the individual  defendants  (not the employee) was the  plaintiff's  predecessor
trustee and  breached  various  duties to the two trusts in question  all to the
financial  detriment  of the trusts.  The  complaint  further  alleges  that the
Corporation and the employee by lending to and arranging credit transactions for
the  trusts,  together  with the other  defendants,  aided and abetted the prior
trustee's   breaches  and  violated  the   Racketeer   Influenced   and  Corrupt
Organizations Act. The complaint seeks monetary damages and attorneys' fees. The
Corporation  plans to  vigorously  defend the action and is presently  unable to
reliably  estimate  the  amount  of  loss  it  may  suffer  as a  result  of the
litigation.

Item 4.  Submission of Matters to Vote of Security Holders.

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2003.

                                     PART II

Item 5.  Market for Common  Equity and  Related  Stockholder  Matters  and Small
         Business Issuer Purchases of Equity Securities.

Market for Common Stock, Stockholders and Dividends

         Although the common stock of the Company is traded from time to time on
an individual  basis,  no  established  trading market has developed and none is
expected to develop in the foreseeable future. The common stock is not traded on
any exchange or on the NASDAQ National  Market System,  nor are there any market
makers  known  to  management.  During  2003,  management  was  aware  of a  few
transactions  in which the Company's  common stock traded in a range from $18.87
to  $24.67  per  share.  However,  management  has not  ascertained  that  these
transactions  are the result of arm's length  negotiations  between the parties,
and because of the limited  number of shares  involved,  these prices may not be
indicative of the market value of the common stock.

         As of March 5, 2004, there were  approximately 514 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         The  Company  has never paid any cash  dividends,  and to  support  its
continued  capital  growth,  does not expect to pay cash  dividends  in the near
future.  The dividend  policy of the Company is subject to the discretion of the
Board of  Directors  and depends upon a number of factors,  including  earnings,
financial  condition,  cash needs and general  business  conditions,  as well as
applicable regulatory  considerations.  At present, the Company's only source of
funds with which it could pay  dividends  is  dividend  payments  from the Bank.
South Carolina  banking  regulations  restrict the amount of cash dividends that
can  be  paid  to  shareholders,  and  all  of  the  Bank's  cash  dividends  to
shareholders   are  subject  to  the  prior   approval  of  the  South  Carolina
Commissioner of Banking.

Securities Authorized for Issuance under Equity Compensation Plans

         The information  required by Item 201(d) of Regulation S-B is set forth
in Item 11 of this Form 10-KSB.



                                       8
<PAGE>

Recent Sales of Unregistered Securities

         During 2003, the Company issued shares of Common Stock to the following
classes of person upon the exercise of options issued  pursuant to the Company's
stock option plan.  The  securities  were issued  pursuant to the exemption from
registration provided by Section 4 (2) of the Securities Act of 1933 because the
issuance did not involve a public offering.
<TABLE>
<CAPTION>
         Date Issued                Class of Purchasers           Number of Shares         Aggregate Exercise Price
         -----------                -------------------           ----------------         ------------------------
<S>         <C>                    <C>                                   <C>                        <C>
            5/1/03                 Non-officer Employee                  900                        $ 7,500
</TABLE>


Purchases of Equity Securities by the Company and Affiliated Purchasers

         Neither  the Company nor any  "affiliated  purchaser"  as defined in 17
C.F.R.  240.10b-18(a)(3)  purchased  any  shares  or units  of any  class of the
Company's  equity  securities  that is registered  pursuant to Section 12 of the
Exchange Act during the fourth  quarter of 2003.  Accordingly,  no disclosure is
required pursuant to 17 C.F.R. 228.703.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         Statements  included in this Form 10-KSB  which are not  historical  in
nature  are  intended  to be,  and are  hereby  identified  as  "forward-looking
statements"  for  purposes  of the safe  harbor  provided  by section 21E of the
Securities  and  Exchange  Act of 1934,  as amended.  Words such as  "estimate",
"project",  "intend",  "expect",  "believe",  "anticipate",  "plan", and similar
expressions  identify forward looking  statements.  The Company cautions readers
that forward looking statements, including without limitation, those relating to
the Company's new offices, future business prospects, revenues, working capital,
liquidity, capital needs, adequacy of allowance for loan losses, interest costs,
and income,  are  subject to certain  risks and  uncertainties  that could cause
actual results to differ from those indicated in forward looking statements, due
to several important factors herein  identified,  among others,  and other risks
and factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.  These forward-looking  statements are based
on  current   expectations,   estimates  and  projections  about  our  industry,
management's  beliefs,  and  assumptions  made by management.  Such  information
includes,  without  limitation,   discussions  as  to  estimates,  expectations,
beliefs,  plans,  strategies,  and objectives  concerning  the Company's  future
financial and operating  performance.  These  statements  are not  guarantees of
future performance and are subject to risks,  uncertainties and assumptions that
are difficult to predict,  particularly in light of the fact that the Company is
a relatively  new company  with limited  operating  history.  Therefore,  actual
results may differ from those  expressed or forecasted  in such  forward-looking
statements. The risks and uncertainties include, but are not limited to:

     o    The Company's growth and ability to maintain growth;

     o    government  monetary and fiscal  policies,  as well as legislative and
          regulatory changes;

     o    the effect of interest  rate changes on our level and  composition  of
          deposits, loan demand and

     o    the value of our loan collateral and securities;

     o    the effects of competition from other financial institutions operating
          in the Company's market

     o    areas  and  elsewhere,   including   institutions  operating  locally,
          regionally, nationally and internationally;

     o    failure of assumptions  underlying the  establishment of the allowance
          for loan losses, including

     o    the value of collateral securing loans; and

     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

         The Company  undertakes no obligation to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  In light of these risks,  uncertainties,  and assumptions,
the forward-looking events discussed in this report might not occur.

                                       9
<PAGE>

         This  discussion is intended to assist in  understanding  the financial
condition  and  results  of  operations  of the  Company,  and should be read in
conjunction with the financial  statements and related notes contained elsewhere
herein. Because the Bank is responsible for all of the Company's operations, the
discussion will refer to the results of operations of the Bank.

Critical Accounting Policies

         The Company has adopted  various  accounting  policies which govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  the  Company's  financial   statements.   The
significant accounting policies of the Company are described in the footnotes to
the consolidated financial statements.


         Certain   accounting   policies  involve   significant   judgments  and
assumptions by management, which have a material impact on the carrying value of
certain assets and liabilities. Management considers such accounting policies to
be  critical  accounting  policies.   The  judgments  and  assumptions  used  by
management  are based on  historical  experience  and other  factors,  which are
believed to be reasonable under the circumstances.  Because of the nature of the
judgments and assumptions  made by management,  actual results could differ from
those  judgments  and  estimates,  which  could  have a  material  impact on the
carrying  values of assets and  liabilities and the results of operations of the
Company.

         The  Company  believes  the  allowance  for loan  losses is a  critical
accounting  policy that  requires the most  significant  judgments and estimates
used in  preparation  of its  consolidated  financial  statements.  Refer to the
section  "Allowance  for  Loan  Losses"  for  a  description  of  the  Company's
estimation and methodology related to the allowance for loan losses.

Earnings Performance

         The Bank had net income from operations for the year ended December 31,
2003,  of  $2,104,267,  or $1.52 per share,  compared to net income for the year
ended  December 31, 2002, of $1,418,764 or $1.03 per common share.  The Bank had
net interest income (the difference  between interest earned on interest earning
assets and interest paid on interest  bearing  liabilities)  of  $8,474,452  for
2003,  as compared to  $5,854,703  for 2002.  The Bank also had other  operating
income (principally service charges, fees and commissions) of $1,254,286 in 2003
and $860,419 in 2002.  The Bank provided  $949,302 and $674,830 to its allowance
for loan losses in 2003 and 2002, respectively, and had other operating expenses
(principally  salaries and benefits and  occupancy  and  equipment  expenses) of
$5,549,169 in 2003, and $3,826,266 in 2002.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of
interest rates,  volume and mix of interest  earning assets and interest bearing
liabilities, and the relative funding of these assets.

         For  the  year  ended  December  31,  2003,  net  interest  income  was
$8,474,452.  During the year ended  December 31, 2002,  net interest  income was
$5,854,703.  The 44.7%  increase in net interest  income  during 2003 can not be
attributed to any single factor,  but, rather, to a combination of factors which
served  to  positively  affect  net  interest  income   performance.   The  most
quantifiable  of  these  factors  are,  (a)  the  comparative  dollar-for-dollar
increases in earning assets and  interest-bearing  liabilities - average earning
assets grew $2.2 million more than average  interest-bearing  liabilities during
the year, and (b) the improvement in interest spread, the difference between the
percentage   yield  on   earning   assets   and  the  cost  of  funds   rate  on
interest-bearing  liabilities,  which  improved by 52 basis  pointsin  2003 as a
result of the 72 basis  points  decline in the average  cost of funds  rate,  as
compared to the 20 basis points decline in the average yield on earning assets.

                                       10
<PAGE>

         The table  "Average  Balances,  Yields and Rates,"  provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and interest  bearing  liabilities  for the years ended December 31, 2003
and 2002.
<TABLE>
<CAPTION>
                                                                 Average Balances, Yields and Rates
                                                                       (Dollars in Thousands)
                                                                      Year Ended December 31,
                               -----------------------------------------------------------------------------------------------------
                                             2003                                2002                               2001
                                             ----                                ----                               ----
                                            Interest                           Interest                           Interest
                                 Average     Income/   Yield/      Average      Income/   Yield/     Average       Income/    Yield/
                                Balance(1)   Expense    Rates      Balance(1)   Expense    Rate     Balances(1)    Expense    Rate
                               -----------   -------    -----      -----------  -------    -----    -----------    -------    -----
Assets
<S>                               <C>         <C>         <C>        <C>         <C>        <C>        <C>           <C>       <C>
Federal funds sold ..........    $       -    $     -        -      $       -    $     -       -        $     17     $    1    5.88%
Due From banks - ............        6,761         70     1.04%         9,993        157    1.57%          4,556        177    3.89%
Interest-bearing
Investment securities .......       13,666        533     3.90%        13,849        739    5.34%         14,192        894    6.30%
Loans (2) (3) ...............      194,944     12,282     6.30%       141,269      9,312    6.59%        102,333      8,596    8.40%
Total interest earning ......      215,374     12,884     5.98%       165,111     10,208    6.18%        121,098      9,668    7.98%
assets
Cash and due from banks .....        4,663                              3,074                              2,305
Valuation reserve for .......          100                                156                                124
investment securities
Allowance for loan losses ...      (2,144)                            (1,553)                            (1,234)
Premises and equipment ......        4,217                              2,817                              2,843
Other assets ................        3,630                              2,683                              2,330
                                 ---------                          ---------                           --------
Total assets ................    $ 225,840                          $ 172,288                           $127,466
                                 =========                          =========                           ========
Liabilities and
shareholders' equity
Interest bearing ............    $  33,729    $   579     1.72%     $  31,447    $   735    2.34%       $ 23,683     $  857    3.62%
transaction accounts
Savings .....................       34,094        613     1.80%         8,838        175    1.98%          2,750         66    2.40%
Time deposits $100,000 and
over ........................       28,312        699     2.47%        18,168        588    3.24%         14,721        872    5.92%
Other time deposits .........       80,867      2,035     2.52%        69,892      2,334    3.34%         51,314      2,826    5.51%
                                 ---------    -------               ---------    -------                --------     ------
Total interest bearing
deposits ....................      177,002      3,926     2.22%       128,345      3,832    2.99%         92,468      4,621    5.00%
Retail repurchase agreements         4,903         25     0.51%         5,887         65    1.10%          4,617        123    2.66%
Other Borrowed Funds ........       10,672        460     4.31%        10,276        456    4.44%          8,875        391    4.41%
                                 ---------    -------               ---------    -------                --------     ------
Total interest bearing%
liabilities .................      192,577      4,411     2.29%       144,508      4,353    3.01%        105,960      5,135    4.85
Non-interest bearing
demand deposits .............       16,046                             12,951                              7,864
Other liabilities ...........        1,854                              1,115                              1,149
Shareholders' equity ........       15,363                             13,714                             12,493
                                 ---------                          ---------                           --------
Total liabilities and
shareholders' equity ........    $ 225,840                          $ 172,288                           $127,466
                                 =========                          =========                           ========
Interest rate spread (4) ....                             3.69%                             3.17%                              3.13%
Net interest income and net .
 yield on earning  assets (5)                   8,473     3.93%                    5,855    3.55%                     4,533    3.74%

Interest free funds
 supporting earning assets (6)   $  22,797                            $20,603                           $ 15,138
</TABLE>
(1)  Average balances are computed on a daily basis.
(2)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is  recognized  on a cash basis and excludes  impact of deferred
     loan origination fees.
(3)  Interest income on loans for 2003, 2002, and 2001, included total loan fees
     of $893, $731, and $608, respectively.
(4)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets less total interest bearing liabilities.

                                       11
<PAGE>


Rate/Volume Analysis of Net Interest Income

         The  effect  of  changes  in  average  balances  (volume)  and rates on
interest  income,  interest  expense and net  interest  income,  for the periods
indicated,  is shown below.  The effect of a change in average  balance has been
determined  by applying the average rate in the earlier  period to the change in
average balance in the later period,  as compared with the earlier  period.  The
effect of a change in the  average  rate has been  determined  by  applying  the
average  balance in the later  period to the change in the  average  rate in the
later  period,  as compared  with the earlier  period.  Changes  resulting  from
average balance/rate variances are included in changes resulting from volume.


                                                  Year Ended December 31,
                                                   2003 compared to 2002
                                                 Increase (Decrease) Due to
                                                 --------------------------
                                                   (Dollars in Thousands)
                                             Volume         Rate          Total
                                             ------         ----          -----
Interest earned on:
   Due from banks-Interest-bearing ......     $   (50)     $   (36)     $   (86)
  Investments ...........................         (10)        (196)        (206)
  Net Loans .............................       3,536         (566)       2,970
                                              -------      -------      -------

Total Interest Income ...................       3,476         (798)       2,678
                                              -------      -------      -------

Interest paid on:
  Interest Checking .....................          54         (210)        (156)
  Savings Deposits ......................         500          (62)         438
  Time Deposits $100,000 and over .......         329         (218)         111
  Other time deposits ...................         365         (664)        (299)
  Retail Repurchase Agreements ..........         (11)         (29)         (40)
  Other Borrowed Funds ..................          18          (14)           4
                                              -------      -------      -------

Total Interest Expense ..................       1,255       (1,197)         (58)
                                              -------      -------      -------

Change in Net Interest Income ...........     $ 2,221      $   399      $ 2,620
                                              =======      =======      =======

         During the year 2004 management expects that interest rates will remain
fairly stable.  Therefore,  any improvements in net interest income for 2004 are
expected to be largely the result of  increases in the volume and changes in the
mix of interest earning assets and liabilities.  Management  expects to continue
following the market strategies which it has employed to date.

Interest Rate Sensitivity

         Interest rate  sensitivity  management is concerned with the timing and
magnitude of repricing  assets  compared to liabilities and is an important part
of asset/liability  management. It is the objective of interest rate sensitivity
management to generate stable growth in net interest income,  and to control the
risks  associated  with interest rate movement.  Management  constantly  reviews
interest rate risk exposure and the expected  interest rate  environment so that
timely adjustments in interest rate sensitivity can be made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative  basis through twelve months,  rate  sensitive  assets  exceeded rate
sensitive liabilities,  resulting in an asset sensitive position at December 31,
2003 of $29.6  million  for a  cumulative  gap ratio of  1.16:1.  When  interest
sensitive  liabilities exceed interest sensitive assets for a specific repricing
"horizon", a negative interest sensitivity gap results. The gap is positive when
interest sensitive assets exceed interest sensitive liabilities, as was the case
at December 31, 2003, with respect to the one year time horizon. For a bank with
a positive gap,  such as the Bank,  rising  interest  rates would be expected to
have a  positive  effect on net  interest  income  and  falling  rates  would be
expected to have the opposite effect.

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts  of fixed  rate  loans are  reflected  at the  earlier  of their
contractual  maturity  date or the  date at  which  the  loans  may be  repriced
contractually.  Time  deposits in other  banks are  reflected  in the  deposits'


                                       12
<PAGE>

maturity dates.  Repurchase agreements and other borrowed funds are reflected in
the earliest  contractual  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity,  such as interest bearing  transaction  accounts and savings deposits,
are reflected in the earliest repricing interval due to contractual arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits are reflected at their  contractual  maturity  dates.  Fixed rate
advances are reflected at their  contractual  maturity dates,  and variable rate
advances  are  reflected  in the  earliest  repricing  interval  since they were
borrowed under the daily rate credit option, and reprice daily.

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                      December 31, 2003
                                                               Within         4-12          Over 1-5        Over 5
                                                              3 Months       Months          Years          Years            Total
                                                              --------       ------         --------        ------           -----
                                                                                      (Dollars in thousands)
Interest earning assets
<S>                                                           <C>            <C>             <C>            <C>             <C>
   Interest-bearing deposits in other banks ...........       $     27       $      0        $      0       $      0        $     27
   Other investments (Book Value) .....................          2,710              0           8,509          2,976          14,195
   Loans
      Fixed rate ......................................          9,566          7,623          11,819          2,976          31,594
      Variable rate ...................................        195,350              0               0              0         195,350
                                                              --------       --------        --------       --------        --------
        Total interest earning assets .................       $207,652       $  7,623        $ 20,328       $  5,563        $241,166

Interest bearing liabilities
   Interest bearing deposits
      Interest bearing transaction accounts ...........         36,532              0               0              0          36,532
      Savings & MMIA ..................................         43,531              0               0              0          43,531
      Time deposits $100,000 and over .................          8,586         19,402           4,796              0          32,784
      Other time deposits .............................         29,254         40,078          14,250              0          83,582
        Total interest bearing deposits ...............        117,903         59,480          19,046              0         196,429
      Repurchase agreements ...........................          6,089              0               0              0           6,089
      Other borrowed Funds ............................          2,236              0               0         10,000          12,236
                                                              --------       --------        --------       --------        --------
        Total interest bearing liabilities ............       $126,228       $ 59,480        $ 19,046       $ 10,000        $214,754

Interest sensitivity gap ..............................       $ 81,424       $(51,857)       $  1,282       $ (4,437)
Cumulative interest sensitivity gap ...................       $ 81,424       $ 29,567        $ 30,849       $ 26,412
Gap ratio .............................................           1.65            .13            1.07
Cumulative gap ratio ..................................           1.65           1.16            1.15
</TABLE>

Provision for Loan Losses

         The allowance for loan losses,  established  through charges to expense
in the form of a provision for loan losses,  allows for loan losses  inherent in
the Bank's loan  portfolio.  Loan losses or  recoveries  are charged or credited
directly to the  allowance.  The level of the  allowance  for loan losses at any
given reportable  period is the result of applying the methodology  discussed in
the section  under the heading  "Allowance  for Loan  Losses." The Bank provided
$949,302 and $674,830 to the allowance  during the years ended December 31, 2003
and 2002,  respectively.  The  increase of $274,472 was required to maintain the
loss reserve at a level  determined by risk ratings assigned to individual loans
contributing to the $67,880,945  growth in the total loan portfolio for the year
and to replace the net amount of loans charged-off during the year of $99,302.

Other Income

         Other income,  which consists  primarily of mortgage banking loan fees,
loan brokerage fees, service charges on deposit accounts,  and other commissions
and fees income, increased by 45.8% to $1,254,286 in 2003 from $860,419 in 2002.
Of the total $393,867  increase in non-interest  income,  mortgage  banking loan
fees, which were favorably influenced by homeowner refinancing to take advantage



                                       13
<PAGE>

of low long term rates,  accounted for $96,963, or 24.6%, of the increase.  Loan
brokerage  fees  increased   $152,002,   or  38.6%  of  the  total  increase  in
non-interest  income.  The loan brokerage  business benefited in its second full
year of operations  from much of the work done in the prior year to develop this
business  line  through  expanding  market  contacts.  The  increase  in service
charges,  commissions and fees,  which  accounted for $96,865,  or 24.6%, of the
total increase, resulted primarily from growth in the Company's customer base.

Other Expenses

         Other  expenses,  which are those  non-interest  expenses most commonly
referred to as other  operating  expenses,  increased by $1,722,903,  or 45%, in
2003. While all categories of expenses  comprising the $5,549,169 other expenses
total  increased  in 2003  over  those of  2002,  the  most  significant  dollar
increases  were  in  the  categories  of (1)  salaries  and  employee  benefits,
$799,266,  or  46.4%  of the  total  increase,  (2)  other  operating  expenses,
$266,020, or 13.1% of the total increase, (3) other outside services,  $194,600,
or 11.3% of the total  increase,  (4) legal expense,  $180,565,  or 10.5% of the
total increase,  (5) data  processing  expense,  $165,997,  or 9.6% of the total
increase, and (6) occupancy expense, $156,455, or 9.1% of the total increase.

Beyond the increases in non-interest expenses which can be reasonably attributed
to a 31.1% growth in average  assets in 2003 over 2002,  the most notable  basis
for, or elements of, the increase in each of the above  identified  non-interest
expense  categories  identified  above as (1),  (2),  (5), and (6) were expenses
associated with opening a new branch in the Hilton  Head/Bluffton  area of South
Carolina in July; identified above under (3) was use of third-party providers to
improve systems and internet  security,  as well as service providers to enhance
internal  audit  procedures,  and  identified  above under (4) was a full year's
expense related to the matter disclosed under Legal Proceedings.

Income Taxes

         During the year ended  December 31, 2002,  the Bank accrued  $1,003,262
for current income taxes.  The Bank accrued  $1,386,000 for current income taxes
during 2003. The Bank accounts for income taxes under SFAS No. 109,  "Accounting
for Income Taxes."  Certain items of income and expense  (principally  provision
for loan  losses and  depreciation)  are  included in one  reporting  period for
financial  accounting  purposes  and  another  for  income tax  purposes.  These
accounting  timing  differences  resulted  in a deferred  income tax  benefit of
$260,000 being recognized in 2003, and $208,000 being recognized in 2002.

Investment Portfolio

         As of December  31, 2003,  the Bank's  investment  portfolio  comprised
approximately  5.7 % of its total assets.  The following  table  summarizes  the
carrying  value amounts of securities  held by the Bank at December 31, 2003 and
at December 31, 2002.

                        Securities Portfolio Composition

<TABLE>
<CAPTION>
                                              December                     December 31,                       December 31,
                                              31, 2003                        2002                                2001
                                              --------                        ----                                ----
                                                 Net                           Net                                 Net
                                             Unrealized                     Unrealized                         Unrealized
                                    Book       Holding     Fair       Book    Holding       Fair      Book       Holding      Fair
                                    Value    Gain/(Loss)   Value     Value   Gain/(Loss)    Value     Value    Gain/(Loss)    Value
                                    -----    -----------   -----     -----   -----------    -----     -----    -----------    -----
                                                                      (Dollars in thousands)
Available for sale:
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>         <C>
U. S. Government agency
obligations ....................    $ 9,498    $    47    $ 9,545    $13,996    $   132    $14,128    $ 8,000    $   181     $ 8,181
State and local
obligations ....................        123          5        128        123          4        127        123         (3)        120
Restricted .....................        700          -        700        600          -        600        600          -         600
                                    -------    -------    -------    -------    -------    -------    -------    -------     -------
FHLB Stock .....................    $10,321    $    52    $10,373    $14,719    $   136    $14,855    $ 8,723    $   178     $ 8,901
                                    =======    =======    =======    =======    =======    =======    =======    =======     =======
Held for investment:
U.S. ...........................    $ 3,021    $    20    $ 3,041    $ 1,517    $    31    $ 1,548    $   500    $    29     $   529
Government agency
obligations trust ..............        478        127        605        476         73        549        475         62         537
Preferred securities state
and local obligations ..........    $   375    $    12    $   387    $   375    $    12    $   387    $   375    $     1     $   376
                                                                     -------    -------    -------    -------    -------     -------
                                    $ 3,874    $   159    $ 4,033    $ 2,368    $   116    $ 2,484    $ 1,350    $    92     $ 1,442
                                    =======    =======    =======    =======    =======    =======    =======    =======     =======
</TABLE>


                                       14
<PAGE>

         On an ongoing basis,  management  assigns securities upon purchase into
one of two  categories  (available-for-sale  or  held-to-maturity)  based on the
intent,  taking into  consideration  factors such as expectations for changes in
market interest rates, liquidity needs,  asset/liability  management strategies,
and  capital  requirements.  The Bank does not  maintain  a  securities  trading
account.

         The following table presents scheduled maturities of debt securities at
December 31, 2003.  Available-for-sale  securities  are stated at estimated fair
value and held-for-investment securities are stated at amortized cost.

                         Securities Portfolio Maturities

<TABLE>
<CAPTION>
                                                                                             December 31, 2003
                                                                             Available for Sale              Held for Investment
                                                                             ------------------              -------------------
                                                                          Amortized       Estimated        Amortized       Estimated
                                                                            Cost          Fair Value          Cost        Fair Value
                                                                            ----          ----------          ----        ----------
U.S. Government Agency Obligations                                                         (Dollars in thousands)
<S>                                                                        <C>              <C>              <C>              <C>
         Due from one to five years ............................           $7,498           $7,540           $1,011           $1,024
         Due from five to ten years ............................            1,000            1,004                0                0
         Due after ten years ...................................            1,000            1,000            2,010            2,018

State and local obligations(1)
         Due after ten years ...................................              123              128              375              387
Trust Preferred securities
         Due after ten years ...................................              478              605
Equity securities ..............................................              700              700

Total (2) (3)
         Due from one to five years ............................           $7,498           $7,540           $1,011           $1,024
         Due from five to ten years ............................            1,000            1,004                0                0
         Due after ten years ...................................            1,123            1,128            2,863            3,010
</TABLE>
-----------------
(1)  Not adjusted for tax equivalency
(2)  Excludes equity securities
(3)  Weighted  average yields on debt  securities  scheduled to mature in one to
     five  years,  five to ten years,  and after ten years are 3.12%,  4.00% and
     4.83%,  respectively.  Due to call  features  (the  ability of the  issuing
     entity to redeem a security on a  specified  date prior to  maturity),  the
     yields shown for the three  maturity  ranges are disclosed for  information
     purposes only as of 12/31/03, and are likely to change.

  Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries, or any foreign loans.

         The amount of loans outstanding at December 31, 2003, 2002, 2001, 2000,
1999 are shown in the following  table according to type of loan. All loan types
reflected in the loan portfolio composition experienced an increase in 2003 over
2002,  exclusive  of  consumer  loans.  The  decline in  consumer  loans was the
consequence of beginning to underwrite in the later part of 2002 a type of short
maturity term consumer loan, called deferred  presentment or payday loans, which
the bank ceased to underwrite in the fourth  quarter of 2003.  With the December
31, 2003,  consumer  loans  category  total  reflecting the fact that all of the
deferred  presentment loans had been fully paid-out,  the outstanding balance of
consumer loans declined.



                                       15
<PAGE>

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                        2003            2002             2001            2000             1999
                                                        ----            ----             ----            ----             ----

<S>                                               <C>              <C>              <C>              <C>              <C>
Commercial, financial and .....................   $  51,523,910    $  47,099,954    $  36,270,381    $  23,755,686    $  17,136,114
agricultural
Real estate - construction ....................      14,345,975       14,211,986       13,097,957       11,349,351        7,639,096
Real estate mortgage ..........................     160,813,718       96,495,309       76,168,473       47,272,549       31,625,439
Consumer ......................................         554,999        1,053,596          629,235          460,842          600,794
                                                  -------------    -------------    -------------    -------------    -------------
    Total loans ...............................     227,238,602      158,860,845      126,166,046       82,838,428       57,001,433

Less allowance for loan losses ................      (2,600,000)      (1,750,000)      (1,450,000)      (1,055,000)        (800,000)
                                                  -------------    -------------    -------------    -------------    -------------

Total Loans, net of allowance for loan losses .   $ 224,638,602    $ 157,110,845    $ 124,716,046    $  81,783,428    $  56,201,433
                                                  =============    =============    =============    =============    =============
</TABLE>

Maturity Distribution of Loans

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2003,  as well as the  type of  interest
requirement on such loans.

                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                                         December 31, 2003
                                                                                         -----------------
                                                                  1 Year               1-5               5 Years
                                                                 or Less              Years              or More              Total
                                                                 -------              -----              -------              -----
                                                                                       (Dollars in Thousands)
<S>                                                             <C>                 <C>                 <C>                 <C>
Commercial and industrial ..........................            $ 34,297            $ 16,227            $    999            $ 51,523
Real Estate-construction ...........................               5,337               8,087                 922              14,346
Real Estate-mortgage ...............................              45,790              92,215              22,809             160,814
Consumer installment ...............................                 153                 402                   0                 555
      Total ........................................            $ 85,557            $116,931            $ 24,730            $227,238
                                                                ========            ========            ========            ========
</TABLE>

         A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and  amounts of risks  assumed and to  ultimately  minimize  losses.  Such
policies include limitations on  loan-to-collateral  values for various types of
collateral,  requirements for appraisals of real estate collateral, problem loan
management  practices and collection  procedures,  and nonaccrual and charge-off
guidelines.

         Commercial loans primarily represent loans made to businesses,  and may
be made on either a secured or an  unsecured  basis.  Collateral  is  ordinarily
taken unless the borrower has strong cash flows,  low debt to worth ratios,  and
the loan is of short duration.  When taken, collateral usually consists of liens
on  receivables,  equipment,  inventories,  furniture  and  fixtures.  Unsecured
business loans are generally short-term with emphasis on repayment strengths and
low debt to worth ratios.  Commercial lending involves  significant risk because
repayment usually depends on the cash flows generated by a borrower's  business,
and the debt service capacity of a business can deteriorate because of downturns
in  national  and local  economic  conditions.  To  control  risk,  initial  and
continuing financial analysis of a borrower's financial information is required.

         Real estate  construction  loans  generally  consist of  financing  the
construction  of 1-4 family  dwellings  and some  nonfarm,  nonresidential  real
estate.  Usually, loan to cost ratios are limited to 75% and permanent financing
commitments are required prior to the advancement of loan proceeds.


                                       16
<PAGE>

         Loans  secured by real  estate  mortgages  comprised  nearly 78% of the
Bank's loan  portfolio  at December  31,  2003.  Residential  real estate  loans
consist mainly of first and second  mortgages on single family homes,  with some
multifamily  loans.  Loan-to-value  ratios for these  instruments  are generally
limited  to 90%.  Nonfarm,  nonresidential  loans are  secured by  business  and
commercial  properties with  loan-to-value  ratios generally limited to 80%. The
repayment  of both  residential  and  business  real estate  loans is  dependent
primarily  on the income and cash flows of the  borrowers,  with the real estate
serving as a secondary or liquidation source of repayment.

         Consumer loans generally involve more risks than other loans because of
the type and nature of the underlying  collateral,  or because of the absence of
collateral.  Consumer loan repayments are dependent on the borrower's continuing
financial stability and are likely to be adversely affected by job loss, divorce
and illness.  Furthermore,  the  application of various  federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be  recovered  on such loans in the case of a default.  In most cases,
any  repossessed  collateral will not provide an adequate source of repayment of
the outstanding loan balance.

Nonperforming Loans; Other Problem Assets

         When a loan is 90 days past due as to interest or principal or there is
serious doubt as to collectibility,  the accrual of interest income is generally
discontinued  unless  the  estimated  net  realizable  value  of  collateral  is
sufficient to assure  collection of the principal  balance and accrued interest.
When the  collectibility  of a  significant  amount of  principal  is in serious
doubt,  the  principal  balance  is  reduced  to the  estimated  fair  value  of
collateral by  charge-off  to the  allowance for loan losses and any  subsequent
collections  are credited first to the remaining  principal  balance and then to
the  allowance  for loan  losses as a  recovery  of the  amount  charged  off. A
nonaccrual loan is not returned to accrual status unless  principal and interest
are current and the borrower  has  demonstrated  the ability to continue  making
payments  as agreed.  At December  31,  2003,  the Bank had four loans  totaling
$295,000 on non-accrual  status. Net income for 2003 includes no interest income
on these loans.  Had these loans been current in accordance  with their original
terms,  $12,392 of additional  interest income would have been recorded in 2003.
At December 31, 2002,  the Bank had one loan  totaling  $112,000 on  non-accrual
status.  There were no loans 90 days or more past due which were still  accruing
interest or troubled debt restructurings at December 31, 2003, 2002, 2001, 2000,
and 1999.

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans.  These are loans that are neither  included in  non-accrual  status,  nor
loans that are past due 90 days or more and still  accruing.  A loan is added to
the potential  problem list when management  becomes aware of information  about
possible  credit  problems of  borrowers  that causes  serious  doubts as to the
ability of such  borrowers to comply with the current loan repayment  terms.  On
December  31, 2003 the total  amount of loans  determined  by  management  to be
potential  problem  loans was $628,351.  This amount  consisted of loans made to
four borrowers.

Real Estate Owned

         The Bank did not  hold any  other  real  estate  acquired  pursuant  to
foreclosure or in-substance foreclosure at December 31, 2003.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the
period in which  management has determined  that it is more likely than not such
amounts have become  uncollectible.  Recoveries of previously  charged off loans
are credited to the  allowance.  The table,  "Summary of Loan Loss  Experience,"
summarizes loan balances at the end of each period indicated,  averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.


                                       17
<PAGE>

         In reviewing the adequacy of the allowance for loan losses at each year
end,  management took into  consideration the historical loan losses experienced
by the Bank,  current economic  conditions  affecting the borrowers'  ability to
repay,  the volume of loans,  and the  trends in  delinquent,  nonaccruing,  and
potential  problem loans, and the quality of collateral  securing  nonperforming
and problem loans. After charging off all known losses, management considers the
allowance for loan losses adequate to cover its estimate of loan losses inherent
in the loan portfolio as of December 31, 2003.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio.  Also,  the
calculation provides for management's assessment of trends in national and local
economic conditions that might affect the general quality of the loan portfolio.
For  outstanding  loans,  the risk rating system is the major factor employed to
quantify the probable  losses in the loan  portfolio.  Predetermined  percentage
factors for dollars outstanding in each loan grade are applied and then totaled.
For loans specifically identified by management during loan reviews,  management
separates these loans from the general pool of loans and assigns a separate risk
rating for these  loans based on the  likelihood  of  collectibility,  financial
condition of the borrower, value of collateral,  and other relevant factors. Two
additional  calculations are based on FDIC  classifications  and daily statement
loan type total using  factors as noted below.  The four  methods for  measuring
probable losses are performed  monthly and their results  averaged to provide an
amount to be established as a reserve  against loan losses.  The monthly reserve
provisions,  and  the  details  supporting  the  calculations  utilized  in  the
computation,  are  reviewed  by the  Board's  Loan  Committee  and the  Board of
Directors.  The factors used in these  calculations  were initially derived from
prior  experience with similar systems at other banks.  These factors have been,
and will continue to be,  modified as First South Bank's actual  historical loss
experience in different  economic  environments can be fully incorporated into a
predictive model.  Regulators also review the adequacy of the allowance for loan
losses as part of their  examination of the Bank and may require  adjustments to
the  allowance  based  upon  information  available  to them at the  time of the
examination.

         Management  also performs  periodic  reviews of the Bank's  off-balance
sheet credit risks,  such as unfunded loan  commitments  and standby  letters of
credit.  When these reviews identify a probable loss, a separate loss reserve is
established.  The  review  performed  at  December  31,  2003,  as well as those
performed  throughout the 2003 year, did not identify an off-balance  sheet risk
upon which a reserve should be established.

                         Summary of Loan Loss Experience
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                     -----------------------
                                                                       2003         2002          2001          2000        1999
                                                                       ----         ----          ----          ----        ----
<S>                                                                 <C>           <C>           <C>           <C>           <C>
Total loans outstanding at end of period .....................      $227,239      $158,861      $126,166      $ 82,838      $ 57,001
Average amount of loans outstanding ..........................       194,944       141,269       102,333        70,980        44,821

Balance of allowance for loan losses - beginning .............      $  1,750      $  1,450      $  1,055      $    800      $    575
                                                                    --------      --------      --------      --------      --------
Loans charged off:
Commercial & industrial ......................................           114           375            49             0             0
Real estate-mortgage .........................................            20            18             0             0             0
Consumer installment * .......................................         1,674             0             2             0             0
                                                                    --------      --------      --------      --------      --------
Total charge-offs ............................................         1,808           393            51             0             0

Recoveries of loans previously charged-off:
Commercial & industrial ......................................            35             0             0             0             0
Real estate-mortgage .........................................             0            17             0             0             0
Consumer installment * .......................................         1,674             1             1             0             0
                                                                    --------      --------      --------      --------      --------
Total recoveries .............................................         1,709            18             1             0             0

Net charge-offs ..............................................            99           375            50             0             0
Additions to allowance charged to expense ....................           949           675           445           255           225
Balance of allowance for loan losses - ending ................      $  2,600      $  1,750      $  1,450      $  1,055      $    800
                                                                    --------      --------      --------      --------      --------
</TABLE>


                                       18
<PAGE>

<TABLE>
<CAPTION>
Ratios                                                                2003          2002          2001          2000          1999
                                                                      ----          ----          ----          ----          ----
Net charge-offs during period to average
<S>                                                                  <C>           <C>           <C>           <C>           <C>
   loans outstanding during period ...........................        0.05%         0.27%         0.05%         0.00%         0.00%
Net charge-offs to loans at end of period ....................        0.04%         0.24%         0.04%         0.00%         0.00%
Allowance for loan losses to average loans ...................        1.33%         1.10%         1.21%         1.49%         1.78%
Allowance for loan losses to loans at end of period ..........        1.14%         1.10%         1.15%         1.27%         1.40%
  Nonperforming loans to allowance for loan losses
   at end of period ..........................................       11.35%         6.40%        27.31%        27.30%        87.75%
Net charge-offs to allowance for loan losses .................        3.81%        21.43%         3.45%         0.00%         0.00%
Net charge-offs to provision for loan losses .................       10.43%        55.56%        11.23%         0.00%         0.00%
</TABLE>

*The amount of consumer loan losses in 2003, which was matched dollar-for-dollar
by the  amount  of  consumer  loan  recoveries,  consisted  solely  of  deferred
presentment  loans.  The bank  ceased to make  this  type of loan in the  fourth
quarter of 2003.

     The  following  table  presents the  allocation  of the  allowance for loan
losses at the end of the years ended  December 31, 2003 and 2002,  compared with
the percent of loans in the applicable categories to total loans.

                     Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                           Period Ended December 31,
                                                                           -------------------------
                                              2003                 2002             2001               2000                1999
                                              ----                 ----             ----               ----                ----
                                                    % of              % of               % of               % of               % of
                                         Amount    Loans    Amount    Loans    Amount    Loans    Amount    Loans   Amount    Loans
                                         ------    -----    ------    -----    ------    -----    ------    -----   ------    -----
                                                                         (Dollars in thousands)
<S>                                     <C>        <C>     <C>        <C>     <C>        <C>     <C>       <C>      <C>       <C>
Commercial and industrial ...........   $1,017     39.10%  $  858     49.00%  $  703     48.50%  $  506    48.00%   $  219    30.10%
Real estate - construction ..........      290     11.20%     210     12.00%     174     12.00%     127    12.00%       95    13.40%
Real estate - mortgage ..............    1,272     48.90%     656     37.50%     551     38.00%     406    38.50%      474    55.40%
Consumer installment ................       21      0.80%      26      1.50%      22      1.50%      16     1.50%       12     1.10%
                                        ------    ------   ------    ------   ------    ------   ------   ------    ------   ------
Total ...............................   $2,600    100.00%  $1,750    100.00%  $1,450    100.00%  $1,055   100.00%   $  800   100.00%
                                        ======    ======   ======    ======   ======    ======   ======   ======    ======   ======
</TABLE>

Deposits

         The average  amounts and average rate paid on deposits held by the Bank
for the years ended December 31, 2003 and 2002 are summarized below:

<TABLE>
<CAPTION>
                                                                         Average Deposits

                                                            December 31, 2003        December 31, 2002         December 31, 2001
                                                            -----------------        -----------------         -----------------
                                                           Amount        Rate       Amount           Rate      Amount         Rate
                                                           ------        ----       ------           ----      ------         ----
                                                                                   (Dollars in thousands)
<S>                                                     <C>              <C>      <C>               <C>      <C>              <C>
Noninterest bearing demand .........................    $ 16,046                  $ 12,951                   $ 7,864
Interest bearing transaction accounts ..............      33,729         1.72%      31,447          2.34%      23,683         3.62%
Savings & MMIA .....................................      34,094         1.80%       8,838          1.98%       2,750         2.40%
Time deposits - $100,000 and over ..................      28,312         2.47%      18,168          3.24%      14,721         5.92%
Other time deposits ................................      80,867         2.52%      69,892          3.34%      51,314         5.51%
                                                        --------         ----     --------          ----     --------         ----
Total deposits .....................................    $177,002         2.22%    $128,345          2.99%    $100,332         4.60%
                                                        ========         ====     ========          ====     ========         ====
</TABLE>

         As of December 31, 2003, the Bank held  $32,784,000 in time deposits of
$100,000 or more, with  approximately  $8,586,000  with maturities  within three
months,  $19,482,000  with  maturities  over three through  twelve  months,  and
$4,796,000 with maturities over twelve months. Wholesale time deposits generated
through  corporations,  banks, credit unions,  etc., on a national level totaled
approximately  $23,868,000  as of December  31,  2003.  It is a common  industry
practice not to consider these types of deposits as core deposits  because their
retention  can be  expected  to be  heavily  influenced  by rates  offered,  and
therefore  they  have  the  characteristics  of  shorter-term  purchased  funds.
Wholesale time deposits  involve the  maintenance of an appropriate  matching of
maturity distribution and a diversification of sources to achieve an appropriate
level of liquidity.  Such deposits are generally more volatile and interest rate
sensitive than other deposits.

                                       19
<PAGE>

Borrowed Funds

         Major sources of borrowed funds in 2003 and 2002,  other than deposits,
were retail repurchase agreements and Federal Home Loan Bank advances.

         Retail repurchase  agreements are short-term borrowings from commercial
customers  collateralized  by  government or government  agency  securities  and
repayable  with  interest.  At December 31, 2003 and 2002,  First South Bank had
$6,088,913 and $3,229,737 in retail  repurchase  agreements,  respectively.  The
weighted average interest rates for retail repurchase agreements  outstanding at
December  31,  2003 and  2002  were  .38%  and  .69%,  respectively,  and  those
repurchase agreements all had next day maturities.  The maximum amount of retail
repurchase  agreements  at the end of any  month  was  $7,058,835  in  2003  and
$8,064,675  in 2002.  The  approximate  average  amount  of  outstanding  retail
repurchase  agreements  was  $4,903,000  in 2003  and  $5,887,000  in  2002  and
approximate weighted interest rates in 2003 were .51% in 2003 and 1.10% in 2002.

         At  December  31,  2003 and 2002,  First  South had two  advances of $5
million  each  outstanding  from the  Federal  Home  Loan Bank of  Atlanta.  The
advances are  collateralized  by alien on qualifying  first mortgage loans in an
amount necessary to satisfy outstanding  indebtedness plus accrued interest. The
borrowings  carried fixed interest rates of 4.3% and 4.6% and mature in February
and March 2011. One of the advances  became callable during February 2003 and is
callable until  maturity.  The other advance will become  callable in March 2004
and will be callable until its maturity. The approximate average amounts of such
borrowings  outstanding  in 2003 and 2002  were $10  million  and $8.9  million,
respectively.  The  approximate  weighted  interest rates for 2003 and 2002 were
4.45% and 4.41%,  respectively.  The maximum amount of such advances outstanding
at the end of any month in 2003 and 2002 was $10 million.

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend  payout ratio  (dividends  declared per share divided by net income per
share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for each period indicated.


                                                Year Ended December 31,
                                                -----------------------
                                             2003         2002         2001
                                             ----         ----         ----

Return on assets ...................        0.93%         0.82%       0.71%
Return on equity ...................       13.70%        10.35%       7.25%
Dividend payout ratio ..............        0.00%         0.00%       0.00%
Equity to assets ratio .............        6.80%         7.96%       9.80%

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 76 % of total assets at December 31, 2003.  Asset liquidity is provided
from several sources,  including  amounts due from banks and federal funds sold,
and funds from maturing loans.  The Bank is a member of the FHLB of Atlanta and,
as such,  has the  ability  to borrow  against  the  security  of its 1-4 family
residential  mortgage loans. The Bank currently has two ten year $5,000,000 loan
advances from the FHLB of Atlanta.  One of these advances is presently  callable
and the other is callable in March 2004. In addition,  at December 31, 2003, the
Bank also had a $2,000,000 line advance from the FHLB.  This advance,  which was
in the form of a daily rate credit,  was repaid in January  2004.  The Bank also
has  additional  lines of credit with other  banks in the form of federal  funds
lines in the  amount of  $10,000,000.  The Bank has never  drawn on any of these
federal  funds lines.  Management  believes  that the Bank's  overall  liquidity
sources are adequate to meet its operating  needs in the ordinary  course of its
business.


                                       20
<PAGE>

Capital Resources

         The equity capital of the Company increased  $1,440,778 during 2002 and
by  $2,059,397  in 2003.  The  increase  in 2003  resulted  from an  increase in
retained earnings of $2,104,267,  a reduction in other  comprehensive  income of
$52,370,  and  additional  paid-in  capital of $7,500 from the exercise of stock
options.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under  these  standards,  financial  institutions  are  required  to
maintain certain minimum ratios of capital to  risk-weighted  assets and average
total assets. Under the provisions of the Federal Deposit Insurance  Corporation
Improvements Act of 1991, federal financial institution  regulatory  authorities
are  required to  implement  prescribed  "prompt  corrective  actions"  upon the
deterioration  of the capital  position of a bank. If the capital position of an
affected institution were to fall below certain levels,  increasingly  stringent
regulatory corrective actions are mandated.

         At  December  31,  2003,  both the  Company and the Bank met all of the
requirements to be adequately  capitalized.  Capital ratios are presented in the
following table,  compared with the "well  capitalized" and minimum ratios under
the FDIC regulatory definitions and guidelines:

<TABLE>
<CAPTION>
                                                                                                                    To be well
                                                                                                                    capitalized
                                                                                                                   under prompt
                                                                                        For capital                 corrective
                                                                                     adequacy purposes          action provisions
                                                             Actual                       Minimum                     Minimum
                                                             ------                       -------                     -------
                                                     Amount           Ratio        Amount         Ratio         Amount      Ratio
                                                     ------           -----        ------         -----         ------      -----
                                                                                    (Dollars in thousands)
As of December 31, 2003
<S>                                                 <C>                <C>        <C>              <C>        <C>              <C>
   Total Capital (to risk
      weighted assets) ....................         $18,921            8.49%      $17,815          8.0%       $22,269          10.0%
   Tier 1 Capital (to risk
      weighted assets) ....................          16,321            7.33%        8,908          4.0         13,362           6.0
   Tier 1 Capital (to average
      assets)(leverage) ...................          16,321            6.47%       10,088          4.0         12,610           5.0
</TABLE>

         With the level of annual retained earnings  insufficient to support the
growth  in  assets  the Bank has  experienced,  the  capital  position  has been
declining annually.  Following an examination by management of options available
through  which  capital  levels  could be  returned  to those at or above  those
well-capitalized  ratios shown in the above table, the Bank received  $4,900,000
in the form of Tier 1 capital  from the Company on January 30,  2004.  The funds
received  were  proceeds from the issuance and sale by the Company of $5,000,000
FSBS  Capital  Trust  I  trust  preferred  securities.   (See  note  18  to  the
Consolidated Financial Statements.)


Inflation
         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those  businesses  which have large  investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are  normally  corresponding  increases  in the money  supply,  and  banks  will
normally experience  above-average  growth in assets,  loans and deposits.  Also
general  increases  in the  prices  of goods  and  services  usually  result  in
increased operating expenses.


                                       21
<PAGE>

Off-Balance Sheet Arrangements

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These  commitments are legally binding  agreements to lend money to customers of
the Bank at  predetermined  interest  rates for a  specific  period of time.  At
December 31, 2003,  the Bank had issued  commitments  to extend  credit of $38.2
million through  various types of lending  arrangements.  Of these  commitments,
83.1 %, or $32 million,  expire  within one year,  and 16.9 %, or $6.5  million,
expire  in one  year or  more.  Past  experience  indicates  that  many of these
commitments to extend credit will expire unused.

         The  Company   evaluates   each   customer's   creditworthiness   on  a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Company upon extension of credit,  is based of the credit  evaluation of the
borrower.  Collateral  varies, but may include accounts  receivable,  inventory,
property, plant and equipment, commercial and residential real estate.


                                       22
<PAGE>

Item 7. Financial Statements.

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

                       Consolidated Financial Statements
                 Years Ending December 31, 2003, 2002, and 2001

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY


                                    Contents

                                                                          Page

Independent Auditors' Report .........................................      2
Consolidated Balance Sheets ..........................................      3
Consolidated Statements of Operations ................................      4
Consolidated Statements of Changes in Stockholders' Equity ...........      5
Consolidated Statements of Cash Flows ................................      6
Notes to Financial Statements ........................................    7-30




                                       23
<PAGE>
CHERRY
BEKAERT &
HOLLAND
Certified Public
Accounts &
Consuntants

                          Independent Auditors' Report



The Board of Directors and Stockholders
First South Bancorp, Inc. and Subsidiary


We have  audited the  accompanying  consolidated  balance  sheets of First South
Bancorp,  Inc. and Subsidiary (the Company) as of December 31, 2003 and 2002 and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity  and cash  flows  for each of the years in the three  year  period  ended
December  31,   2003.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of First South Bancorp,
Inc.  and  Subsidiary  at  December  31,  2003 and 2002 and the results of their
operations  and their cash flows for each of the years in the three year  period
ended  December 31, 2003 in  conformity  with  accounting  principles  generally
accepted in the United States of America.


                                        s/Cherry Bekaert & Holland, L.L.P.




Charlotte, North Carolina
January 30, 2004, except for Note 18, as to which the date is February 18, 2004






                                       24
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                           December 31, 2003 and 2002

<TABLE>
<CAPTION>
                                                                                                        2003                 2002
     Assets                                                                                             ----                 ----

<S>                                                                                              <C>                    <C>
Cash and due from banks ..............................................................           $  4,492,767           $  4,192,080
Interest-bearing deposits ............................................................                 25,000                100,000
Securities available-for-sale ........................................................             10,372,164             14,855,346
Securities held-for-investment .......................................................              3,873,928              2,368,583
Loans, net ...........................................................................            224,169,439            156,977,796
Premises and equipment, net ..........................................................              5,455,891              2,832,672
Other assets .........................................................................              3,331,774              3,637,801
                                                                                                 ------------           ------------

     Total Assets ....................................................................           $251,720,963           $184,964,278
                                                                                                 ============           ============

     Liabilities and Stockholders' Equity

Deposits
     Noninterest-bearing demand ......................................................           $ 19,028,127           $ 14,535,143
     Interest-bearing demand and savings .............................................             80,063,488             56,890,963
     Time deposits ...................................................................            116,364,574             84,271,841
                                                                                                 ------------           ------------
        Total deposits ...............................................................            215,456,189            155,697,947

Retail repurchase agreements .........................................................              6,088,913              3,229,737
Other borrowed funds .................................................................             12,235,553             10,454,691
Other accrued expenses and liabilities ...............................................              1,531,180              1,232,172
                                                                                                 ------------           ------------

     Total liabilities ...............................................................            235,311,835            170,614,547
                                                                                                 ------------           ------------

Commitments and contingencies ........................................................                      -                      -
Stockholders' equity
     Common stock no par value; authorized 30,000,000 shares;
     1,382,040 and 920,780
        issued and outstanding at December 31, 2003 and 2002,
        respectively .................................................................                      -                      -
     Paid-in capital .................................................................             11,152,489             11,144,989
     Retained earnings ...............................................................              5,224,807              3,120,540
     Accumulated other comprehensive income ..........................................                 31,832                 84,202
                                                                                                 ------------           ------------

 Stockholders' equity ................................................................             16,409,128             14,349,731
                                                                                                 ------------           ------------
                                                                                                 $251,720,963           $184,964,278
                                                                                                 ------------           ------------
</TABLE>

        See accompanying notes to consolidated financial statements.



                                       25
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                     Consolidated Statements of Operations
                  Years ended December 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>
                                                                               2003                     2002                2001
                                                                               ----                     ----                ----

Interest income
<S>                                                                        <C>                   <C>                   <C>
     Loans .......................................................         $ 12,282,117          $  9,312,105          $  8,596,068
     Federal funds sold ..........................................                    -                     -                 1,363
     Securities
         U.S. Government and agency obligations ..................              431,568               631,322               787,742
         State and local obligations .............................               26,016                25,995                25,979
         Other securities ........................................               74,993                81,446                80,154
     Deposits with banks .........................................               70,064               156,644               177,014
                                                                           ------------          ------------          ------------
           Total interest income .................................           12,884,758            10,207,512             9,668,320
                                                                           ------------          ------------          ------------

Interest expense
     Deposits
         Time ....................................................            2,734,418             2,921,920             3,697,867
         Interest-bearing demand and savings .....................            1,191,777               910,346               922,915
     Borrowed funds ..............................................              457,528               452,021               384,005
     Other .......................................................               26,583                68,522               130,219
                                                                           ------------          ------------          ------------
           Total interest expense ................................            4,410,306             4,352,809             5,135,006

          Net interest income ....................................            8,474,452             5,854,703             4,533,314

Provision for loan losses ........................................              949,302               674,830               445,853
                                                                           ------------          ------------          ------------

          Net interest income after provision for
         loan losses .............................................            7,525,150             5,179,873             4,087,461

Non-interest income
     Service charges, fees, and commissions ......................              454,579               357,714               324,681
     Loan brokerage fees .........................................              454,344               302,342                     -
     Mortgage banking loan fees ..................................              233,305               136,342                50,006
     Other .......................................................              112,058                64,021                56,559
                                                                           ------------          ------------          ------------
           Total other operating income ..........................            1,254,286               860,419               431,246

Non-interest expenses
     Salaries and employee benefits ..............................            3,190,603             2,391,337             1,921,795
     Occupancy and equipment .....................................              635,843               479,388               480,377
     Legal expenses ..............................................              263,765                83,200                13,284
     Data processing .............................................              329,269               163,272               130,844
     Other outside services ......................................              262,986                68,386                79,317
     Other .......................................................              866,703               640,683               572,680
                                                                           ------------          ------------          ------------
           Total other operating expenses ........................            5,549,169             3,826,266             3,198,297

           Income before income taxes ............................            3,230,267             2,214,026             1,320,410

Current income tax expense .......................................            1,386,000             1,003,262               612,575
Deferred income tax benefit ......................................             (260,000)             (208,000)             (198,000)
                                                                           ------------          ------------          ------------

           Net income ............................................         $  2,104,267          $  1,418,764          $    905,835
                                                                           ============          ============          ============

Earnings per common share ........................................         $       1.52          $       1.03          $       0.66
Diluted earnings per common share ................................         $       1.46          $       0.99          $       0.65
</TABLE>

See accompanying notes to consolidated financial statements.



                                       26
<PAGE>




                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                  Years ended December 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
                                                       Common                                           Accumulated
                                                      Stock in                                             Other           Total
                                                      Number of        Paid-In          Retained       Comprehensive   Stockholders'
                                                       Shares          Capital          Earnings       Income (Loss)       Equity
                                                       ------          -------          --------       -------------       ------

<S>                                                   <C>            <C>              <C>              <C>               <C>
Balance at December 31, 2000 .................          917,780      $11,096,989      $   795,941      $    (2,986)      $11,889,944

     Comprehensive income:
        Netincome ............................                -                -          905,835                -
        Net change in unrealized
        gain on securities
        available-for-sale,
        net of tax of ($72,357) ..............                -                -                -          113,174
       Comprehensive income ..................                -                -                -                -         1,019,009
                                                      ---------      -----------      -----------      -----------       -----------

Balance at December 31, 2001 .................          917,780       11,096,989        1,701,776          110,188        12,908,953
                                                      ---------      -----------      -----------      -----------       -----------

     Exercised stock options .................            3,000           48,000                -                -            48,000

     Comprehensive income:
        Net income ...........................                -                -        1,418,764                -
        Net change in unrealized
        gain on securities
        available-for-sale,
        net of tax benefit of $16,614 ........                -                -                -          (25,986)
       Comprehensive income ..................                -                -                -                -         1,392,778
                                                      ---------      -----------      -----------      -----------       -----------

Balance at December 31, 2002 .................          920,780       11,144,989        3,120,540           84,202        14,349,731
                                                      ---------      -----------      -----------      -----------       -----------

     Exercised stock options .................              600            7,500                -                -             7,500

     Comprehensive income:
        Net income ...........................                -                -        2,104,267                -
        Net change in unrealized
        gain on securities
        available-for-sale,
        net of tax benefit of $32,098 ........                -                -                -          (52,370)
     Comprehensive income: ...................                -                -                -                -         2,051,897

     Three-for-two common stock
     split ...................................          460,660                -                -                -                 -
                                                      ---------      -----------      -----------      -----------       -----------

Balance at December 31, 2003 .................        1,382,040      $11,152,489      $ 5,224,807      $    31,832       $16,409,128
                                                      =========      ===========      ===========      ===========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       27
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
Cash flows from operating activities
<S>                                                                            <C>                 <C>                 <C>
     Net income ........................................................       $  2,104,267        $  1,418,764        $    905,835
     Adjustments to reconcile net income to net
     cash
          provided by operating activities
            Depreciation and amortization ..............................            243,468             189,003             203,548
            Provision for loan losses ..................................            949,302             674,830             445,853
            Gain on disposal of premises and
            equipment ..................................................             (6,453)                  -                   -
            (Gain) Loss on sale of other real estate
            owned ......................................................             (3,549)              2,851                   -
            Deferred tax asset .........................................           (260,000)           (208,000)           (198,000)
            Decrease (increase) in interest
            receivable .................................................           (195,401)           (150,497)            172,270
            Decrease (increase) in other assets ........................            204,610            (495,309)            170,380
            Increase (decrease) in accrued expenses
               and other liabilities ...................................            331,106             806,024            (546,424)
                                                                               ------------        ------------        ------------

            Net cash provided by operating
            activities .................................................          3,367,350           2,237,666           1,153,462
                                                                               ------------        ------------        ------------

Cash flows from investing activities
     Origination of loans, net of principal
     collected .........................................................        (67,880,945)        (33,812,549)        (43,316,121)
     Proceeds from matured / called securities
     available-for-sale ................................................         10,998,714          11,000,000          12,000,896
     Proceeds from matured / called securities
     held-for-investment ...............................................            518,503                   -           2,999,084
     Purchase of securities available-for-sale .........................         (6,600,000)        (16,998,552)         (8,437,438)
     Purchase of securities held-for-investment ........................         (2,023,848)         (1,017,363)                  -
     Proceeds from sale of other real estate owned .....................            337,457             147,149                   -
     Proceeds from disposal of premises and
     equipment .........................................................             20,487                   -                   -
     Purchases of premises and equipment ...............................         (2,880,721)           (145,446)           (174,038)
     Increase in cash surrender value of life
     insurance .........................................................            (37,090)            (41,110)            (37,951)
                                                                               ------------        ------------        ------------

             Net cash used in investing activities .....................        (67,547,443)        (40,867,871)        (36,965,568)
                                                                               ------------        ------------        ------------

Cash flows from financing activities
     Net increase in deposits ..........................................         59,758,242          38,414,871          18,697,566
     Proceeds from exercise of stock options ...........................              7,500              48,000                   -
     Net (decrease) increase in retail repurchase
     agreements ........................................................          2,859,176          (2,393,657)          2,656,251
     Net (decrease) increase in other borrowings .......................           (219,138)            414,024                   -
     Proceeds of advances from FHLB ....................................          6,000,000                   -          12,500,000
     Repayment of advances from FHLB ...................................         (4,000,000)                  -          (2,500,000)
                                                                               ------------        ------------        ------------

            Net cash provided by financing
            activities .................................................         64,405,780          36,483,238          31,353,817
                                                                               ------------        ------------        ------------

Net increase (decrease) in cash and cash
equivalents ............................................................            225,687          (2,146,967)         (4,458,289)

Cash and cash equivalents at beginning of year .........................          4,292,080           6,439,047          10,897,336
                                                                               ------------        ------------        ------------

Cash and cash equivalents at end of year ...............................       $  4,517,767        $  4,292,080        $  6,439,047
                                                                               ============        ============        ============

Supplemental disclosure of cash flow information
     Cash paid during the year for interest ............................       $  4,347,578        $  4,626,160        $  5,472,592
                                                                               ============        ============        ============
     Cash paid during the year for income taxes ........................       $  1,132,904        $  1,063,007        $    811,581
                                                                               ============        ============        ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                 Notes to the Consolidated Financial Statements
                           December 31, 2003 and 2002

Note 1 - Organization

First South  Bancorp,  Inc.  (the  "Corporation"  or the  "Company")  is a South
Carolina  corporation  organized  in 1999 for the  purpose  of  being a  holding
company for First South Bank (the Bank).  On September  30, 1999,  pursuant to a
plan  of  exchange  approved  by  the  shareholders  of  the  Bank,  all  of the
outstanding  shares of common  stock of the Bank were  exchanged  for  shares of
common  stock  of the  Corporation.  The  Corporation  presently  engages  in no
business  other than that of owning the Bank and has no employees.  The Bank was
incorporated on April 23, 1996, and began banking operations on August 19, 1996.
The Bank is a South Carolina chartered commercial bank and is engaged in lending
and deposit gathering  activities from two branches in Spartanburg  County,  one
branch in Columbia,  South Carolina,  one branch in Hilton Head, South Carolina,
and a loan production office in Asheville, North Carolina. It operates under the
laws of South  Carolina  and the Rules and  Regulations  of the Federal  Deposit
Insurance   Corporation   and  the  South  Carolina  State  Board  of  Financial
Institutions.


Note 2 - Summary of significant accounting policies

The  following is a  description  of the  significant  accounting  and reporting
policies that First South Bancorp,  Inc. and Subsidiary follows in preparing and
presenting their financial statements.

     (a)  Basis of Presentation and Consolidation

          The  consolidated  financial  statements  include the  accounts of the
          Corporation and its wholly-owned subsidiary, the Bank. All significant
          intercompany   balances  and  transactions  have  been  eliminated  in
          consolidation.

     (b)  Use of Estimates

          The preparation of the consolidated financial statements in conformity
          with accounting  principles generally accepted in the United States of
          America  requires  management to make estimates and  assumptions  that
          affect  reported  amounts of assets and  liabilities and disclosure of
          contingent  liabilities  at the date of the financial  statements,  as
          well as the  amounts  of income  and  expenses  during  the  reporting
          period. Actual results could differ from those estimates.

     (c)  Securities

          Investments in equity  securities that have readily  determinable fair
          values  and all  investments  in debt  securities  are  classified  at
          acquisition into one of three categories and accounted for as follows:

          -    securities  held-for-investment are held-to-maturity and reported
               at amortized cost,

          -    trading  securities  are  reported at fair value with  unrealized
               gains and losses included in earnings, or;

          -    securities  available-for-sale  are  reported at  estimated  fair
               value with  unrealized  gains and losses  reported  as a separate
               component of comprehensive income (net of tax effect).

      The  Company  intends  to hold the  available-for-sale  securities  for an
      indefinite  period of time but may sell them prior to maturity.  All other
      securities have been  classified as  held-to-maturity  securities  because
      management has determined  that the Company has the intent and the ability
      to hold all such securities until maturity.

      Gains and losses on sales of securities are recognized  when realized on a
      specific  identification,  trade date basis.  Premiums and  discounts  are
      amortized into interest income using a method that  approximates the level
      yield method.


                                       29
<PAGE>

      There were no investments classified as trading securities at December 31,
2003 and 2002.

     (d)  Loans and allowance for loan losses

          Loans are  carried at their  principal  amount  outstanding.  Interest
          income is  recorded  as earned on an  accrual  basis.  The  accrual of
          interest is discontinued when, in management's  opinion,  the borrower
          may be unable to meet payments as they become due,  generally when the
          loan is 90 days delinquent.  All interest  accrued,  but not collected
          for loans that are placed on nonaccrual,  is reversed against interest
          income. A commercial loan is considered past due when a payment is not
          received by the next  business day after the due date. A consumer loan
          is considered  past due when a payment is not received  within 30 days
          after the due date.

          The Company uses the  allowance  method in providing  for loan losses.
          The provision for loan losses is based upon  management's  estimate of
          the amount  needed to  maintain  the  allowance  for loan losses at an
          adequate  level  to  cover  known  and  expected  losses  in the  loan
          portfolio.  In  determining  the provision  amount,  management  gives
          consideration  to current and  anticipated  economic  conditions,  the
          growth and composition of the loan portfolio,  the relationship of the
          allowance  for loan  losses to  outstanding  loans and other  factors.
          Management  believes  that the  allowance for loan losses is adequate.
          While  management  uses  the  best   information   available  to  make
          evaluations, future adjustments may be necessary if economic and other
          conditions differ substantially from the assumptions used.

          Management  considers  loans to be  impaired  when,  based on  current
          information and events, it is probable that the Company will be unable
          to collect all amounts due according to the  contractual  terms of the
          loan agreement. Factors that influence management's judgments include,
          but are not limited to, loan payment pattern, source of repayment, and
          value of  collateral.  A loan would not be  considered  impaired if an
          insignificant  delay in loan payment occurs and management  expects to
          collect all amounts due. The major sources for identification of loans
          to be  evaluated  for  impairment  include  past  due  and  nonaccrual
          reports, internally generated lists of loans with certain risk grades,
          and  regulatory  reports of  examination.  Impaired loans are measured
          using either the discounted  expected cash flow method or the value of
          collateral  method.  When the ultimate  collectibility  of an impaired
          loan's principal is in doubt,  wholly or partially,  all cash receipts
          are applied to principal.

     (e)  Other real estate owned

          Other real estate owned (OREO) represents  properties acquired through
          foreclosure  or  other  proceedings.  OREO is  held  for  sale  and is
          recorded at the lower of the recorded amount of the loan or fair value
          of the  properties  less  estimated  costs of disposal.  Fair value is
          determined by appraisal.  Any  write-down to fair value at the time of
          transfer to OREO is charged to the allowance for loan losses. Property
          is evaluated  regularly to ensure the carrying  amount is supported by
          its current fair value.  OREO is reported net of allowance  for losses
          in the Company's financial statements.

     (f)  Premises and equipment

          Premises and equipment,  including leasehold improvements,  are stated
          at cost less accumulated  depreciation.  Depreciation is provided over
          the  estimated   useful  lives  of  the   respective   assets  on  the
          straight-line-basis. Leasehold improvements are amortized over a term,
          which includes the remaining lease term and probable  renewal periods.
          Expenditures  for major renewals and  betterments  are capitalized and
          those for maintenance and repairs are charged to operating  expense as
          incurred.

     (g)  Loan Origination Fees

          Origination  fees received and direct costs  incurred are amortized to
          interest income over the contractual lives of the loans.

     (h)  Cash and cash equivalents

          Cash and cash  equivalents  include  cash and due from banks,  federal
          funds sold and interest-bearing  deposits. During the normal course of
          business,  the Company may have cash  deposits  with banks that are in
          excess of federally insured limits.

                                       30
<PAGE>

     (i)  Income taxes

          Deferred tax assets and  liabilities are recognized for the future tax
          consequences   attributable  to  differences   between  the  financial
          statement carrying amount of existing assets and liabilities and their
          respective tax bases. Deferred tax assets and liabilities are measured
          using  enacted tax rates  expected  to apply to taxable  income in the
          years  in  which  those  temporary  differences  are  expected  to  be
          recovered  in income.  Deferred  tax assets are reduced by a valuation
          allowance if it is more likely than not that the tax benefits will not
          be realized.

          (j)  Earnings per common share

          Earnings  per common share is computed  based on the weighted  average
          number of common shares outstanding. Diluted earnings per common share
          includes the dilutive effect of outstanding stock options.

          (k)  Stock Options

          Financial   Accounting  Standards  Board  (FASB)  Statement  No.  148,
          Accounting for Stock-Based  Compensation - Transition and Disclosure -
          An Amendment of FASB  Statement  No. 123, was issued in December  2002
          and provides  alternative methods of transition for a voluntary change
          to the fair value based method of accounting for stock-based  employee
          compensation.   In  addition,  SFAS  No.  148  amends  the  disclosure
          requirements of SFAS No. 123 to require prominent  disclosures in both
          annual and interim financial statements about the method of accounting
          for  stock-based  employee  compensation  and the effect of the method
          used  on  reported  results.  The  disclosure   requirements  of  this
          statement  are  effective  for fiscal years ending after  December 15,
          2002 and are included in these financial statements.

          The  Company  has elected to  continue  using the  measurement  method
          prescribed  in  Accounting   Principles  Board  Opinion  No.  25  and,
          accordingly,  FASB  Statement  No. 123 has no effect on the  Company's
          financial  position  or  results  of  operations.   As  a  result,  no
          compensation  cost has been  recognized for the stock option plan. Had
          compensation  cost for the Company's stock option plan been determined
          based on the fair  value at the grant  date of the  awards  consistent
          with the  provisions  of FASB  Statement  No. 123, the  Company's  net
          earnings and earnings per share would have  decreased to the pro forma
          amounts indicated below:


<TABLE>
<CAPTION>
                                                                                    2003                 2002                  2001
                                                                                    ----                 ----                  ----
<S>                                                                         <C>                  <C>                  <C>
Net income - as reported ...........................................        $    2,104,267       $     1,418,764      $      905,835
Net income - pro forma .............................................             1,953,093             1,289,861             778,241
Earnings per common share - as reported ............................                  1.52                  1.03                0.66
Earnings per common share - pro forma ..............................                  1.41                  0.93                0.56
Diluted earnings per common share - as reported ....................                  1.46                  0.99                0.65
Diluted earnings per common share - pro forma ......................                  1.35                  0.90                0.55
</TABLE>

(l)  Fair value of financial instruments

     FASB  Statement  No.  107,   Disclosures  about  Fair  Value  of  Financial
     Instruments,  requires disclosure of fair value information about financial
     instruments,  whether or not  recognized on the face of the balance  sheet,
     for which it is practicable to estimate that value. The assumptions used in
     the estimation of the fair value of the Company's financial instruments are
     detailed  below.  Where quoted  prices are not  available,  fair values are
     based  on  estimates  using  discounted  cash  flows  and  other  valuation
     techniques.  The use of discounted cash flows can be significantly affected
     by the  assumptions  used,  including  the discount  rate and  estimates of
     future cash flows.  The following  disclosures  should not be considered an
     indication of the liquidation value of the Company,  but rather represent a
     good-faith  estimate of the value of the financial  instruments held by the
     Company.


                                       31
<PAGE>

       The  following  methods and  assumptions  were used to estimate  the fair
       value for each class of financial instruments.

       Cash and cash  equivalents.  For cash on hand,  amounts  due from  banks,
       federal funds sold,  and  interest-bearing  deposits,  the carrying value
       approximates fair value.

       Securities.  The fair value of investments  securities is based on quoted
       market prices,  if available.  If a quoted market price is not available,
       fair  value  is  estimated   using  quoted   market  prices  for  similar
       securities.  Restricted  Federal Home Loan Bank (FHLB) stock is valued at
       cost.

       Loans. The fair value of fixed rate loans is estimated by discounting the
       future cash flows using the current rates at which similar loans would be
       made to borrowers  with similar credit ratings and for the same remaining
       maturities. The fair value of variable rate loans with frequent repricing
       and no significant changes in credit risk approximates book value.

       Deposits and  borrowings.  The fair value of fixed rate time deposits and
       borrowed  funds is estimated by  discounting  the future cash flows using
       the current  rates at which  similar  deposits  and  borrowings  would be
       accepted for the same remaining maturities.

       Other  interest-bearing   liabilities.   The  carrying  value  of  retail
       repurchase  agreements and other borrowed funds  approximates  fair value
       since  these   obligations  have  variable   interest  rates  with  daily
       repricings.  At least an equal amount of  securities,  at their  carrying
       values, are pledged as collateral for all repurchase agreements.

   (l) Fair value of financial instruments

       Commitments.  The fair value of  commitments to extend credit is based on
       fees currently being charged for similar instruments and is considered to
       approximate  carrying  value.  For  other  commitments,  generally  of  a
       short-term  nature,  the carrying  value is considered to be a reasonable
       estimate of fair value.

   (l)Recent accounting pronouncements

      FASB Statement No. 145,  Rescission of FASB  Statements No. 4, 44, and 64,
      Amendment of FASB Statement No. 13, and Technical Corrections,  was issued
      in April 2002 and the  provisions  of this  statement  were  effective for
      fiscal years  beginning after May 15, 2002. The adoption of the provisions
      of this  Statement  did not have a  material  impact  on the  consolidated
      financial statements of the Company.

      FASB  Statement  No. 146,  Accounting  for Costs  Associated  with Exit or
      Disposal  Activities,  was  issued  in June 2002 and  addresses  financial
      accounting  and  reporting  for costs  associated  with  exit or  disposal
      activities.  The  provisions of this statement were effective for disposal
      activities  initiated  after  December  31,  2002.  The  adoption  of  the
      provisions  of  this  Statement  did not  have a  material  impact  on the
      consolidated financial statements of the Company.

      FASB  Statement  No.  149,   Amendment  of  Statement  133  on  Derivative
      Instruments  and Hedging  Activities,  was issued in April 2003 and amends
      SFAS  No.  133 for  certain  decisions  made by the  Financial  Accounting
      Standards  Board as part of the Derivatives  Implementation  Group process
      and  to  clarify  the  definition  of a  derivative.  This  statement  was
      effective  for  contracts  entered  into or modified  after June 30, 2003,
      except for certain  specific  issues already  addressed by the Derivatives
      Implementation  Group and  declared  effective  that are  included  in the
      statement. The adoption of the provisions of this statement did not have a
      material impact on the consolidated financial statements of the Company.

      FASB Statement No. 150, Accounting for Certain Financial  Instruments with
      Characteristics of Both Liabilities and Equity, was issued in May 2003 and
      establishes  standards for how to classify and measure  certain  financial
      instruments  with  characteristics  of both  liabilities and equity.  This
      statement was effective for financial instruments entered into or modified
      after May 31, 2003,  and  otherwise  was effective at the beginning of the
      first interim  period  beginning  after June 15, 2003. The adoption of the
      provisions  of  this  statement  did not  have a  material  impact  on the
      consolidated financial statements of the Company.


                                       32
<PAGE>

      FASB   Interpretation  No.  45,  Guarantor's   Accounting  and  Disclosure
      Requirements  for  Guarantees,  Including  Guarantees of  Indebtedness  of
      Others  an  interpretation  of FASB  Statements  No.  5,  57,  and 107 and
      rescission of FASB  Interpretation  No. 34 was issued in November 2002 and
      elaborates on the disclosures to be made by a guarantor in its interim and
      annual financial statements about its obligations under certain guarantees
      that it has issued.  It also  clarifies  that a  guarantor  is required to
      recognize, at the inception of a guarantee, a liability for the fair value
      of the obligation undertaken in issuing the guarantee. The adoption of the
      provisions of this FASB  Interpretation  did not have a material impact on
      the consolidated financial statements of the Company.

      FASB Interpretation No. 46, Consolidation of Variable Interest Entities an
      interpretation of ARB No. 51, as amended by FASB  Interpretation  No. 45R,
      was  issued  in  January  2003 and  addresses  consolidation  by  business
      enterprises  of variable  interest  entities.  At December 31,  2003.  the
      Company  did not have any  variable  interest  entities as defined by this
      Interpretation and therefore,  the adoption of the provisions of this FASB
      Interpretation  did  not  have  a  material  impact  on  the  consolidated
      financial  statements  of the Company in 2003.  Subsequent to December 31,
      2003, the company formed a wholly-owned Delaware statutory business trust,
      FSBS Capital Trust I (the "Trust"),  which issued $5,000,000 of guaranteed
      preferred  beneficial  interests  in  the  Company's  junior  subordinated
      deferrable  interest  debentures.  The trust will be a  variable  interest
      entity in future periods.

 (m)  Operating Segments

      The Company has determined that,  using the definitions  contained in FASB
      Statement No. 131, Disclosures about Segments of an Enterprise and Related
      Information,   all  of  its  activities  constitute  only  one  reportable
      operating segment.

  (n)    Financial statement reclassification

       Certain of the prior year  amounts have been  reclassified  to conform to
       current year presentation;  such  reclassifications are immaterial to the
       financial statements.

Note 3 - Securities

Available-for-sale

A  summary  of the  amortized  cost  and  estimated  fair  value  of  securities
available-for-sale follows:

<TABLE>
<CAPTION>
                                                                                         Gross             Gross         Estimated
                                                                     Amortized         Unrealized       Unrealized          Fair
                                                                       Cost              Gains            Losses           Value
                                                                       ----              -----            ------           -----
December 31, 2003
<S>                                                                <C>               <C>               <C>               <C>
              U.S. Government agency obligations ...........       $ 9,497,730       $    68,805       $    22,190       $ 9,544,345
              State and local obligations ..................           123,093             4,726                             127,819
              Restricted FHLB stock ........................           700,000                                               700,000
                                                                   -----------       -----------       -----------       -----------
                Total Securities
                  Available-for-sale .......................       $10,320,823       $    73,531       $    22,190       $10,372,164
                                                                   ===========       ===========       ===========       ===========

December 31, 2003
              U.S.Government agency obligations ............       $13,996,523       $   131,890       $         -       $14,128,413
              State and local obligations ..................           123,014             3,919                             126,933
              Restricted FHLB stock ........................           600,000                                               600,000
                                                                   -----------       -----------       -----------       -----------
                Total Securities
                  Available-for-sale .......................       $14,719,537       $   135,809       $         -       $14,855,346
                                                                   ===========       ===========       ===========       ===========
</TABLE>

                                       33
<PAGE>

There have been no sales of securities  available-for-sale  in 2003 or 2002. The
Company has only one  security in an  unrealized  loss  position at December 31,
2003.  The  security,  with a fair value of $977,810 and an  unrealized  loss of
$22,190 at December 31, 2003, has been in a continuous  unrealized loss position
for less than 12 months.

Held-for-investment

A summary of the carrying  value and  estimated  fair market value of securities
held-for- investment follows:


<TABLE>
<CAPTION>
                                                                                          Gross            Gross          Estimated
                                                                      Amortized         Unrealized       Unrealized          Fair
                                                                         Cost             Gains            Losses           Value
                                                                         ----             -----            ------           -----
December 31, 2003
<S>                                                                 <C>               <C>                      <C>        <C>
                  U.S. Government agency obligations .......        $1,010,927        $   12,823               $ -        $1,023,750
                  Trust Preferred securities ...............           477,862           127,592           605,454
                  Mortgage backed securities ...............         2,010,139             7,496         2,017,635
                  State and local obligations ..............           375,000            11,592                 -           386,592
                                                                    ----------        ----------        ----------        ----------
                    Total securities held-for-investment ...        $3,873,928        $  159,503                 -        $4,033,431
                                                                    ==========        ==========        ==========        ==========


December 31, 2002
                  U.S. Government agency obligations .......        $1,517,363        $   30,457               $ -        $1,547,820
                  Trust Preferred securities ...............           476,220            72,858           549,078
                  State and local obligations ..............           375,000            12,283                 -           387,283
                                                                    ----------        ----------        ----------        ----------
                    Total securities
                  held-for-investment ......................        $2,368,583        $  115,598                 -        $2,484,181
                                                                    ==========        ==========        ==========        ==========
</TABLE>


The    scheduled    maturities    of    securities    held-for-investment    and
available-for-sale at December 31, 2003 were as follows:


<TABLE>
<CAPTION>
                                                                    Available-for-Sale                    Held-for-Investment
                                                                    ------------------                    -------------------
                                                                                 Estimated                                Estimated
                                                              Amortized             Fair               Amortized            Fair
                                                                 Cost               Value                Cost               Value
                                                                 ----               -----                ----               -----

<S>                                                          <C>                 <C>                <C>                  <C>
Due in one year or less ............................         $         -         $         -        $          -         $         -
Due from one to five years .........................           7,497,730           7,540,475           1,010,927           1,023,750
         Due from five to 10 years .................           1,000,000           1,003,750                   -                   -
   Due after ten years .............................           1,123,093           1,127,939             852,862             992,046
   Mortgage backed securities ......................                   -                   -           2,010,139           2,017,635
   Equity securities ...............................             700,000             700,000                   -                   -
                                                             -----------         -----------         -----------         -----------
                                                             $10,320,823         $10,372,164         $ 3,873,928         $ 4,033,431
                                                             ===========         ===========         ===========         ===========
</TABLE>

At  December  31,  2003,  securities  with a  carrying  value  of  approximately
$8,500,000 were pledged to secure retail repurchase agreements and Treasury, tax
and loan deposits.


                                       34
<PAGE>

Note 4 - Loans and allowance for loan losses

Loans at December 31, 2003 and 2002 are summarized as follows:

                                                      2003             2002
                                                      ----             ----
Construction and land development ............   $  14,345,975    $  14,211,986
1-4 Family residential properties ............      55,948,902       30,904,373
Multifamily residential properties ...........       1,274,998          933,999
Non-farm nonresidential properties ...........     101,938,822       62,878,939
Other real estate loans ......................       1,650,997        1,777,998
Commercial and industrial, non-real estate ...      51,523,910       47,052,954
Consumer .....................................         554,999        1,053,596
Other ........................................               -           47,000
                                                 -------------    -------------
Total loans ..................................     227,238,603      158,860,845
Less: Allowance for loan losses ..............      (2,600,000)      (1,750,000)
      Net deferred loan fees .................        (469,164)        (133,049)
                                                 -------------    -------------
                                                 $ 224,169,439    $ 156,977,796
                                                 =============    =============

The  activity  in the  allowance  for loan  losses  for  2003,  2002 and 2001 is
summarized as follows:

                                          2003           2002            2001
                                          ----           ----            ----

Balance at beginning of year ......   $ 1,750,000    $ 1,450,000    $ 1,055,000
Provision charged to operations ...       949,302        674,830        445,853
Loan charge-offs ..................    (1,808,203)      (392,450)       (51,670)
Loan recoveries ...................     1,708,901         17,620            817
                                      -----------    -----------    -----------
Balance at end of year ............   $ 2,600,000    $ 1,750,000    $ 1,450,000
                                      ===========    ===========    ===========

At  December  31, 2003 and 2002,  nonaccrual  loans  amounted  to  $295,039  and
$111,559,  respectively.  The  Company  evaluates  impairment  of  loans  on  an
individual  loan  basis.  As of December  31,  2003 and 2002 loans  individually
evaluated and considered  impaired  under FASB Statement No. 114,  Accounting by
Creditors for Impairment of a Loan were immaterial.

At December 31, 2003, the Company had loans outstanding to officers,  directors,
and their related interests of $3,450,473. During 2003, directors, officers, and
their related interests borrowed  $2,835,278 and repaid $5,823,220.  At December
31, 2002, the Company had loans  outstanding to officers,  directors,  and their
related interests of $6,438,415.  During 2002,  directors,  officers,  and their
related interests borrowed $2,545,525 and repaid $2,296,960.

In the normal  course of  business  there are  outstanding  commitments  for the
extension of credit,  which are not  reflected in the financial  statements.  At
December  31, 2003 and 2002,  pre-approved  but unused lines of credit for loans
totaled approximately  $38,169,647 and $21,541,050,  respectively.  In addition,
the Company had issued  standby  letters of credit  amounting  to  approximately
$2,539,000  and  $2,828,000  at December  31, 2003 and 2002,  respectively.  The
Company  also had  $2,375,000  in  outstanding  variable  rate  commercial  loan
commitments at December 31, 2003. These  commitments  represent no more than the
normal  lending  risk  that  the  Company  commits  to its  borrowers.  If these
commitments  are drawn,  the  Company  will  obtain  collateral  if it is deemed
necessary  based  on  management's   credit   evaluation  of  the  counterparty.
Management  believes  that  these  commitments  can  be  funded  through  normal
operations.  The fair value of these standby  letters of credit is based on fees
currently  charged for similar  instruments  and is  immaterial to the financial
statements taken as a whole.

The Company grants primarily  commercial,  real estate, and installment loans to
customers  throughout its market area,  which consists  primarily of Spartanburg
County,  Richland  County,  and  Hilton  Head  area in  South  Carolina  and the
Asheville area in North Carolina.  The real estate  portfolio can be affected by
the condition of the local real estate market.  The  commercial and  installment
loan portfolio can be affected by the local economic conditions.


                                       35
<PAGE>

Note 5 - Premises and equipment

Premises and equipment at December 31, 2003 and 2002 are summarized as follows:

                                                     2003               2002
                                                     ----               ----

Land .....................................       $   431,412        $   431,412
Buildings ................................         4,715,267          2,253,509
Leasehold Improvements ...................            93,590             93,590
Furniture and equipment ..................         1,439,200            983,864
Construction in progress .................                 -             52,261
                                                 -----------        -----------
                                                   6,679,469          3,814,636

Less: accumulated depreciation ...........        (1,223,578)          (981,964)
                                                 -----------        -----------
                                                 $ 5,455,891        $ 2,832,672
                                                 ===========        ===========


Depreciation  expense  for the years  ended  2003,  2002 and 2001 was  $243,468,
$189,003, and $203,548, respectively.

Note 6 - Deposits

A summary of deposit accounts at December 31, 2003 and 2002 follows:

                                                     2003               2002
                                                     ----               ----

Demand
     Non-interest bearing ..............        $ 19,028,127          14,535,143
     Interest bearing ..................          36,531,572          34,676,720
Savings ................................          43,531,916          22,214,243
Time, $100,000 or more .................          32,784,468          20,560,906
Other time .............................          83,580,106          63,710,935
                                                ------------        ------------
                                                $215,456,189        $155,697,947
                                                ============        ============

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

2004 ...............................................     $97,498,661
2005 ...............................................       9,738,561
2006 ...............................................       9,127,352
2007 ...............................................               -
2008 and thereafter ................................               -
                                                        ------------
                                                        $116,364,574
                                                        ============

Directors and executive officers were customers of and had transactions with the
Bank in the  ordinary  course of  business.  Included in such  transactions  are
deposit  accounts,  all of which were made under  normal  terms.  The  aggregate
amount of these deposit  accounts was  $4,913,801 and $3,288,426 at December 31,
2003 and 2002, respectively.

Note 7 - Other borrowed funds

At December 31, 2003 and 2002, the Bank had two $5,000,000  fixed-rate  advances
outstanding from the FHLB that are  collateralized by a lien on qualifying first
mortgage and  commercial  loans in an amount  necessary  to satisfy  outstanding
indebtedness  plus accrued  interest.  The borrowings  carried interest rates of
4.3%  and  4.6% and  mature  in  February  2011  and  March of 2011.  One of the
$5,000,000  advances is callable until maturity and the other $5,000,000 advance
will be callable March 2004 through maturity. At December 31, 2003 the Bank also
had a $2,000,000 variable-rate advance from the FHLB that is collateralized by a
lien on  qualifying  first  mortgage  loans in an amount  necessary  to  satisfy
outstanding  indebtedness  plus  accrued  interest.  The  borrowing  carried  an
interest  rate of 1.15% and matured in January  2004.  The  variable-rate  is 30
basis points above the FHLB overnight rate and adjusts daily. The unused portion
of the line of credit with the FHLB was  approximately  $20,000,000  at December
31, 2003.


                                       36
<PAGE>

Treasury,  tax and loan  accounts  with  balances  of $235,553  and  $454,691 at
December 31, 2003 and 2002,  respectively  are also  included in other  borrowed
funds.  These  borrowings  bear interest at the federal funds rate less 25 basis
points.

At  December  31, 2003 and 2002,  the Bank had  $10,000,000  of unused  lines of
credit to purchase federal funds from banks.

Note 8 - Regulatory capital requirements

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory   and   possible   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the  Company  and the  Bank's  financial  statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action,  the Company and the Bank must meet  specific  capital  guidelines  that
involve  quantitative  measures  of  their  assets,  liabilities,   and  certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by
the regulators  about  components,  risk  weighting,  and other factors.  Prompt
corrective action provisions are not applicable to bank holding companies.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier I  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003  and  2002,  that  the  Company  and  the  Bank  met all  capital  adequacy
requirements to which it is subject.

As of December 31, 2003, the most recent  notification from the FDIC categorized
the Bank as adequately  capitalized  under the  regulatory  framework for prompt
corrective  action.  To be categorized as adequately  capitalized  the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification  that  management  believes have changed the Bank's  category.  The
Company and the Bank's actual capital amounts and ratios as of December 31, 2003
and 2002 are also presented in the table.



<TABLE>
<CAPTION>
                                                                                                                  To Be Well
                                                                                                               Capitalized Under
                                                                                     For Capital               Prompt Corrective
                                                            Actual                Adequacy Purposes            Action Provisions
                                                            ------                -----------------            -----------------
                                                   Amount            Ratio       Amount         Ratio        Amount          Ratio
                                                   ------            -----       ------         -----        ------          -----

December 31, 2003
<S>                                             <C>                  <C>      <C>               <C>         <C>               <C>
     Total Capital
     (To Risk Weighted Assets) ..........       $18,921,000          8.49%    $17,819,000       >8.0%       $22,274,000       >10.0%
     Tier I Capital
     (To Risk Weighted Assets) ..........       $16,321,000          7.33%    $ 8,910,000       >4.0%       $13,365,000       >6.0%
     Tier I Capital
     (To Average Assets) ................       $16,321,000          6.47%    $10,088,000       >4.0%       $12,610,000       >5.0%
</TABLE>


<TABLE>
<CAPTION>
                                                                                                                  To Be Well
                                                                                                               Capitalized Under
                                                                                     For Capital               Prompt Corrective
                                                            Actual                Adequacy Purposes            Action Provisions
                                                            ------                -----------------            -----------------
                                                     Amount            Ratio       Amount       Ratio        Amount          Ratio
                                                     ------            -----       ------       -----        ------          -----

December 31, 2002
<S>                                                 <C>                <C>      <C>              <C>        <C>              <C>
      Total Capital
      (To Risk Weighted  Assets) .............      $15,968,000        10.04%   $12,729,000      >8.0%      $15,912,000      >10.0%
      Tier I Capital
      (To Risk Weighted Assets) ..............      $14,218,000         8.94%   $ 6,365,000      >4.0%      $ 9,547,000      >6.0%
      Tier I Capital
      (To Average Assets) ....................      $14,218,000         7.57%   $ 7,508,000      >4.0%      $ 9,385,000      >5.0%
</TABLE>



                                       37
<PAGE>

Note 9 - Income taxes

The provision for income taxes is summarized below:

<TABLE>
<CAPTION>
                                                                     2003                        2002                     2001
                                                                     ----                        ----                     ----
Currently payable
<S>                                                               <C>                        <C>                        <C>
    Federal .......................................               $ 1,284,325                $   945,312                $   571,902
    State .........................................                   101,675                     57,950                     40,673
                                                                  -----------                -----------                -----------
                                                                    1,386,000                  1,003,262                    612,575

Deferred
    Federal .......................................                  (240,927)                  (195,986)                  (177,856)
    State .........................................                   (19,073)                   (12,014)                   (20,144)
                                                                  -----------                -----------                -----------
                                                                     (260,000)                  (208,000)                  (198,000)
                                                                  -----------                -----------                -----------

    Total income taxes ............................               $ 1,126,000                $   795,262                $   414,575
                                                                  ===========                ===========                ===========
</TABLE>


The reasons for the  difference  between the statutory  federal income tax rates
and the effective tax rates are summarized as follows for:

<TABLE>
<CAPTION>
                                                                                                          Years ended
                                                                                                          December 31,
                                                                                                          ------------
                                                                                            2003              2002            2001
                                                                                            ----              ----            ----
<S>                                                                                         <C>               <C>             <C>
Statutory rates ..............................................................              34.0%             34.0%           34.0%
  Increase (decrease) resulting from:
       State taxes, net of federal benefit ...................................               2.1%              2.0%            2.0%
       Effect of tax exempt interest and dividends ...........................              (0.5%)            (0.6%)          (1.5%)
       Life Insurance ........................................................              (0.7%)            (1.5%)          (3.2%)
       Other, net ............................................................               0.0%              2.0%            0.1%
                                                                                            ----              ----            ----
                                                                                            34.9%             35.9%           31.4%
                                                                                            ====              ====            ====
</TABLE>

The tax  effects of  temporary  differences  result in  deferred  tax assets and
liabilities as presented below:

                                                      2003              2002
                                                      ----              ----
Deferred tax assets
   Allowance for loan losses ...............      $   950,000       $   680,000
   Other ...................................          174,000            83,000
          Gross deferred tax assets ........        1,124,000           763,000
   Less:  valuation allowance ..............                -            (1,300)
                                                  -----------       -----------
       Net deferred tax assets .............        1,124,000           761,700

Deferred tax liabilities
   Depreciation ............................         (159,000)          (55,700)
   Available-for-sale securities ...........          (20,000)          (53,000)
                                                  -----------       -----------

       Net .................................      $   945,000       $   653,000
                                                  ===========       ===========

The change in the valuation  allowance  was $1,300 for the year ending  December
31, 2003.


                                       38
<PAGE>

Note 10 - Commitments and contingencies

The  Company  leases the land and  building  for its  branches  under  operating
leases. Future minimum lease payments at December 31, 2003, are as follows:

                 2004                                       $  142,227
                 2005                                           62,194
                 2006                                           26,124
                 2007 and thereafter                                 -
                                                             ---------
                                                            $  230,545
                                                             =========

Total lease expense was $171,176, $134,755 and $120,062 for 2003, 2002 and 2001,
respectively.

The  Company is  subject to legal  proceedings  and  claims  which  arise in the
ordinary  course of business.  In the opinion of management,  the disposition of
these claims will not have a material  adverse impact on the financial  position
or results of operations of the Company.

Note 11 - Restrictions on dividends, loans and advances

Federal and state banking  regulations  place certain  restrictions on dividends
paid and loans or advances made by the Bank to the Corporation. The total amount
of cash  dividends,  which  may be paid at any  date  without  prior  regulatory
consent,  is generally limited to the year's net income of the Bank provided the
Bank received a composite rating of one or two at the last examination conducted
by the federal or state regulatory authority,  and loans or advances are limited
to 10 percent of the Bank's common stock and surplus on a secured basis.

In  addition,  cash  dividends  paid by the  Bank to the  Corporation  would  be
prohibited  if the effect  would  cause the Bank's  capital to be reduced  below
applicable minimum regulatory capital requirements.

In 2003, the Bank's banking  regulators  conducted a routine  examination of the
Bank. As a result of this  examination,  the Bank's Board of Directors  signed a
memorandum of  understanding  with the banking  regulators in September  2003 in
connection  with the Bank's deferred  presentment  lending program that the Bank
was in the process of terminating.  Included in the memorandum of  understanding
was an  agreement  that the Bank  would  not pay cash  dividends  without  prior
approval  of  the  banking  regulators.  The  memorandum  of  understanding  was
terminated in January 2004.  Based on the composite  rating assigned to the Bank
as a result of the  banking  regulator's  examination,  the Bank cannot pay cash
dividends without prior approval of the banking regulators.


Note 12 - Employee benefit plans

401(k) plan
All employees of the Company who meet certain eligibility criteria are permitted
to participate in a 401(k) plan. For each  employee's  contribution  up to 6% of
compensation, the Company makes a 100% matching contribution. Expense related to
this plan was $93,770, $81,937 and $68,052 in 2003, 2002 and 2001, respectively.

Salary continuation plan

During 1999,  the Company  entered  into a salary  continuation  agreement  with
certain officers of the Company. The plan provides for a series of payments over
a  specified  number of periods to these  employees  upon  their  retirement  or
termination  as stated in the  plan.  The  amount  of  accrued  benefit  expense
included in other  liabilities was $114,050 and $86,678 at December 31, 2003 and
2002, respectively.


                                       39
<PAGE>

Note 13 - Stock options

The  Company  has  issued  incentive  stock  options  to  certain  officers  and
employees.  As permitted by FASB Statement No. 123,  Accounting for  Stock-Based
Compensation,  the Company has elected to continue using the measurement  method
prescribed in Accounting Principles Board Opinion No. 25 and, accordingly,  FASB
Statement No. 123 has no effect on the Company's  financial  position or results
of operations.

Note 13 - Stock options, continued

The following is a summary of stock option activity and related  information for
the years ended December 31, 2003, 2002 and 2001:


<TABLE>
<CAPTION>
                                                            2003                        2002                       2001
                                                            ----                        ----                       ----
                                                                  Weighted                     Weighted                  Weighted
                                                                   Average                     Average                    Average
                                                 Options       Exercise Price   Options    Exercise Price   Options   Exercise Price
                                                 -------       --------------   -------    --------------   -------   --------------

<S>                                              <C>            <C>            <C>            <C>            <C>           <C>
Outstanding- Beginning
   of period ...........................         157,890        $   11.61      141,173        $   10.41      107,442       $    9.49
   Granted .............................          20,654            20.65       21,218            19.37       33,731           12.95
   Exercised ...........................            (900)            8.33       (4,500)           10.67            -               -
   Forfeited ...........................               -                -            -                -            -               -
                                                --------        ---------     --------        ---------     --------       ---------
Outstanding- End of Period .............         177,644        $   12.68      157,891        $   11.61      141,173       $   10.41
                                                ========        =========     ========        =========     ========       =========

Exercisable- End of
   Period ..............................         118,001        $   10.41       96,048        $    9.64       80,896       $    9.16
                                                ========        =========     ========        =========     ========       =========

Weighted average fair
   value of options granted ............                        $   13.41                      $  12.65                    $    5.82
                                                                =========                      ========                    =========
</TABLE>

Exercise prices for options  outstanding as of December 31, 2003 and 2002 ranged
from $7.33 to $21.00.  The weighted average remaining  contractual life of those
options is approximately 6.5 years at December 31, 2003 and 7 years at 2002.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions  used for grants in 2003,  2002 and 2001;  dividend  yield of 0.00%,
expected volatility of 50% in 2003 and 2002 and 20% in 2001,  risk-free interest
rates of 3.77% in 2003,  4.00% in 2002 and 5.00% in 2001,  and expected lives of
10 years for the options.


Note 14 - Fair value of financial instruments

The estimated fair values of financial instruments are as follows:

<TABLE>
<CAPTION>
                                                                               2003                                  2002
                                                                               ----                                  ----
                                                                    Carrying         Estimated            Carrying         Estimated
                                                                     Amount         Fair Value             Amount         Fair Value
                                                                     ------         ----------             ------         ----------
                                                                         (in thousands)                        (in thousands)

Financial assets
<S>                                                                <C>                <C>                <C>                <C>
     Cash and cash equivalents .........................           $  4,518           $  4,518           $  4,292           $  4,292
   Securities
     Available-for-sale ................................             10,372             10,372             14,855             14,855
     Held-for-investment ...............................              3,874              4,033              2,369              2,484
   Loans ...............................................            224,169            231,008            156,978            159,430

Financial liabilities
   Deposits ............................................            215,456            216,247            155,698            156,109
   Retail repurchase agreements ........................              6,089              6,089              3,230              3,230
   Other borrowed funds ................................             12,235             15,089             10,455             12,140
</TABLE>


                                       40
<PAGE>

The fair value  estimates are made at a specific point in time based on relevant
market and other information about the financial instruments.  Because no market
exists for a significant  portion of the Company's financial  instruments,  fair
value  estimates  are  based  on  judgments   regarding   future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial instruments, and such other factors. These estimates are subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore  cannot be determined  with  precision.  Changes in assumptions  could
significantly affect the estimates.  In addition,  the tax ramifications related
to the  realization  of the  unrealized  gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimates.

Note 15 - Earnings per common share (EPS)

The reconciliation of the numerators and denominators of the earnings per common
share and diluted EPS computation follows:


<TABLE>
<CAPTION>
                                                                                                                             Per
                                                                                   Income                Shares             Share
December 31, 2003                                                               (Numerator)           (Denominator)         Amount
                                                                                -----------           -------------         ------

Earnings per common share:
<S>                                                                             <C>                     <C>                <C>
Income available to common  stockholders ..........................             $2,104,267              1,381,722          $   1.52
Dilutive effect of stock options ..................................                      -                 62,844             (0.06)

Diluted EPS:
Income available to common
    stockholders + assumed
    conversions ...................................................             $2,104,267              1,444,566          $   1.46
                                                                                ==========             ==========          ========
</TABLE>


Options  to  purchase  14,204  shares  of common  stock at $21.00  per share and
options  to  purchase  450  shares of common  stock at $20.33 per share were not
included in the  computation of diluted  earnings per share for 2003 because the
options'  exercise price was greater than the average market price of the common
shares.

<TABLE>
<CAPTION>
                                                                                                                              Per
                                                                                 Income                   Shares             Share
December 31, 2002                                                              (Numerator)            (Denominator)         Amount
                                                                               -----------            -------------         ------

Earnings per common share:
<S>                                                                             <C>                      <C>               <C>
Income available to common  stockholders ..........................             $1,418,764               ,380,863          $   1.03
Dilutive effect of stock options ..................................                      -                 45,525             (0.04)
                                                                                ----------             ----------          --------

Diluted EPS:
Income available to common
    stockholders + assumed
    conversions ...................................................             $1,418,764              1,426,388          $    .99
                                                                                ==========             ==========          ========
</TABLE>


                                       41
<PAGE>

Options to purchase 3,750 shares of common stock at $17.33 per share, options to
purchase  150 shares of common stock at $18.11 per share and options to purchase
16,718  shares of common  stock at $20.00  per share  were not  included  in the
computation of diluted earnings per share for 2002 because the options' exercise
price was greater than the average market price of the common shares.

<TABLE>
<CAPTION>
                                                                                                                              Per
                                                                               Income                   Shares               Share
December 31, 2001                                                            (Numerator)             (Denominator)           Amount
                                                                             -----------             -------------           ------

        Earnings per common share:
<S>                                                                                   <C>                 <C>              <C>
        Income available to common  stockholders ..........................           $ 905,835           1,376,670        $   0.66
        Dilutive effect of stock options ..................................                   -              27,581           (0.01)
                                                                                      ---------           ---------        --------

              Diluted EPS:
              Income available to common
                  stockholders + assumed  conversions .....................           $ 905,835           1,404,251        $   0.65
                                                                                      =========           =========        ========
</TABLE>

Options to purchase  600 shares of common  stock at $13.33 per share and options
to purchase  17,550 shares of common stock at $14.00 per share were not included
in the  computation of diluted  earnings per share for 2001 because the options'
exercise price was greater than the average market price of the common shares.


Note 16 - Condensed financial statements of parent company

Financial information pertaining to First South Bancorp, Inc. is as follows:


Balance Sheets

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                 2003                  2002                  2001
                                                                                 ----                  ----                  ----
Assets
<S>                                                                          <C>                   <C>                   <C>
Cash .............................................................           $    55,500           $    48,000           $         -
Investment in common stock of First South Bank ...................            16,353,628            14,301,731            12,908,953
                                                                                                   -----------           -----------
    Total assets .................................................           $16,409,128           $14,349,731           $12,908,953
                                                                             ===========           ===========           ===========

Stockholders' Equity
Stockholders' equity .............................................           $16,409,128           $14,349,731           $12,908,953
                                                                             -----------           -----------           -----------
    Total stockholders' equity ...................................           $16,409,128           $14,349,731           $12,908,953
                                                                             ===========           ===========           ===========
</TABLE>


Statements of Operations

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                            -----------------------
                                                                                  2003                2002                    2001
                                                                                  ----                ----                    ----
 Income
<S>                                                                           <C>                   <C>                   <C>
    Operating income .............................................            $        -            $        -            $        -

Expense
    Other expenses ...............................................                     -                     -                     -
                                                                              ----------            ----------            ----------

Loss before equity in undistributed net
    income of First South Bank ...................................                     -                     -                     -
Equity in undistributed net income
    of First South Bank ..........................................             2,104,267             1,418,764               905,835
                                                                              ----------            ----------            ----------

Net income .......................................................            $2,104,267            $1,418,764            $  905,835
                                                                              ==========            ==========            ==========
</TABLE>


                                       42
<PAGE>

Note 16 - Condensed financial statements of parent company, continued

Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                              -----------------------
                                                                                     2003               2002                 2001
                                                                                     ----               ----                 ----
Cash flows from operating activities
<S>                                                                             <C>                 <C>                  <C>
    Net income ........................................................         $ 2,104,267         $ 1,418,764          $   905,835
    Equity in undistributed income of
       First South Bank ...............................................          (2,104,267          (1,418,764)            (905,835
                                                                                -----------         -----------          -----------

         Net cash provided by operating activities ....................                   -                   -                    -

Cash flows from financing activities
    Proceeds from stock option exercise ...............................               7,500              48,000                    -
                                                                                -----------         -----------          -----------

         Net cash provided by financing activities ....................               7,500              48,000                    -
                                                                                -----------         -----------          -----------

    Net increase in cash and cash equivalents .........................               7,500              48,000                    -

    Cash and cash equivalents at the
       beginning of year ..............................................              48,000                   -                    -
                                                                                -----------         -----------          -----------

    Cash and cash equivalents at the end of year ......................         $    55,500         $    48,000   $                -
                                                                                ===========         ===========          ===========
</TABLE>

Note 17 - Noncash transactions

The Company donated $4,720 of computers during the year ended December 31, 2003.
The Company  foreclosed  on assets  during the year ended  December 31, 2002 and
transferred the loans and accrued  interest  balances at the time of foreclosure
to other real estate owned in the amount of $772,644.

Note 18 - Subsequent events

In January 2004, the Company formed a wholly-owned  Delaware  statutory business
trust, FSBS Capital Trust I (the "Trust"), which issued $5,000,000 of guaranteed
preferred beneficial  interests in the Company's junior subordinated  deferrable
interest debentures (the "Trust Preferred Securities"). These debentures qualify
as Tier I capital.  All of the common  securities  of the Trust are owned by the
Company.  The proceeds from the issuance of the common  securities and the Trust
Preferred  Securities  were  used by the  Trust to  purchase  from  the  Company
$5,155,000  of junior  subordinated  debentures  of the  Company  which  carry a
variable  interest  rate of 3 Month  LIBOR  plus  2.8%  per  annum.  The  junior
subordinated debentures represent the sole asset of the Trust.

The Company has entered into contractual arrangements which, taken collectively,
fully guarantee payment of (i) accrued and unpaid  distributions  required to be
paid on the Trust Preferred  Securities;  (ii) the redemption price with respect
to any Trust Preferred Securities called for redemption by FSBS Capital Trust I,
and (iii) payments due upon a voluntary or involuntary  dissolution,  winding up
or liquidation of the Trust.

The Trust Preferred  Securities are mandatorily  redeemable upon maturity of the
debentures  in  January  2034 or upon  earlier  redemption  as  provided  in the
indenture.  The Company has the right to redeem the debentures  purchased by the
Trust in whole or in part, at any time,  however if they are redeemed before the
fifth  anniversary,  the cost would be 105% of the par value of the  securities.
The debentures may be redeemed after the fifth anniversary at par.


                                       43
<PAGE>

On  February  18,  2004,  the  Board of  Directors  of the  Company  approved  a
three-for-two  split of the  Company's  common  stock  effected in the form of a
stock dividend for  shareholders  of record on March 5, 2004.  Accordingly,  all
share and per share information  presented  throughout the financial  statements
have been restated to reflect the effect of the stock split.

Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable

Item 8A. Controls and Procedures

         Based on the evaluation required by 17 C.F.R. Section  240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17  C.F.  R.  Sections  240.13a-15(e)  or  240.15d-15(e),  the  Company's  chief
executive  officer and chief financial  officer concluded that the effectiveness
of such  controls and  procedures,  as of the end of the period  covered by this
annual report, was adequate.

         No disclosure is required under 17 C.F.R. Sections 228.308


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
         With Section 16(a) of the Exchange Act.

         The information set forth under the captions "Management of the Company
- Directors and  Executive  Officers" and "Section  16(a)  Beneficial  Ownership
Reporting Compliance" in registrant's  definitive proxy statement filed with the
Commission  for the  2004  Annual  Meeting  of  Shareholders  (the  "2004  Proxy
Statement") is incorporated herein by reference.

         Audit Committee Financial Expert

         The Company's  board of directors has determined  that the Company does
not have an "audit committee  financial expert", as that term is defined by Item
401(e) of Regulation S-B promulgated by the Securities and Exchange  Commission,
serving on its audit committee.  The Company's audit committee is a committee of
directors who are elected by the  shareholders  and who are  independent  of the
Company and its  management.  After reviewing the experience and training of all
of the  Company's  independent  directors,  the board of directors has concluded
that  no  independent  director  meets  the  SEC's  very  demanding  definition.
Therefore, it would be necessary to find a qualified individual willing to serve
as both a  director  and  member of the  audit  committee  and have that  person
elected  by the  shareholders  in order to have an  "audit  committee  financial
expert" serving on the Company's audit committee.  The Company's audit committee
is,  however,  authorized to use  consultants  to provide  financial  accounting
expertise in any instance where members of the committee believe such assistance
would be useful. Accordingly, the Company does not believe that it needs to have
an "audit committee financial expert" on its audit committee.

         Code of Ethics

         The  Company  has  adopted a code of ethics  (as  defined  by 17 C.F.R.
228.406) that applies to its principal executive officer and principal financial
officer.  The Company will provide a copy of the code of ethics, free of charge,
to any person upon written request to V. Lewis Shuler, Executive Vice President,
First South Bancorp, 1450 John B. White, Sr. Blvd., Spartanburg, S.C. 29306.

Item 10. Executive Compensation.

         The information set forth under the caption "Management  Compensation,"
in the 2004 Proxy Statement is incorporated herein by reference.


Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters.


         The  information  set forth under the caption  "Security  Ownership  of
Certain  Beneficial  Owners  and  Management"  in the 2004  Proxy  Statement  is
incorporated herein by reference.


                                       44
<PAGE>

         Securities Authorized for Issuance Under Equity Compensation Plans.

<TABLE>
<CAPTION>
         Plan category              Number of securities      Weighted-average          Number of securities
                                    to be issued upon         execise price of          remaining available
                                    exercise of               outstanding options,      for future issuance
                                    outstanding options,      warranties and rights     under equity compensation
                                    warrants and rights                                 plans (excluding securities
                                                                                        reflected in column (a)
                                            (a)                        (b)                       (c)
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                    <C>                         <C>
Equity compensation plans
approved by security holders                 157,890                $11.61                      67,110

Equity compensation plans
not approved by security holders                   0                     0                           0
                                            --------                 -----                     -------

Total                                        157,890                $11.61                      67,110
</TABLE>


Item 12. Certain Relationships and Related Transactions.

         The information set forth under the caption "Certain  Relationships and
Related  Transactions"  in the 2004 Proxy  Statement is  incorporated  herein by
reference.


                                       45
<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

(a)      Description of Exhibits.

Exhibit No.                Description

3.1            Articles of Incorporation of Registrant (1)
3.2            Bylaws of Registrant (1)
4.1            Form of Common Stock Certificate(2)
10.1           First South Bank Stock Option Plan (3)
10.2           Form of  Option  Agreements  with  Barry L.  Slider,  dated as of
               December 31, 1998, December 31, 1997 and December 31, 1996. (3)
10.3           Option  Agreement  with  Barry L.  Slider,  dated as of April 17,
               1997(2)
10.4           Form of Salary  Continuation  Agreements with Barry L. Slider and
               V. Lewis Shuler dated November 19, 1999 (2)
21             Subsidiaries of Registrant (3)
31.1           Rule  13a-14(a) /  15d-14(a)  Certifications  of Chief  Executive
               Officer
31.2           Rule  13a-14(a) /  15d-14(a)  Certifications  of Chief  Financial
               Officer
32             Section 1350 Certifications
--------------
(1)  Incorporated by reference to Form 8-A filed November 12, 1999
(2)  Incorporated  by reference  to Form 10-KSB for the year ended  December 31,
     2000
(3)  Incorporated  by reference  to Form 10-KSB for the year ended  December 31,
     1999

(b)  Reports on Form 8.K

     None

Item 14.   Principal Accountant Fees and Services

           The  information  set forth  under the  caption  "Independent  Public
Accountants-Fees  Paid to Independent  Auditors" in the 2004 Proxy  Statement is
incorporated herein by reference.





                                       46
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                   First South Bancorp, Inc.


March 24, 2004                     By: s/Barry L. Slider
                                      ------------------------------------------
                                         Barry L. Slider
                                         President and Chief Executive Officer


                                   By: s/V. Lewis Shuler
                                      ------------------------------------------
                                         V. Lewis Shuler
                                         Executive Vice President
                                         (Principal Financial and Principal
                                          Accounting Officer)

         In accordance  with the Exchange Act, this Report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:

<TABLE>
<CAPTION>
Signature                                Title                                              Date
---------                                -----                                              ----
<S>                                      <C>                                                <C>
--------------------------               Director                                           March __, 2004
Richard H. Brooks

--------------------------               Director                                           March __, 2004
Harold E. Fleming, M.D.

s/Joel C. Griffin
--------------------------               Director                                           March 24, 2004
Joel C. Griffin

--------------------------               Chairman, Director                                 March __, 2004
Roger A. F. Habisreutinger

s/Ashley F. Houser
--------------------------               Director                                           March 24, 2004
Ashley F. Houser

s/Herman E. Ratchford
--------------------------               Director                                           March 24, 2004
Herman E. Ratchford

s/Chandrakant V. Shanbhag
--------------------------               Director                                           March 24, 2004
Chandrakant V. Shanbhag

s/Barry L. Slider
--------------------------               President, Chief Executive Officer, Director       March 24, 2004
Barry L. Slider

s/David G. White
--------------------------               Director                                           March 24, 2004
David G. White
</TABLE>


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