UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-K

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

       For the Fiscal Year Ended December 31, 2007 File Number 000-28037

                            FIRST SOUTH BANCORP, INC.
             (Exact name of Registrant as specified 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)

       Registrant'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)

         Indicate  by check  mark if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No

         Indicate  by  check  mark if the  registrant  is not  required  to file
reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                  Yes [X]           No [ ]

         Indicate by check mark if there is no disclosure  of delinquent  filers
pursuant to Item 405 of Regulation S-K contained herein,  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-K
or any amendment to this Form 10-K.[ ]

         Indicate by check mark whether the  registrant  is a large  accelerated
filer, an accelerated  filer, a  non-accelerated  filer, or a smaller  reporting
company.  See the definitions of "large accelerated filer,"  "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange

Large accelerated filer [ ]                         Accelerated filer [ ]

 Non-accelerated filer [ ]                         Smaller Reporting Company [X]
(Do not check if a smaller reporting company)

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act).

 [  ] Yes          [X] No

         The  aggregate  market value of the  Registrant's  Common Stock held by
non-affiliates  on June 30, 2007, the last business day of the Registrant's most
recently  completed second fiscal quarter,  was approximately  $54,025,950.  The
Registrant  has no  non-voting  common equity  outstanding.  For purposes of the
foregoing  calculation  only,  all  directors  and  executive  officers  of  the
Registrant have been deemed affiliates.

                  As of February 28, 2008,  there were  2,161,218  shares of the
Registrant's Common Stock, no par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

                  Portions of the Proxy Statement for the 2008 Annual Meeting of
Shareholders  to be held May 21,  2008,  to be filed  with  the  Securities  and
Exchange  Commission are  incorporated by reference into Part III of this Annual
Report on Form 10-K.



<PAGE>

<TABLE>
<CAPTION>

                                Table of Contents


                                 Filing Sections

<S>                                                                                                                           <C>
Cover Page.....................................................................................................................1

Part I

Item 1.       Business.........................................................................................................4
Item 1A       Risk Factors....................................................................................................10
Item 1B       Unresolved Staff Comments.......................................................................................10
Item 2.       Properties......................................................................................................10
Item 3.       Legal Proceedings...............................................................................................11
Item 4.       Submission of Matters to Vote of Security Holders...............................................................11

Part II

Item 5        Market for Common Equity and Related Stockholder Matters........................................................11
Item 6        Selected Financial Data.........................................................................................12
Item 7        Management's Discussion and Analysis or Plan of Operation.......................................................12
Item 7A       Quantitative and Qualitative Disclosures About Market Risk......................................................30
Item 8        Financial Statements and Supplementary Data.....................................................................31

Part III

Item 9        Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................61
Item 9A(T)   Controls and Procedures..........................................................................................61
Item 9B      Other Information................................................................................................61
Item 10      Directors, Executive Officers, Promoters, and Control Persons....................................................62
Item 11      Executive Compensation...........................................................................................62
Item 12      Security Ownership of Certain Beneficial Owners and Management...................................................62
Item 13      Certain Relationships and Related Transactions and Director Independence ........................................63
Item 14      Principal Accountant Fees and Services...........................................................................63
Item 15      Exhibits and Financial Statement Schedules.......................................................................64
Signatures....................................................................................................................66
Exhibit Index.................................................................................................................67
</TABLE>













                                       2
<PAGE>


Forward-Looking Statements

         Statements  included in this report 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 the  value  of our  loan  collateral  and
          securities,

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


                                       3
<PAGE>

Part I

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 a 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 Bluffton,  South
Carolina, and a branch opened in 2007 in Greenville, South 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,  Beaufort,  and Greenville Counties in South
Carolina. In addition, the Bank also makes other authorized  investments.  As of
December 31, 2007, the Bank employed 70 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, 2007. At
that time, in Spartanburg,  15 banks,  savings and loans, and savings banks with
45 branch  locations  competed for aggregate  deposits of  approximately  $2.554
billion.  The Bank has a city-wide  deposit  market  share of 6.68% and a market
share  rank of 7 out of the 15  competitors.  The Bank  also has a  full-service
branch located in each of Columbia, South Carolina,  Greenville, South Carolina,
and Bluffton,  South Carolina.  The Columbia branch had a market share of 0.97%,
and the  Bluffton  branch had a market  share of 8.33%,  at June 30,  2007.  The
Greenville branch was not open on that date.

         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


                                       4
<PAGE>

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.

Employees

         As of December  31, 2007,  we had a total of 73 employees  including 67
full-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining unit. We consider the relations with employees good.


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 subsidiary are limited to banking,  managing or controlling  banks,
furnishing  services to or performing services for its subsidiary 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.  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  there under 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


                                       5
<PAGE>

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 the
Deposit  Insurance  Fund 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 Deposit  Insurance Fund.
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.

         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. See "Other Safety and
Soundness Regulations - Prompt Corrective Action" below.

         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 well capitalized at
December 31, 2007.

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.


                                       6
<PAGE>

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

         The FDIC merged the Bank  Insurance  Fund and the  Savings  Association
Insurance  Fund to form the Deposit  Insurance Fund ("DIF") on March 31, 2006 in
accordance  with the  Federal  Deposit  Insurance  Reform Act of 2005.  The FDIC
maintains the DIF by assessing depository institutions an insurance premium. The
amount each institution is assessed is based upon statutory factors that include
the balance of insured  deposits  as well as the degree of risk the  institution
poses to the  insurance  fund.  The FDIC uses a risk-based  premium  system that
assesses higher rates on those  institutions that pose greater risks to the DIF.
Under the rule adopted by the FDIC in November 2006,  beginning January 1, 2007,
the FDIC will  place each  institution  in one of four risk  categories  using a
two-step  process based first on capital  ratios (the capital group  assignment)
and then on other  relevant  information  (the  supervisory  group  assignment).
Beginning  January  1,  2007,  rates  range  between  5 and 43 cents per $100 in
assessable deposits.

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 there under, 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
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  there under,  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.


                                       7
<PAGE>

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;  prohibiting the acceptance of employee
benefit plan deposits; 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  acquisition  scenario,  such  acquisitions  are
subject to certain deposit percentage limitations 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  authorities 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.

Gramm-Leach-Bliley Act

         The  Gramm-Leach-Bliley  Act,  (the  "Act")  which  makes it easier for
affiliations  between banks,  securities  firms and insurance  companies to take
place,  became  effective  in  March  of 2000.  The Act  removed  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)


                                       8
<PAGE>

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  created  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  established  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  (SEC) 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.


Sarbanes-Oxley Act

         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,  and will impact its fees for


                                       9
<PAGE>

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.

USA Patriot Act

         In 2001,  the USA Patriot Act was enacted.  The Act requires  financial
institutions  to  help  prevent,   detect,  and  prosecute  international  money
laundering  and  financing  of  terrorism.  The  effectiveness  of  a  financial
institution  in  combating  money  laundering  activities  is  a  factor  to  be
considered in any application submitted by a financial institution with the bank
regulatory  agencies.  Our Bank has adopted  systems and procedures  designed to
comply  with the USA  Patriot  Act and  regulations  adopted  thereunder  by the
Secretary of the Treasury.

Legislative Proposals

         Proposed  legislation which could significantly  affect the business of
banking is introduced in Congress from time to time. For example, numerous bills
are pending in Congress and the South Carolina  Legislature  to provide  various
forms of relief to  homeowners  from  foreclosure  of  mortgages  as a result of
publicity surrounding economic problems resulting from subprime mortgage lending
and the economic adjustments in national real estate markets.  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 1A. Risk Factors

         Not required for smaller reporting companies.

Item 1B. Unresolved Staff Comments

         Not applicable.

Item 2.  Properties.

Description of Property.

         The Bank owns the real  property  at 1450 John B.  White,  Sr.,  Blvd.,
Spartanburg,  South Carolina,  where its main offices are located. The Bank also
owns the real  property  adjacent to its main office at 1460 John B. White,  Sr.
Blvd,  Spartanburg,  South  Carolina.  A portion of this facility houses deposit
operations and the financial  services division of the Bank. The remaining space


                                       10
<PAGE>

is used for  several  tenants  and would  allow  further  expansion  of the main
office.  The Bank also owns the real property for its Greenville branch location
at 1068 North Church Street,  Greenville,  South  Carolina.  The Bank leases the
properties at 1035 Fernwood  Glendale Road,  Spartanburg,  South Carolina,  1333
Main  Street,  Columbia,  South  Carolina,  and 7  Arley  Way,  Bluffton,  South
Carolina. All properties are believed to be well suited for the Bank's needs.

Item 3.  Legal Proceedings.

         The  Company  may  from  time  to  time be a  party  to  various  legal
proceedings  arising in the ordinary  course of business,  but management of the
Company  is not aware of any  pending or  threatened  litigation  or  unasserted
claims or assessments that are expected to result in losses,  if any, that would
be material to the Company's business and operations.

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 2007.


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters and Small
         Reporting Company Purchases of Equity Securities.

Market for Common Stock, Stockholders and Dividends

         Our common  stock  trades from time to time over the counter and trades
are reported on the OTC Bulletin  Board under the symbol  "FSBS." The  following
table shows the reported high and low bid prices of our common stock reported by
the OTC  Bulletin  Board for the  periods  shown.  The prices  reported  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.  The prices have been adjusted to reflect a 6 for
5 stock split declared in May 2006.

                    Year Ended December 31, 2007    Year Ended December 31, 2006
                    ----------------------------    ----------------------------
                           Low         High              Low            High
                           ---         ----              ---            ----

First Quarter ......   $   26.50    $   29.00          $   31.10    $   35.00
Second Quarter .....       25.30        29.75              25.50        33.50
Third Quarter ......       22.25        26.51              26.05        28.74
Fourth Quarter .....       16.00        24.45              27.00        28.40


         As of  February  28,  2008,  there  were 501  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.


                                       11
<PAGE>

Securities Authorized for Issuance under Equity Compensation Plans

         The information  required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.


Recent Sales of Unregistered Securities

         During  2007,  the  Company  did not issue any  unregistered  shares of
common stock.


 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 2007.  Accordingly,  no disclosure is
required pursuant to 17 C.F.R. 228.703.

Item 6.  Selected Financial Data

         Not required for smaller reporting companies.

Item 7.  Management's Discussion and Analysis or Plan of Operation.

         Some  of the  statements  in  this  report  constitute  forward-looking
statements,  within the meaning of the Private Securities  Litigation Reform Act
of 1995 and the Securities Exchange Act of 1934. These statements are related to
future events, other future financial  performance or business  strategies,  and
include  statements  containing  terminology  such as "may",  "will",  "should",
"expects",   "scheduled",    "plans",   "intends",   "believes",    "estimates",
"potential",  "continue",  or the  negative  of such  terms or other  comparable
terminology.  Actual  events or results may differ  materially  from the results
anticipated  in these  forward-looking  statements  due to a variety of factors,
including,  without  limitation:  the  effects  of future  economic  conditions,
governmental monetary and fiscal policies, as well as legislative and regulatory
changes, the risks of changes in interest rates and the level and composition of
deposits,  loan demand,  and the values of loan  collateral,  and the effects of
competition from other commercial banks,  thrifts,  consumer finance  companies,
and other financial institutions operating in our market area and elsewhere. All
forward-looking  statements  attributable to our Company are expressly qualified
in their  entirety by these  cautionary  statements.  We disclaim  any intent or
obligation to update these  forward-looking  statements,  whether as a result of
new information,  future events, or otherwise. There is no assurance that future
results, levels of activity, performance, or goals will be achieved.

         Our discussion and analysis of earnings and related  financial data are
presented herein to assist investors in understanding the financial condition of
our Company at December 31, 2007 and 2006, and the results of operations for the
years  ended  December  31,  2007 and 2006.  This  discussion  should be read in
conjunction with consolidated  financial statements and related footnotes of our
Company presented elsewhere herein.  Historical per share data has been adjusted
to reflect our May 2006 six for five stock split.

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


                                       12
<PAGE>

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.

Recent Accounting Pronouncements

         The following is a summary of recent authoritative  pronouncements that
may affect accounting, reporting, and disclosure of financial information by the
Company:

         In  September   2006,   the  FASB  issued  SFAS  No.  157,  Fair  Value
Measurements.  SFAS No. 157 defines  fair  value,  establishes  a framework  for
measuring fair value in generally accepted  accounting  principles,  and expands
disclosures  about fair value  measurements.  This standard does not require any
new fair value  measurements,  but rather  eliminates  inconsistencies  found in
various  prior  pronouncements.  SFAS No. 157 is  effective  for the  Company on
January  1,  2008  and is not  expected  to  have a  significant  impact  on the
Company's financial statements.

         In September,  2006, the FASB ratified the  consensuses  reached by the
FASB's Emerging Issues Task Force ("EITF") relating to EITF 06-4, Accounting for
the Deferred  Compensation  and  Postretirement  Benefit  Aspects of Endorsement
Split-Dollar  Life  Insurance   Arrangements.   EITF  06-4  addresses   employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in  accordance  with SFAS No. 106,  Employers'
Accounting for Postretirement  Benefits Other Than Pensions,  or Opinion No. 12,
Omnibus  Opinion - 1967. EITF 06-4 is effective for fiscal years beginning after
December 15, 2006.  Entities should recognize the effects of applying this Issue
through either (a) a change in accounting  principle through a cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the  statement  of  financial  position  as of the  beginning  of the year of
adoption  or  (b)  a  change  in  accounting  principle  through   retrospective
application to all prior  periods.  The Company does not believe the adoption of
EITF 06-4 will have a  material  impact on its  financial  position,  results of
operations and cash flows.

         In September  2006,  the FASB  ratified the  consensus  reached on EITF
06-5, "Accounting for Purchases of Life  Insurance--Determining  the Amount That
Could  Be  Realized  in  Accordance  with  FASB  Technical  Bulletin  No.  85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). EITF 06-5 states that
a  policyholder   should  consider  any  additional   amounts  included  in  the
contractual terms of the insurance policy other than the cash surrender value in
determining the amount that could be realized under the insurance contract. EITF
06-5 also states that a policyholder  should  determine the amount that could be
realized  under  the  life  insurance  contract  assuming  the  surrender  of an
individual-life  by  individual-life  policy (or certificate by certificate in a
group  policy).  EITF 06-5 is effective for the Company on January 1, 2008.  The
Company does not believe the  adoption of EITF 06-5 will have a material  impact
on its financial position, results of operations or cash flows.

         In March 2007,  the FASB ratified the consensus  reached on EITF 06-10,
"Accounting for Collateral Assignment  Split-Dollar Life Insurance Arrangements"
("EITF 06-10"). The postretirement  aspect of this EITF is substantially similar
to EITF 06-4 discussed above and requires that an employer recognize a liability
for the postretirement  benefit related to a collateral assignment  split-dollar
life insurance  arrangement in accordance  with either FASB Statement No, 106 or
APB Opinion No. 12, as  appropriate,  if the  employer  has agreed to maintain a


                                       13
<PAGE>

life insurance  policy during the employee's  retirement or provide the employee
with a death benefit based on the  substantive  agreement with the employee.  In
addition,  a consensus was reached that an employer should recognize and measure
an  asset  based  on the  nature  and  substance  of the  collateral  assignment
split-dollar life insurance arrangement. EITF 06-10 is effective for the Company
on January 1, 2008. The Company does not believe the adoption of EITF 06-10 will
have a material impact on its financial position,  results of operations or cash
flows.

In  February  2007,  the FASB issued  SFAS No.  159,  The Fair Value  Option for
Financial  Assets and  Financial  Liabilities  - Including  an amendment of FASB
Statement No. 115. This  statement  permits,  but does not require,  entities to
measure many financial  instruments  at fair value.  The objective is to provide
entities with an opportunity to mitigate  volatility in reported earnings caused
by measuring related assets and liabilities  differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the  entity  first  recognizes  an  eligible  instrument  and  will  report
unrealized  gains and  losses on such  instruments  in  current  earnings.  This
statement (1) applies to all entities, (2) specifies certain election dates, (3)
can be applied on an instrument-by-instrument basis with some exceptions, (4) is
irrevocable, and (5) applies only to entire instruments. One exception is demand
deposit  liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS No. 115, available-for-sale and held-to-maturity securities
at the  effective  date are eligible for the fair value option at that date.  If
the fair value option is elected for those  securities  at the  effective  date,
cumulative  unrealized  gains and losses at that date shall be  included  in the
cumulative-effect  adjustment and thereafter,  such securities will be accounted
for as trading securities.  SFAS No. 159 is effective for the Company on January
1, 2008.  Earlier  adoption is  permitted  in 2007 if the Company also elects to
apply the  provisions  of SFAS No. 157, Fair Value  Measurement.  The Company is
currently analyzing the fair value option provided under SFAS No. 159.

         In November 2007, the Securities and Exchange Commission ("SEC") issued
Staff Accounting  Bulletin No. 109,  "Written Loan Commitments  Recorded at Fair
Value Through  Earnings" ("SAB 109").  SAB 109 expresses the current view of the
SEC staff that the  expected  net future  cash flows  related to the  associated
servicing of the loan should be included in the  measurement of all written loan
commitments  that  are  accounted  for  at  fair  value  through  earnings.  SEC
registrants  are  expected  to apply this  guidance  on a  prospective  basis to
derivative loan commitments  issued or modified in the first quarter of 2008 and
thereafter.  The Company is  currently  analyzing  the impact of this  guidance,
which relates to the Company's mortgage loans held for sale.

         In  December  2007,   the  FASB  issued  SFAS  No.  141(R),   "Business
Combinations,"  ("SFAS 14I(R)") which replaces SFAS 141. SFAS 141(R) establishes
principles  and  requirements  for how an  acquirer  in a  business  combination
recognizes  and measures in its financial  statements  the  identifiable  assets
acquired, the liabilities assumed, and any controlling interest;  recognizes and
measures goodwill acquired in the business  combination or a gain from a bargain
purchase;  and  determines  what  information to disclose to enable users of the
financial  statements  to  evaluate  the  nature  and  financial  effects of the
business  combination.  FAS 141(R) is effective for  acquisitions by the Company
taking  place on or  after  January  1,  2009.  Early  adoption  is  prohibited.
Accordingly,  a calendar  year-end  company is required  to record and  disclose
business  combinations  following existing  accounting guidance until January 1,
2009.  The  Company  will assess the impact of SFAS 141 (R) if and when a future
acquisition occurs.

In December  2007,  the FASB issued SFAS No. 160,  "Noncontrolling  Interests in
Consolidated  Financial  Statements - an amendment of ARB No. 51" ("SFAS  160").
SFAS  160   establishes   new  accounting   and  reporting   standards  for  the
noncontrolling  interest  in a  subsidiary  and  for  the  deconsolidation  of a
subsidiary.  Before this  statement,  limited  guidance  existed  for  reporting
noncontrolling interests (minority interest). As a result, diversity in practice


                                       14
<PAGE>

exists. In some cases minority interest is reported as a liability and in others
it is  reported  in  the  mezzanine  section  between  liabilities  and  equity.
Specifically,  SFAS 160 requires the  recognition of a  noncontrolling  interest
(minority  interest) as equity in the  consolidated  financials  statements  and
separate from the parent's equity. The amount of net income  attributable to the
noncontrolling  interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership
interest  in a  subsidiary  that do not  result in  deconsolidation  are  equity
transactions  if the parent  retains  its  controlling  financial  interest.  In
addition,  this statement  requires that a parent  recognize gain or loss in net
income when a subsidiary is  deconsolidated.  Such gain or loss will be measured
using  the  fair  value  of  the   noncontrolling   equity   investment  on  the
deconsolidation  date. SFAS 160 also includes expanded  disclosure  requirements
regarding the interests of the parent and its noncontrolling interests. SFAS 160
is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
The Company is currently evaluating the impact, if any, the adoption of SFAS 160
will have on its consolidated financial statements.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.

Earnings Performance

         The Company had net income from  operations for the year ended December
31, 2007, of $3.171 million, or $1.47 per share,  compared to net income for the
year ended December 31, 2006, of $4.581 million,  or $2.16 per common share. The
Company had net  interest  income (the  difference  between  interest  earned on
interest  earning assets and interest paid on interest  bearing  liabilities) of
$13.927  million for 2007, as compared to $14.651  million for 2006. The Company
also  had  other  operating  income  (principally  service  charges,   fees  and
commissions)  of $965 thousand in 2007 and $1.202  million in 2006.  The Company
provided  $1.126  million and $950  thousand to its allowance for loan losses in
2007  and  2006,  respectively,   and  had  other  ordinary  operating  expenses
(principally  salaries and benefits and  occupancy  and  equipment  expenses) of
$8.801 million in 2007, and $7.715 million in 2006.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans, investment securities, interest-bearing 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 Company'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, 2007,  net interest  income was $13.927
million.  During the year ended  December  31,  2006,  net  interest  income was
$14.651  million.  The  4.9%  decrease  in net  interest  income  in 2007 can be
primarily  attributed to the change in the economic environment between 2006 and
2007.  During 2006,  interest rates were rising and the Company's earning assets
were repricing more rapidly than interest-bearing liabilities.  During 2007 when
the average  prime rate  increased 94 basis points,  the repricing  frequency of
interest-bearing liabilities,  especially in the area of time deposits, exceeded
that of earning  assets.  The extent to which  earnings in 2007 were  negatively
impacted  by the change in the  economic  environment  between  2006 and 2007 is
shown in the following  table.  The average yield on earning assets increased in
2007  over  that of  2006 by 1 basis  point  (8.32%-8.31%),  while  the  cost of
interest-bearing  liabilities  between the two periods increased 49 basis points
(4.93% - 4.44%). In addition,  contributing to the negative effect of the change
in the  economic  environment  between the periods are changes in the  Company's
balance sheet.  The increase in average  earning assets of $17.373  million from
2006 exceeded the $15.665 million  increase in  interest-bearing  liabilities by
$1.7 million.  Although the growth in average earning assets  exceeded  interest
bearing  liabilities,  it was not sufficient to offset the pace of repricing for
average interest-bearing  liabilities.  The net effect of these combined changes
between 2006 and 2007 resulted in a 48 basis point  decrease  (3.39% - 3.87%) in
the  interest  spread  from  2006 to 2007.  Further,  the  competition  from new
community  banks  and new  branch  offices  of older  banks in the  Spartanburg,
Columbia,  and  Bluffton  areas of South  Carolina  has  increased  the interest
expense of  interest-bearing  liabilities  and  reduced the  interest  income of
loans.

         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, 2007
and 2006.



                                       15
<PAGE>


                       Average Balances, Yields, and Rates
                             (Amounts in Thousands)
                             Year Ended December 31,

<TABLE>
<CAPTION>
                                                                             2007                                  2006
                                                                             ----                                  ----
                                                                           Interest                              Interest
                                                             Average        Income/   Yields/        Average      Income/    Yields/
                                                            Balances(1)     Expense    Rates       Balances(1)    Expense     Rates
                                                            -----------     -------    -----       -----------    -------     -----
Assets
<S>                                                          <C>           <C>          <C>        <C>          <C>            <C>
Due From banks - Interest-bearing .........................  $   8,611     $     441    5.12%      $  12,320    $     606      4.92%
Investment securities (2) .................................     32,594         1,756    5.39%         34,064        1,607      4.72%
Loans (3) (4) .............................................    310,439        27,065    8.72%        287,887       25,571      8.88%
                                                             ---------     ---------               ---------    ---------
Total interest earning assets .............................    351,644        29,262    8.32%        334,271    $  27,784      8.31%
Cash and due from banks ...................................      4,424                                 5,282
Valuation reserve for investment securities ...............        (69)                                 (325)
Allowance for loan losses .................................     (3,432)                               (3,238)
Premises and equipment ....................................      6,420                                 5,381
Investment in Trust .......................................        155                                   155
Other assets ..............................................      5,909                                 5,396
                                                             ---------                             ---------
Total assets ..............................................  $ 365,051                             $ 346,922
                                                             =========                             =========

Liabilities and shareholders' equity
Interest bearing transaction accounts .....................  $  27,084           951    3.51%      $  31,047    $   1,096      3.53%
Savings ...................................................     64,210         2,886    4.49%         54,225        2,392      4.41%
Time deposits $100,000 and over ...........................     74,996         3,891    5.19%         67,998        3,108      4.57%
Other time deposits .......................................    123,263         6,494    5.27%        127,468        5,684      4.46%
                                                             ---------     ---------               ---------    ---------
Total interest bearing deposits ...........................  $ 289,553     $  14,222    4.91%      $ 280,738    $  12,280      4.37%
Retail repurchase agreements ..............................      2,077            75    3.61%          4,120          173      4.20%
Subordi nated debt ........................................      5,000           412    8.24%          5,000          402      8.04%
Other Borrowed Funds - Long Term ..........................     13,568           572    4.22%          4,178          190      4.55%
Other Borrowed Funds - Short Term .........................      1,000            54    5.40%          1,652           88      5.33%
                                                             ---------     ---------               ---------    ---------
Total interest bearing liabilities ........................  $ 311,198     $  15,335    4.93%      $ 295,688    $  13,133      4.44%
Noninterest-bearing demand deposits .......................     13,786                                14,857
Other liabilities .........................................      2,096                                 2,693
Shareholders' equity ......................................     37,971                                33,684
                                                             ---------                             ---------
Total liabilities and  shareholders' equity ...............  $ 365,051                             $ 346,922
                                                             =========                             =========

Interest rate spread (5) ..................................                             3.39%                                  3.87%
Net interest income and net yield on earning  assets (6)...                $  13,927    3.96%                   $  14,651      4.38%
                                                                           =========                            =========
Interest free funds supporting earning assets (7) .........  $  40,446                             $  38,583
</TABLE>
(1)  Average balances are computed on a daily basis.
(2)  Average investment securities include $123 Tax Exempt Securities
(3)  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.
(4)  Interest  income on loans  for 2007 and 2006  included  total  loan fees of
     $1,016 and $1,073 respectively.
(5)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(6)  Net interest income divided by total interest  earning assets (net interest
     margin).
(7)  Total interest earning assets less total interest bearing liabilities.


                                       16
<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.


<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                              2007 compared to 2006
                                                                                            Increase (Decrease) Due to
                                                                                             (Amounts in thousands)

                                                                               Volume                  Rate                  Total
                                                                               ------                  ----                  -----
Interest earned on:
<S>                                                                           <C>                    <C>                    <C>
  Due from banks-interest-bearing .............................               $  (182)               $    17                $  (165)
  Investments .................................................                   (69)                   218                    149
  Net Loans ...................................................                 2,003                   (509)                 1,494
                                                                              -------                -------                -------

Total Interest Income .........................................               $ 1,752                $  (274)               $ 1,478
                                                                              -------                -------                -------

Interest paid on
  Interest Checking ...........................................               $  (140)               $    (5)               $  (145)
  Savings Deposits ............................................                   440                     54                    494
  Time Deposits $100,000 and over .............................                   320                    463                    783
  Other time deposits .........................................                  (188)                   998                    810
  Retail Repurchase Agreements ................................                   (86)                   (12)                   (98)
  Subordinated debt ...........................................                     -                     10                     10
  Other Borrowed Funds ........................................                   392                    (44)                   348
                                                                              -------                -------                -------

Total Interest Expense ........................................               $   738                $ 1,464                $ 2,202
                                                                              -------                -------                -------
 Change in Net Interest Income .................................              $ 1,014                $(1,738)               $  (724)
                                                                              =======                =======                =======
</TABLE>

         During  the year 2008  management  expects  that  interest  rates  will
decrease for the first half of the year with rates  remaining  fairly  stable in
the second half.  If interest rate  projections  are  accurate,  little,  if any
improvement in net interest income is expected in 2008.

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  liabilities exceed rate
sensitive assets,  resulting in a liability  sensitive  position at December 31,
2007 of $22.330  million  for a  cumulative  gap ratio of 92.6%.  When  interest


                                       17
<PAGE>

sensitive assets exceed interest sensitive  liabilities for a specific repricing
"horizon" a positive interest  sensitivity gap results. The gap is negative when
interest sensitive liabilities exceed interest sensitive assets, as was the case
at December 31, 2007, with respect to the one year time horizon. For a bank with
a negative gap, such as the Bank,  falling  interest  rates would be expected to
have a positive effect on net interest income and rising 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'
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.


                                       18
<PAGE>



                          Interest Sensitivity Analysis
                   Repricing Schedule as of December 31, 2007
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                             Within     After 3 Months    After One Year        After
Interest Earning Assets                                     3 Months     to 12 Months     to Five Years      Five Years       Total
                                                            --------     ------------     -------------      ----------       -----

<S>                                                       <C>             <C>              <C>             <C>             <C>
Investment securities (Amortized Cost) .............      $       -       $   1,000        $   2,998       $  23,805       $  27,803
FHLB Stock .........................................          2,121               -                -               -           2,121
Loans*
  Fixed rate .......................................          6,999           8,277           50,994           3,599          69,869
  Variable rate ....................................        261,260               -                -               -         261,260
                                                          ---------       ---------        ---------       ---------       ---------


Total interest earning assets ......................      $ 270,380       $   9,277        $  53,992       $  27,404       $ 361,053
                                                          =========       =========        =========       =========       =========


Interest Bearing Liabilities
  Interest bearing deposits
    Interest bearing transaction accounts ..........      $  24,489       $       -        $       -       $       -       $  24,489
    Savings ........................................         65,269               -                -               -          65,269
    Time deposits $100,000 and over ................         26,417          42,949            2,655               -          72,021
    Other time deposits ............................         43,207          72,628            5,983               -         121,818
                                                          ---------       ---------        ---------       ---------       ---------
      Total interest bearing deposits ..............      $ 159,382       $ 115,577        $   8,638       $       -       $ 283,597
    Retail repurchase agreements ...................          3,849               -                -               -           3,849
    Subordinated debt ..............................          5,000               -                -               -           5,000
    FHLB Fixed Rate Advances .......................          5,000          10,000           15,000               -          30,000
    Other borrowed funds ...........................          3,179               -                -               -           3,179
                                                          ---------       ---------        ---------       ---------       ---------
                                                                                                                           .........
Total interest bearing liabilities .................      $ 176,410       $ 125,577        $  23,638       $       -       $ 325,625
                                                          =========       =========        =========       =========       =========


Interest Sensitivity Gap ...........................      $  93,970       $(116,300)       $  30,354       $  27,404       $  35,428
Cumulative interest sensitivity gap ................      $  93,970       $ (22,330)       $   8,024       $  35,428
Gap ratio ..........................................         153.27%           7.39%          228.41%           0.00%
Cumulative gap ratio ...............................         153.27%          92.61%          102.46%         110.88%
</TABLE>

* excludes loans in non-accrual status totaling $1,515 and deferred loan fees of
$511

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
$1.126  million  and $950  thousand  to the  allowance  during  the years  ended
December 31, 2007 and 2006, respectively.  The increase of $176 thousand in 2007
was due to loan growth,  primarily the result of  establishing  a new branch and
adding new loan officers in existing branches. Total loans grew by $36.2 million
in 2007 and $28.4 million in 2006.

                                       19
<PAGE>

Noninterest Income

         Noninterest  income,  which consists primarily of mortgage banking loan
fees,  loan  brokerage  fees,  service  charges on deposit  accounts,  and other
commissions  and fees income,  decreased  by $237  thousand,  or 19.7%,  to $965
thousand in 2007 from $1.202 million in 2006. The overall decrease resulted from
a decrease in loan brokerage services and a decrease in service charges fees and
commissions offset by an increase other income. Service charges, commissions and
fees income decreased by $167 thousand,  or 22.6%, loan brokerage fees decreased
by $283 thousand,  or 100%.  The Bank  discontinued  activities  related to loan
brokerage in 2007. These decreases were offset by an increase in other income of
$240 thousand which was primarily composed of a $209 increase in gain on sale of
bank owned assets from 2006 to 2007.


Noninterest Expenses

         Noninterest  expenses,  also  commonly  referred to as other  operating
expenses,  increased  $1.086  million,  or 14.1%.  With  several  categories  of
noninterest  expense  experiencing  either a decline or minimal increase in 2007
compared to 2006,  most of the  increase can be  attributed  to increases in the
categories of salaries and benefits,  occupancy  expense,  and other noninterest
expenses.  Salaries and benefits increased to $5.462 million in 2007 from $4.771
million in 2006, a $691 thousand, or 14.5%, increase. Annual salary increases in
2007 for  employees,  the addition of five new  employees  in 2007,  and a 13.5%
overall  increase in benefits expense in 2007 accounted for the increase in 2007
personnel expense.  The $76 thousand,  or 8.0%, increase in occupancy expense in
2007 compared to that of 2006,  increased to $1.023  million from $947 thousand.
The increase can be primarily attributed to a $26 thousand,  or 12.3%,  increase
in lease  expense  resulting  mainly  from  opening a new branch in 2007,  a $15
thousand,  or 8.2%, increase in depreciation  expense, a $12 thousand,  or 3.7%,
increase  in  premises  and  equipment  maintenance  costs,  and an  increase in
utilities of $16 thousand,  or 33.3%.  Other noninterest  expenses  increased to
$1.955 million in 2007 from $1.626  million in 2006, a $329 thousand,  or 20.2%,
increase.  Loss on sale of bank assets increased $183 thousand,  or 174.4%, FDIC
assessment  increased $119 thousand,  or 270.5%,  and internet  banking  expense
increased $95 thousand,  or $342%.  These increases were offset by a decrease in
advertising  expense of $45 thousand,  or 72.5%, and other loan related expenses
of $27, or 10.8%.

Income Taxes

         During the year ended  December 31, 2007, the Company  recorded  $1.794
million for  current  income  taxes.  The Company  recorded  $2.713  million for
current  income taxes during 2006.  The Company  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.  The  income  tax rate in 2007  amounted  to 34.1% of  pretax  income,
compared to 37.7% in 2006.

Investment Portfolio

         As of December 31,  2007,  the book value of the  Company's  investment
portfolio comprised  approximately 8.0% of its total assets. The following table
summarizes  the  carrying  value  amounts of  securities  held by the Company at
December 31, 2007 and 2006.


                                       20
<PAGE>

Securities Portfolio Composition


<TABLE>
<CAPTION>
(Amounts in thousands)                                       December 31, 2007                         December 31, 2006
                                                             -----------------                         -----------------
                                                               Net Unrealized                            Net Unrealized
                                                    Amortized     Holding        Fair           Book        Holding           Fair
                                                       Cost     Gain/(Loss)      Value          Value      Gain/(Loss)       Value
                                                       ----     -----------      -----          -----      -----------       -----
Available for sale:
<S>                                                <C>           <C>            <C>           <C>            <C>            <C>
U. S. government agency obligations .........      $  4,000      $     98       $  4,098      $  4,000       $     (8)      $  3,992
Government sponsored enterprises ............        17,498           209         17,707        17,993           (143)        17,850
State and local obligations .................           123             3            126           123              5            128
Mortgage-backed securities ..................           437            (1)           436           597            (14)           583
Restricted FHLB Stock .......................         2,121             -          2,121           741              -            741
                                                   --------      --------       --------      --------       --------       --------
                                                   $ 24,179      $    309       $ 24,488      $ 23,454       $   (160)      $ 23,294
                                                   ========      ========       ========      ========       ========       ========
Held for investment:
U.S. government Agency obligations ..........      $  2,000      $     34       $  2,034      $  2,000       $      3       $  2,003
Government sponsored enterprises ............         2,999            45          3,044         6,998             14          7,012
Trust Preferred securities ..................           484           143            627           482            150            632
Mortgage-backed securities ..................           262             4            266           421              3            425
                                                   --------      --------       --------      --------       --------       --------
                                                   $  5,745      $    226       $  5,971      $  9,901       $    170       $ 10,072
                                                   ========      ========       ========      ========       ========       ========
</TABLE>

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

         The following table presents scheduled maturities of debt securities at
December 31, 2007.  Available-for-sale  securities  are stated at estimated fair
value and held-for-investment securities are stated at amortized cost.




                                       21
<PAGE>

Securities Portfolio Maturities


                     Analysis of Investment Securities
                             December 31, 2007
                           (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                       Available-for-Sale                  Held-for-Investment
                                                                       ------------------                  -------------------
                                                                 Amortized            Estimated         Amortized         Estimated
                                                                    Cost              Fair Value           Cost           Fair Value
                                                                    ----              ----------           ----           ----------
U.S. Government Agency Oligations
<S>                                                               <C>                 <C>                <C>                <C>
    Due in one year or less ...........................           $  1,000            $  1,001           $    -             $    -
    Due from one to five years ........................              2,998               3,001                -                  -
    Due from five to ten years ........................              6,500               6,693            4,999              5,077
    Due after ten years ...............................             11,000              11,111                -                  -

State and local obligations (1)
    Due after ten years ...............................                123                 126                -                  -

Trust Preferred securities
    Due after ten years ...............................                  -                   -              484                627

Mortgage Backed securities
    Due after ten years ...............................                437                 436              262                266

Equity Securities .....................................              2,121               2,121                -                  -

Total (2) (3)

    Due in one year or less ...........................           $  1,000            $  1,001           $    -             $    -
    Due from one to five years ........................              2,998               3,001                -                  -
    Due from five to ten years ........................              6,500               6,693            4,999              5,077
    Due after ten years ...............................             11,560              11,673              746                893
</TABLE>
(1)  Not adjusted for tax equivalency
(2)  Excludes equity securities
(3)  Weighted average yields on debt securities scheduled to mature in less than
     one year,  one to five  years,  five to ten years,  and after ten years are
     4.27%,  4.31%,  5.80% and 6.18%,  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 four  maturity  ranges are
     disclosed for  information  purposes only as of December 31, 2007,  and are
     likely to change.




                                       22
<PAGE>

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, 2007 and 2006 are shown
in the following table according to type of loan.


Loan Portfolio Composition


                                                               December 31,
                                                               ------------
                                                          (Amounts in thousands)
                                                          2007            2006
                                                          ----            ----

Commercial, financial and agricultural ...........     $  55,013      $  50,556
Real estate - construction .......................        48,714         29,634
Real estate - mortgage ...........................       228,261        216,395
Consumer .........................................         1,167            395
                                                       ---------      ---------

    Total loans ..................................       333,155        296,980

Less deferred fees ...............................          (511)          (515)
Less allowance for loan losses ...................        (3,700)        (3,275)
                                                       ---------      ---------

Total Loans, net of allowance for loan losses ....     $ 328,944      $ 293,190
                                                       =========      =========

         At December 31, 2007,  $48.688  million of  commercial,  financial  and
agricultural  loans were due in one year or less,  $5.863 million were due after
one year through five years,  and $462  thousand  were due after five years.  At
December 31, 2007,  $42.145 million of real estate - construction loans were due
in one year or less,  and $6.569  million  were due after one year  through five
years. The total amount of all such loans due after one year with  predetermined
interest  rates was $69.869  million and with  floating or  adjustable  interest
rates was $263.286 million.

         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.

                                       23
<PAGE>

         Loans  secured by real estate  mortgages  comprised  about 68.5% of the
Bank's loan  portfolio  at December  31,  2007.  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 collectability,  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  collectability  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, 2007,  the Company had nine loans  totaling
$1.515 million on non-accrual  status.  Net income for 2007 includes no interest
income on these  loans.  Had these loans been current in  accordance  with their
original  terms,  $259  thousand of additional  interest  income would have been
recorded in 2007.  At December  31, 2006,  the Company had eight loans  totaling
$1.757 million on non-accrual status.

         The following table presents  information on  non-performing  loans and
real estate acquired in settlement of loans:


                                                                December 31,
                                                                ------------
                                                          (Amounts in thousands)
Non-performing Assets                                         2007         2006
                                                              ----         ----

Non-performing loans:
  Non-accrual loans ..................................      $1,515       $1,757
  Past due 90 days or more ...........................           6           97
                                                            ------       ------
Total non-performing loans ...........................      $1,521       $1,854

Real estate acquired in settlement of loans ..........         709          965
                                                            ------       ------
Total non-performing assets ..........................      $2,230       $2,819
                                                            ======       ======
Non-performing assets as a
  Percentage of loans and
  other real estate ..................................        0.67%        0.95%

Allowance for loan losses as
  a percentage of non-performing loans ...............      243.26%      176.64%

                                       24
<PAGE>

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, 2007 the total  amount of loans  determined  by  management  to be
potential problem loans was $1.367 million.  This amount consisted of loans made
to seven borrowers.

Real Estate Owned

         During the year ending December 31, 2006, the net affect of foreclosure
on real estate collateral  totaled $445 thousand  resulting in an ending balance
for other real estate owned for December 31, 2006, of $965 thousand,  and during
the year ending  December 31, 2007, the net affect of foreclosure on real estate
collateral  totaled a decrease of $256 thousand  resulting in an ending  balance
for other real estate owned for December 31, 2007, of $709 thousand.

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.

         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 Company,  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, 2007.

         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


                                       25
<PAGE>

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 the  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 Company'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,  2007,  as well as those
performed  throughout the 2007 year, did not identify an off-balance  sheet risk
upon which a reserve should be established.


<TABLE>
<CAPTION>
                                                                                                    Summary of Loan Loss Experience
                                                                                                          (Amounts in thousands)
                                                                                                          Year Ended December 31,
                                                                                                          -----------------------
                                                                                                         2007                 2006
                                                                                                         ----                 ----

<S>                                                                                                    <C>                 <C>
Total loans outstanding at end of period ...................................................           $333,155            $296,980
Average amount of loans outstanding ........................................................            310,439             287,887

Balance of allowance for loan losses - beginning ...........................................              3,275               3,000
                                                                                                       --------            --------
Loans charged off:

Commercial & industrial ....................................................................                712                 265
Real estate-mortgage .......................................................................                  3                 513
Other ......................................................................................                 25                   -
                                                                                                       --------            --------
Total charge-offs ..........................................................................                740                 778

Recoveries of loans previously charged-off:

Commercial & industrial ....................................................................                 22                  88
Real estate-mortgage .......................................................................                 17                  15
                                                                                                       --------            --------
Total recoveries ...........................................................................                 39                 103

Net charge-offs ............................................................................                701                 675

Additions to allowance charged to expense ..................................................              1,126                 950
                                                                                                       --------            --------

Balance of allowance for loan losses - ending ..............................................           $  3,700            $  3,275
                                                                                                       --------            --------

Ratios
                                                                                                           2007                2006
                                                                                                       --------            --------
Net charge-offs during period to average loans outstanding during period ...................               0.23%               0.23%
Net charge-offs to loans at end of period ..................................................               0.21%               0.23%
Allowance for loan losses to average loans .................................................               1.19%               1.14%
Allowance for loan losses to loans at end of period ........................................               1.11%               1.10%
Nonperforming loans to allowance for loan losses at end of period ..........................              41.11%              56.61%
Net charge-offs to allowance for loan losses ...............................................              18.95%              20.61%
Net charge-offs to provision for loan losses ...............................................              62.26%              71.05%
</TABLE>

         The following  table  presents the allocation of the allowance for loan
losses at the end of the years ended  December 31, 2007 and 2006  compared  with
the percent of loans in the applicable categories to total loans.

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                            Allocation of Allowance for Loan Losses
                                                                                   Year Ended December 31,
                                                                                   (Amounts in thousands)
                                                                           2007                                  2006
                                                                           ----                                  ----
                                                               Amount             % of Loans         Amount           % of Loans
                                                               ------             ----------         ------           ----------
<S>                                                           <C>                    <C>             <C>                 <C>
Commercial and industrial ............................        $1,188                 32.11%          $1,081              33.01%
Real estate - construction ...........................           435                 11.76%             361              11.02%
Real estate - mortgage ...............................         2,053                 55.49%           1,813              55.36%
Consumer installment .................................            24                  0.65%              20               0.61%
                                                              ------                ------           ------             ------
Total ................................................        $3,700                100.00%          $3,275             100.00%
                                                              ======                ======           ======             ======
</TABLE>

Deposits

         The average  amounts and average rate paid on deposits held by the Bank
for the years ended December 31, 2007 and 2006 are summarized below:


<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                       ------------
                                                                            2007                           2006
                                                                            ----                           ----
                                                                  Amount            Rate         Amount            Rate
                                                                  ------            ----         ------            ----
                                                                                    (Amounts in thousands)

<S>                                                             <C>                <C>         <C>                 <C>
Noninterest bearing demand ...........................          $ 13,786                       $ 14,857
Interest bearing transaction accounts ................            27,084           3.51%         31,047            3.53%
Savings ..............................................            64,210           4.49%         54,225            4.41%
Time deposits - $100,000 and over ....................            74,996           5.19%         67,998            4.57%
Other time deposits ..................................           123,263           5.27%        127,468            4.46%
                                                                --------           ----        -------             ----

Total interest bearing deposits ......................          $289,553           4.91%       $280,738            4.37%
                                                                ========           ====        ========            ====
</TABLE>

         As of December 31, 2007, the Company held approximately $72.021 million
in time deposits in amounts of $100 thousand or more, with approximately $26.417
million with  maturities  within three months,  $42.949  million with maturities
over three through twelve months, and $2.655 million with maturities over twelve
months.  Wholesale time deposits generated through  corporations,  banks, credit
unions,  etc., on a national level totaled  approximately  $14.862 million as of
December 31, 2007. 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.


Borrowed Funds

         Major sources of borrowed funds in 2007 and 2006,  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, 2007 and 2006, the Company had $3.849
million and $2.171 million in retail repurchase  agreements,  respectively.  The
weighted average interest rates for retail repurchase agreements  outstanding at


                                       27
<PAGE>

December  31,  2007 and 2006  were  2.78%  and  4.36%,  respectively,  and those
repurchase agreements all had next day maturities.  The maximum amount of retail
repurchase  agreements  at the end of any month was  $4.726  million in 2007 and
$5.612 million in 2006.  The  approximate  average amount of outstanding  retail
repurchase  agreements was $2.077 million in 2007 and $4.120 million in 2006 and
approximate weighted interest rates were 3.61% in 2007 and 4.21% in 2006.

         The Company had $33 million in  outstanding  Federal  Home Loan Bank of
Atlanta advances at December 31, 2007, as compared to no outstanding advances on
December 31, 2006.  The average  loan  advance  outstanding  amount for 2007 was
comprised of one $7.425 million one year convertible  advance at rate of 4.115%,
one $3.712  million  one year  convertible  at a rate of 4.06%,  one $15 million
fixed rate advance at a rate of 4.41875%, and various daily rate credit advances
of various amounts outstanding for short periods of time throughout 2007 with an
ending amount  outstanding  of $3 million and with interest rates which averaged
5.40%.  By  comparison,  the  approximate  annual  average amount of outstanding
Federal Home Loan Bank advances in 2006  averaged  $5.641  million.  The average
loan advance  outstanding  amount for 2006 was comprised of one $5 million fixed
rate  advance at a rate of 4.46% called on May 15,  2006,  one $5 million  fixed
rate advance at a rate of 4.62%  called on June 21,  2006,  and three daily rate
credit  advances of various  amounts  outstanding for short periods of time with
interest rates which averaged 4.44%.

         In 2004 the Company  issued  subordinated  debt in the amount of $5.155
million to FSBS Capital Trust I. The subordinated debt matures in 2034 and has a
variable  interest  rate.  The  average  amount  outstanding  in 2007 was $5.155
million  and had an  approximate  weighted  average  rate of 7.99%.  In 2006 the
average  amount  outstanding  was $5.155  million and the  approximate  weighted
average  interest  rate was  8.04%  (see  Note 9 to the  Consolidated  Financial
Statements).

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,
                                                         -----------------------
                                                          2007            2006
                                                          ----            ----

Return on average assets ...........................       0.87%         1.32%
Return on average equity ...........................       8.35%        13.60%
Dividend payout ratio ..............................       0.00%         0.00%
Average equity to average assets ratio .............      10.40%         9.71%


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 58.9% of total assets at December 31, 2007. Asset liquidity is provided
from several sources,  including amounts due from banks, and funds from maturing
investments  and loans.  The Bank is a member of the FHLB and, as such,  has the
ability to borrow  against the security of its First  Mortgage  Residential  and


                                       28
<PAGE>

Commercial loans. At December 31, 2007, the Company had $33 million  outstanding
advances  drawn on its $36.293  million  available  credit from the Federal Home
Loan Bank. The Company also has  additional  lines of credit with other banks in
the form of federal funds lines in the amount of $12 million. The Bank has never
drawn  on any of  these  federal  funds  lines.  Management  believes  that  the
Company's  overall liquidity sources are adequate to meet its operating needs in
the ordinary course of its business.

Capital Resources

         The equity capital of the Company  increased $3.540 million during 2007
and by $5.083  million in 2006. The increase in 2007 resulted from net income of
$3.171 million, an increase in other comprehensive income of $292 thousand,  and
additional  paid-in  capital of $77 thousand from the exercise of stock options.
The increase in 2006 resulted from an increase in net income of $4.581  million,
an  increase  in other  comprehensive  income of $75  thousand,  and  additional
paid-in capital of $427 thousand from the exercise of stock options.

         Both 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  decline  in the  capital  position  of a bank  below  certain  levels.
Increasingly stringent regulatory corrective actions are mandated.

         At  December  31,  2007,  both the  Company and the Bank met all of the
minimum capital adequacy  standards and the Bank met the requirements to be well
capitalized  under the prompt correction action provision of the Federal Deposit
Insurance Act.  Capital  ratios are presented in the table below,  compared with
the minimum  ratios and amounts  necessary to be "well  capitalized"  under FDIC
regulatory definitions and guidelines.



<TABLE>
<CAPTION>
(Amounts in thousands)                                                                                      To Be Well
                                                                                                          Capitalized Under
                                                                                    For Capital           Prompt Corrective
The Bank                                                                        Adequacy Purposes         Action Provisions
As of December 31, 2007                                   Actual                      Minimum                    Minimum
                                                          ------                      -------                    -------
                                                  Amount          Ratio       Amount          Ratio       Amount           Ratio
                                                  ------          -----       ------          -----       ------           -----

Total Capital
<S>                                              <C>              <C>         <C>             <C>        <C>             <C>
(To Risk Weighted Assets) ..............         $46,152          13.72%      $26,907         8.00%      $33,633         10.00%
Tier 1 Capital
(To Risk Weighted Assets) ..............         $37,552          11.17%      $13,453         4.00%      $20,180          6.00%
Tier 1 Capital
(To Average Assets) ....................         $37,552           9.92%      $15,142         4.00%      $18,927          5.00%
</TABLE>

<TABLE>
<CAPTION>
The Holding Company
As of December 31, 2007                                   Actual                      Minimum
                                                          ------                      -------
                                                  Amount          Ratio       Amount          Ratio
Total Capital                                     ------          -----       ------          -----
<S>                                              <C>               <C>        <C>             <C>
(To Risk Weighted Assets) ..............         $47,946           14.25%     $26,922         8.00%
Tier 1 Capital
(To Risk Weighted Assets) ..............         $44,246           13.15%     $13,461         4.00%
Tier 1 Capital
(To Average Assets) ....................         $44,246           11.68%     $15,149         4.00%
</TABLE>

                                       29

<PAGE>

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.

Off-Balance Sheet Arrangements and Contractual Obligations

         The Company has certain ongoing commitments under operating leases. See
Note 12 to the  consolidated  financial  statements at Item 7 of this report for
terms.  These commitments do not  significantly  impact operating  results.  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, 2007,  the Bank had issued  commitments  to extend  credit of $66.1  million
through various types of lending arrangements.  Of these commitments, 68.1 %, or
$45.1 million,  expire within one year, and 31.9%,  or $21.0 million,  expire in
more than one year. 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 on the credit  evaluation of the
borrower.  Collateral  varies, but may include accounts  receivable,  inventory,
property, plant and equipment, commercial and residential real estate.

         The following chart summarizes certain  contractual  obligations of the
Company as of December 31, 2007:


<TABLE>
<CAPTION>
(Amounts in thousands)                                   Less than 1 year  1-3 years       3-5 years    More than 5 years     Total
                                                         ----------------  ---------       ---------    -----------------     -----
<S>                                                          <C>             <C>             <C>             <C>             <C>
Subordinated debentures ............................         $     -         $     -         $     -         $ 5,155         $ 5,155
Operating lease obligations ........................             172             210              78              16             476
Deferred compensation ..............................               -               -               -             333             333
Treasury, Tax, and Loan ............................             179               -               -               -             179
FHLB advances ......................................           3,000          15,000               -          15,000          33,000
                                                             -------         -------         -------         -------         -------
Total contractual obligations ......................           3,351          15,210              78          20,504          39,143
                                                             =======         =======         =======         =======         =======
</TABLE>


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

         Not required for smaller reporting companies.



                                       30
<PAGE>








Item 8.  Financial Statements and Supplementary Data





                     FIRST SOUTH BANCORP INC. AND SUBSIDIARY

                   REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED
                           DECEMBER 31, 2007 AND 2006






                                       31
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS



                                TABLE OF CONTENTS

                                                                       Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                   33

FINANCIAL STATEMENTS
   Consolidated balance sheets                                            34
   Consolidated statements of income                                      35
   Consolidated statements of changes in stockholders' equity             36
   Consolidated statements of cash flows                                  37

NOTES TO FINANCIAL STATEMENTS                                        38 - 60






                                       32
<PAGE>




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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

We have  audited the  accompanying  consolidated  balance  sheets of First South
Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2007 and 2006, and
the related  consolidated  statements of income,  stockholders'  equity and cash
flows for each of the years in the two year  period  ended  December  31,  2007.
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  standards  of the Public  Company
Accounting Oversight Board (United States). 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,  2007 and 2006 and the results of their
operations  and their  cash  flows for each of the years in the two year  period
ended  December 31, 2007, in conformity  with  accounting  principles  generally
accepted in the United States of America.



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




Charlotte, North Carolina
March 26, 2008









                                       33
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                   (Amounts, except share data, in thousands)


<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                      2007                   2006
                                                                                                      ----                   ----
Assets:
<S>                                                                                                 <C>                   <C>
    Cash and due from banks ...........................................................             $   2,373             $   4,994
    Interest-bearing deposits .........................................................                   540                10,688
    Securities available-for-sale .....................................................                24,489                23,293
    Securities held-for-investment ....................................................                 5,745                 9,902
    Loans, net ........................................................................               328,944               293,190
    Premises and equipment, net .......................................................                 7,012                 5,290
    Investment in FSBS Capital Trust I ................................................                   155                   155
    Bank owned life insurance .........................................................                 5,123                 1,090
    Other assets ......................................................................                 4,494                 4,821
                                                                                                    ---------             ---------
               Total assets ...........................................................             $ 378,875             $ 353,423
                                                                                                    =========             =========
Liabilities and Stockholders' Equity

Liabilities
    Noninterest-bearing demand ........................................................             $  11,514             $  16,038
    Interest bearing demand and savings ...............................................                89,758                90,868
    Time deposits .....................................................................               193,839               201,151
                                                                                                    ---------             ---------
              Total deposits ..........................................................               295,111               308,057

Retail repurchase agreements ..........................................................                 3,849                 2,171
Other borrowed funds ..................................................................                33,179                   287
Subordinated debt .....................................................................                 5,155                 5,155
Other accrued expenses and liabilities ................................................                 2,086                 1,798
                                                                                                    ---------             ---------
               Total liabilities ......................................................               339,380               317,468

Commitments and contingencies
Stockholders' equity
   Common stock, no par value;  30,000,000 shares authorized
      2,161,218 and 2,155,538 issued and outstanding at
      December 31, 2007 and 2006, respectively ........................................                     -                     -
Paid-in capital .......................................................................                19,926                19,849
Retained earnings .....................................................................                19,377                16,206
Accumulated other comprehensive income (loss) .........................................                   192                  (100)
                                                                                                    ---------             ---------
            Total stockholders' equity ................................................                39,495                35,955
                                                                                                    ---------             ---------
            Total liabilities and stockholders' equity ................................             $ 378,875             $ 353,423
                                                                                                    =========             =========
</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       34
<PAGE>



                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                 (Amounts, except per share data, in thousands)

<TABLE>
<CAPTION>
                                                                                                    For the years ended December 31,
                                                                                                    --------------------------------
                                                                                                       2007                   2006
                                                                                                       ----                   ----
Interest income
<S>                                                                                                   <C>                    <C>
   Loans .............................................................................                $27,065                $25,571
   Securities
      U. S. Government and agency obligations ........................................                  1,581                  1,447
      State and local obligations ....................................................                      6                      6
      Mortgage backed securities .....................................................                     41                     51
      Other securities ...............................................................                    128                    103
   Deposits with banks ...............................................................                    441                    606
                                                                                                      -------                -------
          Total interest income ......................................................                 29,262                 27,784
                                                                                                      -------                -------
Interest expense
   Deposits
     Time ............................................................................                 10,384                  8,792
     Interest-bearing demand and savings .............................................                  3,838                  3,487
Borrowed funds .......................................................................                    617                    270
Other ................................................................................                    496                    584
                                                                                                      -------                -------
         Total interest expense ......................................................                 15,335                 13,133
                                                                                                      -------                -------
         Net interest income .........................................................                 13,927                 14,651

Provision for loan losses ............................................................                  1,126                    950
                                                                                                      -------                -------
             Net interest income after provision for
                  loan losses ........................................................                 12,801                 13,701
                                                                                                      -------                -------
Noninterest income
     Service charges, fees, and commissions ..........................................                    572                    739
     Gain on sale of investments .....................................................                     12                      -
     Loan brokerage fees .............................................................                      -                    283
     Mortgage banking loan fees ......................................................                     25                     52
     Other income ....................................................................                    356                    128
                                                                                                      -------                -------
            Total noninterest income .................................................                    965                  1,202
                                                                                                      -------                -------
Noninterest expenses
Salaries and employee benefits .......................................................                  5,462                  4,771
Occupancy and equipment ..............................................................                  1,023                    947
Legal expenses .......................................................................                     51                     37
Data processing ......................................................................                    214                    232
Other outside services ...............................................................                     96                    102
Other ................................................................................                  1,955                  1,626
                                                                                                      -------                -------
Total other operating expenses .......................................................                  8,801                  7,715
Income before income taxes ...........................................................                  4,965                  7,188
Income tax expense ...................................................................                  1,794                  2,607
                                                                                                      -------                -------
              Net income .............................................................                $ 3,171                $ 4,581
                                                                                                      =======                =======
Earnings per common share ............................................................                $  1.47                $  2.16
                                                                                                      =======                =======
Diluted earnings per common share ....................................................                $  1.45                $  2.11
                                                                                                      =======                =======
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       35
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 For the years ended December 31, 2007 and 2006
                 (Amounts, except per share data, in thousands)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                             Common Stock                                   other          Total
                                                               in number       Paid-in       Retained    comprehensive Stockholders'
                                                               of Shares       Capital       Earnings    income (loss)    equity
                                                               ---------       -------       --------    -------------    ------

<S>                                                               <C>          <C>            <C>            <C>          <C>
Balance at January 1, 2006 .............................          2,101         19,422         11,625           (175)      30,872

Exercised stock options ................................             55            427                                        427

Comprehensive income:
  Net Income ...........................................                                        4,581                       4,581

  Net change in
   unrealized gain on
   available for sale
   securities, net of taxes of $46 .....................                                                          75           75
                                                                                                                          -------

Comprehensive income ...................................                                                                    4,656
                                                                -------        -------        -------        -------      -------

Balance December 31, 2006 ..............................          2,156         19,849         16,206           (100)      35,955

Exercised Stock Options ................................              6             77                                         77

Comprehensive income:
  Net Income ...........................................                                        3,171                       3,171

  Net change in
   unrealized gain on
   available for sale
   securities, net of taxes of $179 ....................                                                         292          292
                                                                                                                          -------

Comprehensive Income ...................................                                                                    3,463
                                                                -------        -------        -------        -------      -------

Balance at December 31, 2007 ...........................          2,162        $19,926        $19,377        $   192      $39,495
                                                                =======        =======        =======        =======      =======
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       36
<PAGE>


             FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (Amount in thousands)

<TABLE>
<CAPTION>
                                                                                                    For the years ended December 31,
                                                                                                    --------------------------------
                                                                                                         2007                 2006
                                                                                                         ----                 ----
 OPERATING ACTIVITIES
<S>                                                                                                   <C>                  <C>
   Net income ............................................................................            $  3,171             $  4,581
   Adjustments to reconcile net income to net cash
        provided by operating activities
          Depreciation ...................................................................                 443                  419
          Provision for loan losses ......................................................               1,126                  950
          Write downs on other real estate owned .........................................                 135                   75
          Loss on sale of other real estate owned ........................................                   -                   57
          Net amortization of securities .................................................                  (6)                   -
          Gain on sale of bank owned assets ..............................................                  (3)                   -
          Gain on sale of investments ....................................................                 (12)                   -
          Increase in cash surrender value of life insurance .............................                 (34)                 (32)
          Deferred tax provision .........................................................                (233)                (106)
          Decrease (increase) in interest receivable .....................................                 187                 (405)
          Decrease (increase) in other assets ............................................                (263)                 125
          Increase (decrease) in accrued expenses
            and other liabilities ........................................................                 402                 (145)
                                                                                                      --------             --------
              Net cash provided by operating activities ..................................               4,913                5,519
                                                                                                      --------             --------
INVESTING ACTIVITIES
     Origination of loans, net of principal collected ....................................             (38,628)             (30,474)
     Proceeds from matured/called securities available-for-sale ..........................               9,500                9,528
     Proceeds from matured/called securities held-for-investment .........................               4,000                    -
     Proceeds from sale of securities available-for-sale .................................               6,012                    -
     Purchase of securities available-for-sale ...........................................             (16,380)              (9,500)
     Purchase of securities held-for-investment ..........................................                   -               (2,998)
     Proceeds from MBS principal paydowns ................................................                 319                  527
     Deposit for purchase of bank owned life insurance ...................................              (4,000)                   -
     Proceeds from sale of other real estate owned .......................................               1,956                  790
     Proceeds from disposal of premises and equipment ....................................                  19                   43
     Purchases of premises and equipment .................................................              (2,181)                (464)
                                                                                                      --------             --------
                   Net cash used in investing activities .................................             (39,383)             (32,548)
                                                                                                      --------             --------
FINANCING ACTIVITIES
    (Decrease) increase in deposits, net .................................................             (12,946)              42,332
    Proceeds from exercise of stock options ..............................................                  77                  427
    Net increase(decrease) in retail repurchase agreements ...............................               1,678               (3,569)
    Net decrease in other borrowings .....................................................                (108)                 (11)
    Proceeds of advances from FHLB .......................................................              57,500                    -
    Repayment of advances from FHLB ......................................................             (24,500)             (15,000)
                                                                                                      --------             --------
    Net cash provided by financing activities ............................................              21,701               24,179
                                                                                                      --------             --------
    Net increase (decrease) in cash and cash equivalents .................................             (12,769)              (2,850)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ........................................................................              15,682               18,532
                                                                                                      --------             --------
CASH AND CASH EQUIVALENTS,
END OF YEAR ..............................................................................            $  2,913             $ 15,682
                                                                                                      ========             ========
CASH PAID FOR:
Interest .................................................................................            $ 15,154             $ 12,899
                                                                                                      ========             ========
Income taxes .............................................................................            $  2,027             $  3,219
                                                                                                      ========             ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       37
<PAGE>

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 Bluffton, South Carolina, and
one branch in Greenville,  South  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 AND ACTIVITIES

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.

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.

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.

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:

     o    securities  held-for-investment  are  held-to-maturity and reported at
          amortized cost,
     o    trading  securities are reported at fair value with  unrealized  gains
          and losses included in earnings, or;
     o    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).


                                       38
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES (continued)

Securities(continued)   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.

There were no investments  classified as trading securities at December 31, 2007
and 2006.

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 probable  losses in the loan  portfolio.  In determining the provision
amount,  management  gives  consideration to current  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  collectability of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal.


                                       39
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

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.

Premises  and   Equipment  -  Premises  and   equipment,   including   leasehold
improvements, are stated at cost less accumulated depreciation.  Depreciation is
provided over the estimated useful lives 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.

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

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.

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.  Management  believes that no valuation allowance
was required at December 31, 2007 and 2006.

In  July  2006,  the  Financial  Accounting  Standards  Board,  ("FASB")  issued
Interpretation  No. 48 ("FIN 48"),  Accounting for  Uncertainty in Income Taxes.
FIN 48 clarifies the  accounting for  uncertainty in income taxes  recognized in
enterprises'  financial  statements in accordance with SFAS No. 109,  Accounting
for Income  Taxes.  FIN 48 prescribes a  recognition  threshold and  measurement
attributable  for the financial  statement  recognition and measurement of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosures and  transitions.  FIN 48 is effective for fiscal
years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48
effective January 1, 2007. The adoption of FIN 48 did not have any impact on the
Company's consolidated financial position.

Earnings Per Common  Share - Earnings per common share is computed  based on the
weighted  average  number of common  shares  outstanding.  Diluted


                                       40
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

Earnings Per Common  Share(continued)  earnings  per common  share  includes the
dilutive  effect of  outstanding  stock  options.  All share  amounts  have been
adjusted for the 6 for 5 stock split in 2006, see Note 17.

Stock-Based  Compensation  - On January 1, 2006,  the  Company  adopted the fair
value recognition provisions of FASB Statement of Financial Accounting Standards
("SFAS") No. 123(R),  Share-Based  Payment,  to account for  compensation  costs
under its stock option  plans.  The Company  previously  utilized the  intrinsic
value  method  under  Accounting   Principles  Board  Opinion  ("APB")  No.  25,
Accounting for Stock Issued to Employees (as amended). Under the intrinsic value
method  prescribed  by APB 25, no  compensation  costs were  recognized  for the
Company's  stock options  because the option  exercise price in its plans equals
the market price on the date of grant.

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 2005;  dividend yield of 0.00 percent,  expected
volatility of 50 percent in 2005,  risk-free interest rate of 4.33 percent,  and
an expected  life of 10 years for the  options.  No options were granted in 2007
and 2006.

Fair Value of  Financial  Instruments  - SFAS 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.

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


                                       41
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

     Loans(continued)  maturities.  The fair value of  variable  rate loans with
     frequent repricing and no significant  changes in Deposits and Borrowings -
     The fair value of credit risk approximates book value.

     fixed rate time deposits, borrowed funds and subordinated debt 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.

     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.

Recent  Accounting  Pronouncements  -  The  following  is a  summary  of  recent
authoritative   pronouncements  that  may  affect  accounting,   reporting,  and
disclosure of financial information by the Company:

In September 2006, the FASB issued SFAS No. 157, Fair Value  Measurements.  SFAS
No. 157 defines fair value,  establishes a framework for measuring fair value in
generally accepted  accounting  principles,  and expands  disclosures about fair
value  measurements.   This  standard  does  not  require  any  new  fair  value
measurements,  but rather  eliminates  inconsistencies  found in  various  prior
pronouncements. SFAS No. 157 is effective for the Company on January 1, 2008 and
is not  expected  to  have a  significant  impact  on  the  Company's  financial
statements.

In  September,  2006,  the FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force ("EITF")  relating to EITF 06-4,  Accounting for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements.   EITF  06-4  addresses   employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in  accordance  with SFAS No. 106,  Employers'
Accounting for Postretirement  Benefits Other Than Pensions,  or Opinion No. 12,
Omnibus  Opinion - 1967. EITF 06-4 is effective for fiscal years beginning after
December 15, 2006.  Entities should recognize the effects of applying this Issue
through either (a) a change in accounting  principle through a cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the  statement  of  financial  position  as of the  beginning  of the year of
adoption  or  (b)  a  change  in  accounting  principle  through   retrospective
application to all prior  periods.  The Company does not believe the adoption of
EITF 06-4 will have a  material  impact on its  financial  position,  results of
operations and cash flows.

                                       42
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

Recent Accounting Pronouncements(continued) In September 2006, the FASB ratified
the  consensus  reached  on  EITF  06-5,   "Accounting  for  Purchases  of  Life
Insurance--Determining the Amount That Could Be Realized in Accordance with FASB
Technical Bulletin No. 85-4,  Accounting for Purchases of Life Insurance" ("EITF
06-5").  EITF 06-5 states that a  policyholder  should  consider any  additional
amounts included in the contractual terms of the insurance policy other than the
cash surrender  value in determining the amount that could be realized under the
insurance  contract.  EITF 06-5 also states that a policyholder should determine
the amount that could be realized under the life insurance contract assuming the
surrender of an  individual-life  by  individual-life  policy (or certificate by
certificate  in a group  policy).  EITF 06-5 is  effective  for the  Company  on
January 1, 2008.  The Company  does not  believe the  adoption of EITF 06-5 will
have a material impact on its financial position,  results of operations or cash
flows.

In  March  2007,  the  FASB  ratified  the  consensus  reached  on  EITF  06-10,
"Accounting for Collateral Assignment  Split-Dollar Life Insurance Arrangements"
("EITF 06-10"). The postretirement  aspect of this EITF is substantially similar
to EITF 06-4 discussed above and requires that an employer recognize a liability
for the postretirement  benefit related to a collateral assignment  split-dollar
life insurance  arrangement in accordance  with either FASB Statement No, 106 or
APB Opinion No. 12, as  appropriate,  if the  employer  has agreed to maintain a
life insurance  policy during the employee's  retirement or provide the employee
with a death benefit based on the  substantive  agreement with the employee.  In
addition,  a consensus was reached that an employer should recognize and measure
an  asset  based  on the  nature  and  substance  of the  collateral  assignment
split-dollar life insurance arrangement. EITF 06-10 is effective for the Company
on January 1, 2008. The Company does not believe the adoption of EITF 06-10 will
have a material impact on its financial position,  results of operations or cash
flows.

In  February  2007,  the FASB issued  SFAS No.  159,  The Fair Value  Option for
Financial  Assets and  Financial  Liabilities  - Including  an amendment of FASB
Statement No. 115. This  statement  permits,  but does not require,  entities to
measure many financial  instruments  at fair value.  The objective is to provide
entities with an opportunity to mitigate  volatility in reported earnings caused
by measuring related assets and liabilities  differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the  entity  first  recognizes  an  eligible  instrument  and  will  report
unrealized  gains and  losses on such  instruments  in  current  earnings.  This
statement (1) applies to all entities, (2) specifies certain election dates, (3)
can be applied on an instrument-by-instrument basis with some exceptions, (4) is
irrevocable, and (5) applies only to entire instruments. One exception is demand
deposit  liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS No. 115, available-for-sale and held-to-maturity securities
at the  effective  date are eligible for the fair value option at that date.  If
the fair value option is elected for those  securities  at the  effective  date,
cumulative  unrealized  gains and losses at that date shall be  included  in the
cumulative-effect  adjustment and thereafter,  such securities will be accounted



                                       43
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

Recent Accounting  Pronouncements(continued)for  as trading securities. SFAS No.
159 is  effective  for the  Company  on January 1,  2008.  Earlier  adoption  is
permitted in 2007 if the Company also elects to apply the provisions of SFAS No.
157, Fair Value Measurement.  The Company is currently  analyzing the fair value
option provided under SFAS No. 159.

In November 2007, the  Securities and Exchange  Commission  ("SEC") issued Staff
Accounting  Bulletin No. 109,  "Written Loan Commitments  Recorded at Fair Value
Through  Earnings"  ("SAB 109").  SAB 109  expresses the current view of the SEC
staff  that the  expected  net  future  cash  flows  related  to the  associated
servicing of the loan should be included in the  measurement of all written loan
commitments  that  are  accounted  for  at  fair  value  through  earnings.  SEC
registrants  are  expected  to apply this  guidance  on a  prospective  basis to
derivative loan commitments  issued or modified in the first quarter of 2008 and
thereafter.  The Company is  currently  analyzing  the impact of this  guidance,
which relates to the Company's mortgage loans held for sale.

In December  2007,  the FASB issued SFAS No.  141(R),  "Business  Combinations,"
("SFAS 14I(R)") which replaces SFAS 141. SFAS 141(R) establishes  principles and
requirements  for how an  acquirer  in a  business  combination  recognizes  and
measures in its financial  statements  the  identifiable  assets  acquired,  the
liabilities  assumed,  and any  controlling  interest;  recognizes  and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and  determines  what  information  to disclose to enable users of the financial
statements  to  evaluate  the  nature  and  financial  effects  of the  business
combination.  FAS 141(R) is effective  for  acquisitions  by the Company  taking
place on or after January 1, 2009. Early adoption is prohibited.  Accordingly, a
calendar   year-end  company  is  required  to  record  and  disclose   business
combinations  following existing  accounting guidance until January 1, 2009. The
Company will assess the impact of SFAS 141 (R) if and when a future  acquisition
occurs.

In December  2007,  the FASB issued SFAS No. 160,  "Noncontrolling  Interests in
Consolidated  Financial  Statements - an amendment of ARB No. 51" ("SFAS  160").
SFAS  160   establishes   new  accounting   and  reporting   standards  for  the
noncontrolling  interest  in a  subsidiary  and  for  the  deconsolidation  of a
subsidiary.  Before this  statement,  limited  guidance  existed  for  reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is  reported  in  the  mezzanine  section  between  liabilities  and  equity.
Specifically,  SFAS 160 requires the  recognition of a  noncontrolling  interest
(minority  interest) as equity in the  consolidated  financials  statements  and
separate from the parent's equity. The amount of net income  attributable to the
noncontrolling  interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership
interest  in a  subsidiary  that do not  result in  deconsolidation  are  equity
transactions  if the parent  retains  its  controlling  financial  interest.  In
addition,  this statement  requires that a parent  recognize gain or loss in net
income when a subsidiary is  deconsolidated.  Such gain or loss will be measured


                                       44
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES(continued)

Recent  Accounting   Pronouncements(continued)  using  the  fair  value  of  the
noncontrolling  equity  investment on the  deconsolidation  date.  SFAS 160 also
includes expanded disclosure  requirements regarding the interests of the parent
and its  noncontrolling  interests.  SFAS 160 is  effective  for the  Company on
January 1, 2009.  Earlier  adoption  is  prohibited.  The  Company is  currently
evaluating  the  impact,  if any,  the  adoption  of SFAS 160  will  have on its
consolidated financial statements.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.

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

Concentrations of Credit Risk - Financial instruments, which potentially subject
the Company to  concentrations  of credit  risk,  consist  principally  of loans
receivable,  investment  securities,  federal  funds sold and  amounts  due from
banks.

The Company makes loans to individuals and small businesses for various personal
and commercial purposes primarily in and around Spartanburg, Richland, Beaufort,
and Greenville  counties in South Carolina.  The Company's loan portfolio is not
concentrated  in loans to any single  borrower or a  relatively  small number of
borrowers. Additionally,  Management is not aware of any concentrations of loans
to classes of  borrowers  or  industries  that would be  similarly  affected  by
economic conditions.

In  addition  to  monitoring  potential  concentrations  of loans to  particular
borrowers or groups of borrowers,  industries and geographic regions, management
monitors  exposure to credit risk from  concentrations  of lending  products and
practices such as loans that subject borrowers to substantial  payment increases
(e.g.  principal  deferral periods,  loans with initial  interest-only  periods,
etc), and loans with high loan-to-value  ratios.  Management has determined that
there is no concentration of credit risk associated with its lending policies or
practices.  However, there are industry practices that could subject the Company
to increased credit risk should economic  conditions change over the course of a
loan's life.  For example,  the Company makes variable rate loans and fixed rate
principal-amortizing  loans with  maturities  prior to the loan being fully paid
(i.e.  balloon payment  loans).  These loans are  underwritten  and monitored to
manage  the  associated  risks.   Therefore,   management  believes  that  these
particular practices do not subject the Company to unusual credit risk.

The Company's  investment  portfolio consists  principally of obligations of the
United States, its agencies or its corporations and general obligation municipal
securities. In the opinion of Management,  there is no significant concentration
of credit risk in its investment portfolio. The Company places its correspondent
bank account  deposits with high quality  institutions,  and sells its overnight

                                       45
<PAGE>

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES (continued)

Concentrations  of Credit  Risk(continued)  investments to the Federal Home Loan
Bank of Atlanta.  Management  believes credit risk associated with correspondent
accounts is not significant.

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

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


<TABLE>
<CAPTION>
(Amounts in thousands)                                                                       Gross Unrealized
                                                                      Amortized              ----------------              Estimated
                                                                         Cost             Gains            Losses         Fair Value
                                                                         ----             -----            ------         ----------
December 31, 2007
<S>                                                                    <C>               <C>               <C>             <C>
    U.S. government agency obligations .....................           $ 4,000           $    98           $     -         $ 4,098
    Government sponsored enterprises .......................            17,498               209                 -          17,707
    State and local obligations ............................               123                 3                 -             126
    Mortgage-backed securities .............................               437                 -                 1             436
    Restricted FHLB stock ..................................             2,121                 -                 -           2,121
                                                                       -------           -------           -------         -------
        Total ..............................................           $24,179           $   310           $     1         $24,488
                                                                       =======           =======           =======         =======
December 31, 2006
    U.S. government agency obligations .....................           $ 4,000           $     9           $    17         $ 3,992
    Government sponsored enterprises .......................            17,993                 -               143          17,850
    State and local obligations ............................               123                 4                 -             127
    Mortgage-backed securities .............................               597                 -                14             583
    Restricted FHLB stock ..................................               741                 -                 -             741
                                                                       -------           -------           -------         -------
        Total ..............................................           $23,454           $    13           $   174         $23,293
                                                                       =======           =======           =======         =======
</TABLE>

There were sales of securities  available-for-sale  in 2007 with a book value of
$6.000  million  resulting  in gains  of $12  thousand.  There  were no sales of
available-for-sale securities in 2006.

The following table shows gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at December 31, 2007.


                                       46
<PAGE>

NOTE 3 - SECURITIES(continued)

Securities Available-for-Sale


<TABLE>
<CAPTION>
(Amounts in thousands)                                 Less Than              Twelve Months
                                                     Twelve Months                or More               Total
                                                     -------------                -------               -----
                                                              Unrealized              Unrealized              Unrealized
                                                Fair Value      Losses    Fair Value    Losses     Fair Value   Losses
                                                ----------      ------    ----------    ------     ----------   ------

<S>                                                <C>          <C>           <C>         <C>         <C>         <C>
Mortgage backed securities ................        $   -        $    -        $436        $  1        $436        $  1
                                                   -----        ------        ----        ----        ----        ----

Total .....................................        $   -         $   -        $436        $  1        $436        $  1
                                                   =====        ======        ====        ====        ====        ====
</TABLE>

Securities classified as  available-for-sale  are recorded at fair market value.
All of the unrealized losses on securities available-for-sale, on one individual
security,  consisted  of a security in a  continuous  loss  position  for twelve
months or more.  The Company  has the  ability and intent to hold this  security
until such time as the value  recovers  or the  security  matures.  The  Company
believes,  based on  industry  analyst  reports  and  credit  ratings,  that the
deterioration  in value is  attributable to changes in market interest rates and
is not in the  credit  quality of the  issuer  and  therefore,  this loss is not
considered other-than-temporary.

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

<TABLE>
<CAPTION>

(Amounts in thousands)                                                Amortized              Gross Unrealized              Estimated
                                                                         Cost             Gains            Losses         Fair Value
                                                                         ----             -----            ------         ----------
December 31, 2007
<S>                                                                    <C>               <C>               <C>               <C>
U.S. government agency obligations .........................           $ 2,000           $    34           $     -           $ 2,034
Government sponsored enterprises ...........................             2,999                45                 -             3,044
Trust preferred securities .................................               484               143                 -               627
Mortgage backed securities .................................               262                 4                 -               266
                                                                       -------           -------           -------           -------
Total securities held for investment .......................           $ 5,745           $   226           $     -           $ 5,971
                                                                       =======           =======           =======           =======
December 31, 2006
U.S. government agency obligations .........................           $ 2,000           $     3           $     -           $ 2,003
Government sponsored enterprises ...........................             6,999                36                22             7,013
Trust preferred securities .................................               482               150                 -               632
Mortgage backed securities .................................               421                 3                 -               424
                                                                       -------           -------           -------           -------
Total securities held for investment .......................           $ 9,902           $   192           $    22           $10,072
                                                                       =======           =======           =======           =======
</TABLE>

                                       47
<PAGE>


NOTE 3 - SECURITIES(continued)

Securities Held-for-Investment

Securities  classified as  held-for-investment  are recorded at amortized  cost.
There  were  no  unrealized  losses  on  securities   held-for-investment  in  a
continuous loss position for twelve months or more.

The    scheduled    maturities    of    securities    held-for-investment    and
available-for-sale at December 31, 2007 were as follows:


(Amounts in thousands)              Available-For-Sale      Held-For-Investment
                                    ------------------      -------------------
                                    Amortized  Estimated   Amortized   Estimated
                                      Cost     Fair Value    Cost     Fair Value
                                      ----     ----------    ----     ----------

Due in one year or less ........... $ 1,000     $ 1,001     $     -     $     -
Due from one to five years ........   2,998       3,001           -           -
Due from five to ten years ........   6,500       6,693       4,999       5,078
Due after ten years ...............  11,123      11,236           -           -
Mortgage backed securities ........     437         436         262         266
Equity securities .................   2,121       2,121         484         627
                                    -------     -------     -------     -------
                                    $24,179     $24,488     $ 5,745     $ 5,971
                                    =======     =======     =======     =======


At December  31,  2007,  securities  with a book value of  approximately  $9.200
million,  and market  value of $9.354  million  were  pledged  to secure  retail
repurchase agreements, state funds, and Treasury, tax and loan deposits.

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31, 2007 and 2006 are summarized as follows:


(Amounts in thousands)                                        December 31,
                                                              ------------
                                                          2007            2006
                                                          ----            ----
Real Estate:
  Construction and land development ..............     $  48,714      $  29,634
  1-4 family residential properties ..............        66,632         67,063
  Multifamily residential properties .............         4,992          6,987
  Non-farm nonresidential properties .............       153,508        139,267
  Other real estate loans ........................         3,129          3,078
Commercial and industrial, non-real estate .......        55,013         50,556
Consumer .........................................         1,167            395
                                                       ---------      ---------
Total loans ......................................       333,155        296,980
Less allowance for loans losses ..................        (3,700)        (3,275)
Net deferred loan fees ...........................          (511)          (515)
                                                       ---------      ---------
                                                       $ 328,944      $ 293,190
                                                       =========      =========



                                       48
<PAGE>

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES(continued)

The activity in the allowance for loan losses for 2007 and 2006 is summarized as
follows:


(Amounts in thousands)                                        December 31,
                                                              ------------
                                                         2007             2006
                                                         ----             ----
Balance, beginning of year ...................         $ 3,275          $ 3,000
Provision charged to operations ..............           1,126              950
Loan charge-offs .............................            (740)            (778)
Loan recoveries ..............................              39              103
                                                       -------          -------
Balance, end of year .........................         $ 3,700          $ 3,275
                                                       =======          =======

At December 31, 2007 and 2006,  nonaccrual  loans amounted to $1.515 million and
$1.757 million,  respectively.  The Company  evaluates  impairment of commercial
loans on an  individual  loan  basis.  As of  December  31,  2007 and 2006 loans
individually  evaluated and considered impaired under SFAS No. 114,  "Accounting
by Creditors for Impairment of a Loan", were immaterial.

In the normal  course of  business  the  Company  makes  loans to its  executive
officers  and  directors  and their  related  interests.  Such loans are made on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for comparable transactions with other persons and do not
involve more than normal risk of  collectability  or present  other  unfavorable
features. Activity with respect to such loans is summarized as follows:


(Amounts in thousands)                                          December
                                                                --------
                                                          2007              2006
                                                          ----              ----

Balance, beginning of year ...................           $4,687           $3,118
Borrowings ...................................            5,926            6,241
Repayments ...................................            2,572            4,672
                                                         ------           ------
Balance, end of year .........................           $8,041           $4,687
                                                         ======           ======

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, 2007 and 2006,  pre-approved  but unused lines of credit for loans
totaled  approximately  $62.047 million and $50.964  million,  respectively.  In
addition,  the  Company  had  issued  standby  letters  of credit  amounting  to
approximately  $4.083  million and $6.104 million at December 31, 2007 and 2006,
respectively.  The Company also had $12.371 million in outstanding variable rate
commercial loan commitments at December 31, 2007. 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



                                       49
<PAGE>

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES(continued)

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,  Greenville  County, and the Hilton Head area in South
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.

NOTE 5 -  PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2007 and 2006 are summarized as follows:


(Amounts in thousands)                                         December 31,
                                                               ------------
                                                           2007         2006
                                                           ----         ----
Land ..................................................   $  565       $   407
Buildings .............................................    5,983         4,418
Leasehold improvements ................................      695           695
Furniture and equipment ...............................    2,308         1,954
                                                         -------       -------
 ......................................................    9,551         7,474
Less accumulated depreciation .........................   (2,539)       (2,184)
                                                         -------       -------
                                                         $ 7,012       $ 5,290
                                                         =======       =======

Depreciation  expense  for the years ended 2007 and 2006 was $443  thousand  and
$419 thousand, respectively.


NOTE 6 - DEPOSITS

A summary of deposit accounts at December 31, 2007 and 2006 follows:


(Amounts in thousands)                                         December 31,
                                                               ------------
                                                         2007              2006
                                                         ----              ----
Demand
     Non-interest bearing ..................          $ 11,514          $ 16,038
     Interest bearing ......................            24,489            28,765
Savings ....................................            65,269            62,103
Time, $100,000 and over ....................            72,021            74,479
Other ......................................           121,818           126,672
                                                      --------          --------
                                                      $295,111          $308,057
                                                      ========          ========


                                       50
<PAGE>

NOTE 6 - DEPOSITS(continued)

At December 31, 2007, the scheduled maturities of time deposits are as follows:

                              (Amounts in thousands)
                          2008                   $184,381
                          2009                      8,738
                          2010                        566
                          2011                        154
                                                 --------
                                                 $193,839
                                                 ========


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 $1.348  million  and  $1.308  million at
December 31, 2007 and 2006, respectively.


NOTE 7 - RETAIL REPURCHASE AGREEMENTS

Information   concerning  securities  sold  under  agreement  to  repurchase  is
summarized as follows for the year ended December 31, 2007 and 2006:

[(Amounts in thousands)                                      2007           2006
                                                            ----           ----
Average balance during the year ....................       $2,077        $4,120
Average interest rate during the year ..............         3.61%         4.21%
Maximum month-end balance during the year ..........        4,726         5,612


U.S. government agency and government  sponsored  enterprises  securities with a
book value of $3.700  million and a market  value of $3.745  million at December
31, 2007 are used as collateral for the agreements.


NOTE 8 - OTHER BORROWED FUNDS

Other borrowed funds  consisted of advances from the FHLB and treasury,  tax and
loan accounts.

Advances from the FHLB consisted of the following at December 31, 2007:


(Amounts in thousands)                                  Interest          2007
                   Description                            Rate           Balance
                                                          ----           -------
Variable rate, daily rate credits: ..............         4.40%          $ 3,000
Fixed rate, convertible advances maturing:
     April 5, 2017 ..............................         4.115%          10,000
     April 5, 2017 ..............................         4.06%            5,000
Fixed rate advances maturing:
     May 7, 2009 ................................         4.41875         15,000
                                                                         -------
                                                                         $33,000
                                                                         =======

There were no advances from the FHLB at December 31, 2006.


                                       51
<PAGE>


NOTE 8 -  OTHER  BORROWED  FUNDS(continued)

As collateral for all outstanding  advances,  the Company pledges its qualifying
first mortgage loans as well as FHLB stock held by the Company.  At December 31,
2007 the Company had qualifying collateral with the FHLB of $36.293 million with
a remaining availability of $3.293 million.

Treasury, tax and loan accounts with balances of $179 thousand and $287 thousand
at December 31, 2007 and 2006,  respectively are also included in other borrowed
funds.  These  borrowings  bear interest at the federal funds rate less 25 basis
points.

At December  31,  2007,  the Bank had $12  million of unused  lines of credit to
purchase federal funds from banks.


NOTE 9 - SUBORDINATED DEBT

In January 2004, the Company formed a wholly-owned  Delaware  statutory business
trust, FSBS Capital Trust I (the "Trust"), which issued $5 million 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
million of junior subordinated  debentures of the Company which carry a variable
interest  rate  of 3  Month  LIBOR  plus  2.8  percent  per  annum.  The  junior
subordinated  debentures  represent  the sole asset of the Trust.  In accordance
with FIN No. 46 R, the Trust is not consolidated  with the financial  statements
of the Company.

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 the Trust, 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  percent  of the par  value of the
securities. The debentures may be redeemed after the fifth anniversary at par.


NOTE 10 - 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

                                       52
<PAGE>

NOTE  10  -  REGULATORY  CAPITAL   REQUIREMENTS   (continued)  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 1  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2007  and  2006,  that  the  Company  and  the  Bank  met all  capital  adequacy
requirements to which it is subject.

As of December 31, 2007, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action.  To be categorized as adequately  capitalized  the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 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, 2007
and 2006 are also presented in the tables below.

<TABLE>
<CAPTION>

(Amounts in thousands)                                                                                                To Be Well-
                                                                                                                  Capitalized Under
                                                                                           For Capital            Prompt Corrective
                                                                    Actual               Adequacy Purposes        Action Provisions
                                                                    ------               -----------------        -----------------
The Company                                                 Amount          Ratio      Amount          Ratio     Amount        Ratio
                                                            ------          -----      ------          -----     ------        -----
December 31, 2007
<S>                                                        <C>              <C>       <C>              <C>
Total capital (to risk-weighted assets) ............       $47,946          14.25%    $26,922          8.00%        N/A         N/A
Tier 1 capital (to risk-weighted assets) ...........        44,246          13.15%     13,461          4.00%        N/A         N/A
Tier 1 capital (to average assets) .................        44,246          11.68%     15,149          4.00%        N/A         N/A

December 31, 2006
Total capital (to risk-weighted assets) ............       $44,230          14.79%    $23,930          8.00%        N/A         N/A
Tier 1 capital (to risk-weighted assets) ...........        41,055          13.72%     11,965          4.00%        N/A         N/A
Tier 1 capital (to average assets) .................        41,055          11.73%     14,003          4.00%        N/A         N/A

The Bank
December 31, 2007
Total capital (to risk-weighted assets) ............       $46,152          13.72%    $26,907          8.00%    $33,633       10.00%
Tier 1 capital (to risk-weighted assets) ...........        37,552          11.17%     13,453          4.00%     20,180        6.00%
Tier 1 capital (to average assets) .................        37,552           9.92%     15,142          4.00%     18,927        5.00%

December 31, 2006
Total capital (to risk-weighted assets) ............       $42,536          14.22%    $23,930          8.00%    $29,913       10.00%
Tier 1 capital (to risk-weighted assets) ...........        34,361          11.49%     11,965          4.00%     14,956        6.00%
Tier 1 capital (to average assets) .................        34,361           9.82%     14,003          4.00%     17,503        5.00%
</TABLE>

                                       53
<PAGE>

NOTE 11 - INCOME TAXES

The provision for income taxes is summarized below:


                                                            December 31,
                                                            ------------

(Amounts in thousand)                                 2007                 2006
                                                      ----                 ----
Currently payable
    Federal ..............................           $ 1,877            $ 2,498
    State ................................               150                215
                                                     -------            -------
                                                       2,027              2,713
Deferred
    Federal ..............................              (232)              (106)
    State ................................                (1)                 -
                                                     -------            -------
                                                        (233)              (106)
                                                     -------            -------
Total income taxes .......................           $ 1,794            $ 2,607
                                                     =======            =======

The Company had analyzed the tax positions  taken or expected to be taken in its
tax returns and concluded it has no liability related to uncertain tax positions
in accordance with FIN 48.

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

                                                              December 31,
                                                              ------------
                                                           2007         2006
                                                           ----         ----
Statutory rates .......................................    34.0%       34.00%
Increase (decrease) resulting from:
State taxes, net of federal benefit ...................       2%        2.00%
Life insurance ........................................    -0.2%        -0.2%
Other, net ............................................     0.3%         0.5%
                                                           ----        -----
                                                           36.1%        36.3%
                                                           ====        =====

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


                                       54
<PAGE>

NOTE 11 - INCOME TAXES(continued)

                                                             December 31,
                                                             ------------
(Amounts in thousand)                                     2007            2006
                                                          ----            ----
Deferred tax assets
     Allowance for loan losses .................        $ 1,066         $   961
     Available-for-sale securities .............              -              61
     Non-accrual loans .........................            139              47
     Deferred compensation .....................            114              93
     Other .....................................              9               3
                                                        -------         -------
        Gross deferred tax assets ..............          1,328           1,164
         Less valuation allowance ..............              -               -
                                                        -------         -------
          Net deferred tax assets ..............          1,328           1,164
Deferred tax liabilities
    Depreciation ...............................           (126)           (119)
    Deferred loan cost & fees ..................           (168)           (194)
    Prepaid expenses ...........................            (30)            (19)
    Available-for-sale securities ..............           (118)              -
                                                        -------         -------
        Gross deferred liabilities .............           (442)           (332)
                                                        -------         -------
           Net .................................        $   886         $   832
                                                        =======         =======

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The  Company  leases the land and  building  for its  branches  under  operating
leases. Future minimum lease payments at December 31, 2007, are as follows:

                                                          (Amounts in thousands)
2008                                                             $172
2009                                                              123
2010                                                               48
2011                                                               39
2012                                                               39
2013 and thereafter                                                55
                                                                 ----
                                                                 $476
                                                                 ====

Total  lease  expense was $242  thousand  and $216  thousand  for 2007 and 2006,
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 13 - 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

                                       55
<PAGE>

NOTE 13 - RESTRICTIONS ON DIVIDENDS,  LOANS AND ADVANCES (continued) 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.

NOTE 14 - 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 percent  of  compensation,  the  Company  makes a 100  percent  matching
contribution.  Expense  related to this plan was $198 thousand and $164 thousand
in 2007 and 2006, 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 $333 thousand and $273
thousand at December 31, 2007 and 2006, respectively.

NOTE 15 - STOCK OPTIONS

The  Company  has  issued  incentive  stock  options  to  certain  officers  and
employees.

The following is a summary of stock option activity and related  information for
the years ended December 31, 2007 and 2006:


<TABLE>
<CAPTION>
                                                                              2007                              2006
                                                                              ----                              ----
                                                                                      Weighted                           Weighted
                                                                                      Average                            Average
                                                                                      Exercise                           Exercise
                                                                     Options           Price          Options              Price
                                                                     -------           -----          -------              -----
<S>                                                                   <C>             <C>              <C>              <C>
Outstanding at beginning of year ...............................      91,488          $   18.03        146,649          $   14.18
Granted ........................................................           -               -                 -               -
Forfeited ......................................................      (4,071)             27.01           (120)             26.25
Exercised ......................................................      (5,680)             13.58        (55,041)              7.76
                                                                   ---------          ---------      ---------          ---------
Outstanding at end of year .....................................      81,737          $   17.98         91,488          $   18.03
                                                                   =========          =========      =========          =========
Exercisable, end of period .....................................      81,737          $   17.98         91,488          $   18.03
                                                                   =========          =========      =========          =========

Weighted average fair value of options granted .................                      $       -                         $       -
                                                                                      =========                         =========
</TABLE>

Exercise prices for options  outstanding as of December 31, 2007 and 2006 ranged
from $6.10 to $33.00.  The weighted average remaining  contractual life of those
options is approximately 5.79 years at



                                       56
<PAGE>

NOTE 15 - STOCK OPTIONS(continued)

December 31, 2007 and 6.8 years at December 31, 2006.

No shares vested during the years ended December 31, 2007 and 2006.

The total intrinsic value of options  exercised  during the years ended December
31, 2007 and 2006 was $73 thousand and $1.091 million, respectively.

As of December 31, 2007 all options outstanding were exercisable.  The aggregate
intrinsic value of these options was $247 thousand.

On May 5, 2006,  the Company  declared a six for five stock split for a total of
350,053 shares. All share and per share data has been retroactively  restated to
give effect to the common stock split.


NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments are as follows:


<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
(Amounts in thousands)                                                      2007                                   2006
                                                                            ----                                   ----
                                                                 Carrying          Estimated            Carrying          Estimated
                                                                 Amount            Fair Value            Amount           Fair Value
                                                                 ------            ----------            ------           ----------
Financial assets
<S>                                                             <C>                 <C>                 <C>                 <C>
Cash and cash equivalents ..........................            $  2,913            $  2,913            $ 15,682            $ 15,682

Securities
Available-for-sale .................................              24,489              24,489              23,293              23,293
Held-for-investment ................................               5,745               5,971               9,902              10,701
Loans ..............................................             328,944             328,492             293,190             293,842

Financial liabilities
Deposits ...........................................             295,111             297,904             308,057             308,157
Retail repurchase agreements .......................               3,849               3,864               2,171               4,124
Other borrowed funds ...............................              33,179              32,658                 287                 287
Subordinated debt ..................................               5,155               5,155               5,155               5,155
</TABLE>

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.


                                       57
<PAGE>

NOTE 17 - EARNINGS PER COMMON SHARE (EPS)

The reconciliation of the numerators and denominators of the earnings per common
share and diluted  EPS  computation  follows.  All share and per share data have
been retroactively restated for all common stock splits.

<TABLE>
<CAPTION>
(Amounts in thousands)                                                               Income               Shares           Per Share
December 31, 2007                                                                  (Numerator)*        (Denominator)        Amount
                                                                                   ------------        -------------        ------
Earnings per common share:
<S>                                                                                 <C>                  <C>               <C>
Income available to common stockholders ................................            $   3,171            2,159,663         $   1.47
Dilutive effect of stock options .......................................                    -               25,348            (0.02)
                                                                                    ---------            ---------         --------
Diluted EPS:
Income available to common stockholders
    and assumed conversions ............................................            $   3,171            2,185,011         $   1.45
                                                                                    =========            =========         ========

December 31, 2006
Earnings per common share:
Income available to common stockholders ................................            $   4,581            2,120,320         $   2.16
Dilutive effect of stock options .......................................                    -               52,436            (0.05)
                                                                                    ---------            ---------         --------
Diluted EPS:
Income available to common stockholders
    and assumed conversions ............................................            $   4,581            2,172,756         $   2.11
                                                                                    =========            =========         ========
</TABLE>
*(Dollars in thousands)


Options to  purchase  18,356  shares of common  stock with prices  ranging  from
$25.95 to $33.00  per share  were not  included  in the  computation  of diluted
earnings per share for 2007 because the options' exercise price was greater than
the average market price of common shares.

Options to purchase  5,690  shares of common  stock at $29.17 per share were not
included in the  computation of diluted  earnings per share for 2006 because the
options'  exercise  price was greater  than the average  market  price of common
shares.


                                       58
<PAGE>

NOTE 18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

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


                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                                        ------------
 (Amounts in thousands)                                                                          2007                   2006
                                                                                                 ----                   ----
Assets
<S>                                                                                            <C>                    <C>
   Cash ..............................................................................         $ 1,829                $ 1,752
   Investment in Trust (Note 9) ......................................................             155                    155
   Investment in common stock of
         the Bank ....................................................................          37,744                 34,261
   Due from the Bank .................................................................           4,900                  4,900
   Debt issuance costs ...............................................................              22                     42
                                                                                               -------                -------
         Total assets ................................................................         $44,650                $41,110
                                                                                               =======                =======

Liabilities and Stockholders' Equity
   Due to Trust (Note 9) .............................................................         $ 5,155                $ 5,155
   Stockholders' equity ..............................................................          39,495                 35,955
                                                                                               -------                -------
          Total liabilities and stockholders' equity .................................         $44,650                $41,110
                                                                                               =======                =======
</TABLE>


                            Statements of Operations

<TABLE>
<CAPTION>
                                                                                          For the years ended December 31,
                                                                                          --------------------------------
(Amounts in thousands)                                                                     2007                      2006
                                                                                           ----                      ----
<S>                                                                                       <C>                      <C>
Operating income .................................................................        $   412                  $   402
Expense ..........................................................................            432                      422
                                                                                          -------                  -------
Loss before equity in undistributed net income
   of the Bank ...................................................................            (20)                     (20)
Equity in undistributed net income of
   the Bank ......................................................................          3,191                    4,601
                                                                                          -------                  -------
         Net income ..............................................................        $ 3,171                  $ 4,581
                                                                                          =======                  =======
</TABLE>


                                       59
<PAGE>

NOTE 18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY(continued)


                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                        For the years ended December 31,
                                                                                        --------------------------------
(Amounts in thousands)                                                                   2007                       2006
                                                                                         ----                       ----
Operating Activities
<S>                                                                                      <C>                      <C>
Net income .......................................................................       $ 3,171                  $ 4,581
Equity in undistributed income of
the Bank .........................................................................        (3,191)                  (4,601)
Net change in other assets .......................................................            20                       20
                                                                                         -------                  -------
Net cash provided by operating activities ........................................             -                        -
                                                                                         -------                  -------
Financing Activities
Proceeds from stock option exercise ..............................................            77                      427
                                                                                         -------                  -------
Net cash provided by financing activities ........................................            77                      427
                                                                                         -------                  -------
Net increase in cash and cash equivalents ........................................            77                      427
Cash and cash equivalents, beginning of year .....................................         1,752                    1,325
                                                                                         -------                  -------
Cash and cash equivalents, end of year ...........................................       $ 1,829                  $ 1,752
                                                                                         =======                  =======
</TABLE>


                                       60
<PAGE>


Item 9.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable

Item 9A(T). 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 such controls and procedures,
as of the end of the period covered by this annual report, were effective.

Management's Annual Report on Internal Control Over Financial Reporting

Management is responsible for  establishing  and maintaining  adequate  internal
control over financial  reporting,  as such term is defined in Exchange Act Rule
13a-15(f).  A system of internal  control over financial  reporting is a process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance with generally accepted accounting principles.

Under the supervision and with the  participation  of management,  including the
principal executive officer and the principal  financial officer,  the Company's
management  has  evaluated  the  effectiveness  of  its  internal  control  over
financial reporting as of December 31, 2007 based on the criteria established in
a report  entitled  "Internal  Control  -  Integrated  Framework  issued  by the
Committee  of  Sponsoring  Organizations  of the  Treadway  Commission"  and the
interpretive guidance issued by the Commission in Release No. 34-55929. Based on
this evaluation,  the Company's  management has evaluated and concluded that the
Company's internal control over financial reporting was effective as of December
31, 2007.

This  annual  report  does not include an  attestation  report of the  Company's
independent  registered public  accounting firm regarding  internal control over
financial  reporting because  management's report was not subject to attestation
by the Company's  registered  public accounting firm pursuant to temporary rules
of the  Securities  and Exchange  Commission  that permit the Company to provide
only management's report in this annual report.


Item 9B. Other Information

         Not applicable.



                                       61
<PAGE>

PART III

Item  10.  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 "Management of the Company - Executive  Officers",  "Committees
of the  Board of  Directors-Audit  Committee",  and  "Section  16(a)  Beneficial
Ownership Reporting Compliance" in registrant's definitive proxy statement filed
with the Commission for the 2008 Annual Meeting of Shareholders (the "2008 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
407(d)(5)  of  Regulation  S-K   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 11. Executive Compensation.

         The information set forth under the caption "Management  Compensation,"
in the 2008 Proxy Statement is incorporated herein by reference.

Item 12.  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 2008  Proxy  Statement  is
incorporated herein by reference.


                                       62
<PAGE>




<TABLE>
<CAPTION>
                                                                       Equity Compensation Plan Information


                                                            (a)                       (b)                        (c)
                                                    Number of securities                                Number of securities
                                                    to be issued upon         Weighted                  remaining available for
                                                    exercise of               exercise price of         future issuance under
                                                    outstanding options,      outstanding options,      equity compensation
                                                    warrants, and rights      warrants, and rights      plans, (excluding
                                                                                                        securities reflected in (a))
                                                    --------------------      --------------------      ----------------------------
Plan category

<S>                                                       <C>                        <C>                         <C>
Equity compensation plans
 approved by security holders ...................         81,737                     $   17.98                   420,000

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

Total ...........................................         81,737                     $   17.98                   420,000

</TABLE>

Item  13.  Certain   Relationships   and  Related   Transactions   and  Director
           Independence.

         The  information  set forth  under the  captions  "Governance  Matters-
Director  Independence" and "Certain  Relationships and Related Transactions" in
the 2008 Proxy  Statement is  incorporated  herein by reference.  Members of our
Audit  Committee and  Compensation  Committee are all  independent  under NASDAQ
Global Marketplace Rules. The entire Board serves as Nominating  Committee,  and
all Board members are not independent under such rules.

Item 14. Principal Accountant Fees and Services

         The  information  set  forth  under  the  caption  "Independent  Public
Accounts-Fees Paid to Independent Auditors" and Audit Committee  Pre-approval of
Audit and Permissible  Non-Audit  Services of Independent  Auditors" in the 2008
Proxy Statement is incorporated herein by reference.


                                       63
<PAGE>

Item 15. Exhibits and Financial Statement Schedules

(1)  Report of Independent Registered Public Accounting Firm
     Consolidated Balance Sheets
     Consolidated Statements of Income
     Consolidated Statements of Changes in Stockholder's Equity
     Consolidated Statements of Cash Flows
     Notes to Financial Statements

(2)  Financial Statement Schedules - None

(3)  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           February 2008 Salary  Continuation  Agreement between First South
               Bank and Barry L. Slider
10.4.1         February 2008 Endorsement  Split Dollar  Agreement  between First
               South Bank and Barry L. Slider
10.4.2         June 21, 1996 Split Dollar Agreement between First South Bank and
               Barry L. Slider,  as amended June 3, 1999,  with note executed by
               Barry L. Slider

10.4.3         June 21, 1996 Split Dollar Agreement between First South Bank and
               V. Lewis Shuler,  as amended July 23, 1999, with note executed by
               V. Lewis Shuler
10.4.4         November 19, 1999 Salary  Continuation  Agreement  between  First
               South Bank and Barry L.  Slider,  as  amended on April 27,  2000,
               June 19, 2001, March 20, 2007, and September 28, 2007
10.4.5         November 19, 1999 Split Dollar Agreement between First South Bank
               and  the  Trustee  of  the  Barry  L.  Slider  Irrevocable  Trust
               Agreement
10.4.6         November 19, 1999 Salary  Continuation  Agreement  between  First
               South Bank and V.  Lewis  Shuler,  as amended on April 27,  2000,
               June 19, 2001, March 20, 2007, and September 28, 2007
10.4.7         November 19, 1999 Split Dollar Agreement between First South Bank
               and V. Lewis Shuler
10.5           Amended  and  Restated   Declaration   of  the  Trust  among  the
               Registrant, Wells Fargo Delaware Trust Company, Wells Fargo Bank,
               National Association,  Barry L. Slider and V. Lewis Shuler, dated
               as of January 30, 2004. (4)
10.6           Indenture  between  Registrant  and Wells  Fargo  Bank,  National
               Association, dated as of January 30, 2004. (4)
10.7           Guarantee  Agreement between the Registrant and Wells Fargo Bank,
               National Association, dated as of January 30, 2004. (4)
10.8           Registrant's Junior Subordinated Debt Security Due 2034. (4)
10.9           First South Bancorp, Inc., Incentive Stock Option Plan (5)
10.10          Employment Agreement among First South Bancorp, Inc., First South
               Bank, and Barry L. Slider


                                       64
<PAGE>

10.11          Form of Director  Retirement  Agreement  between First South Bank
               and each of Barry L.  Slider  and  each of  Directors  Harold  E.
               Fleming, Joel C. Griffin,  Roger A. F. Habisreutinger,  Herman E.
               Ratchford, Chandrakant V. Shanbhag, and David G. White.
21             Subsidiaries of Registrant (3)
23             Consent of Independent Registered Public Accounting Firm
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
(4)  Incorporated  by reference  to Form 10-QSB for the quarter  ended March 31,
     2004.
(5)  Incorporated  by  reference  to Exhibit  4.2 to  Registrant's  registration
     statement on Form S-8, Registration No. 333-128522



                                       65
<PAGE>


SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                               First South Bancorp, Inc.


March 26, 2008                 By: s/Barry L. Slider
                                ---------------------------------
                               Barry L. Slider
                               President and Chief Executive Officer


                               By: s/V. Lewis Shuler
                               --------------------------------
                               V. Lewis Shuler
                               Executive Vice President

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated:

Signature                                   Title                      Date

 s/ Harold E. Fleming, M.D.
--------------------                Director                   March 26, 2008
Harold E. Fleming, M.D.


-------------------------           Director                   March 26, 2008
Joel C. Griffin

 s/ Roger A. F. Habisreutinger
-------------------------           Chairman,Director          March 26, 2008
Roger A. F. Habisreutinger

 s/ Herman E. Ratchford
--------------------------          Director                   March 26, 2008
Herman E. Ratchford

..s/ Chandrakant V. Shanbhag
-------------------------           Director                   March 26, 2008
Chandrakant V. Shanbhag

 s/ V. Lewis Shuler
--------------------------          Executive Vice President,  March 26, 2008
v. Lewis Shuler                     (Principal Financial and
                                     Principal Accounting
                                     Officer)
 s/ Barry L. Slider
--------------------------          President,                 March 26, 2008
Barry L. Slider                     Chief Executive Officer,
                                    Director

 s/ David G. White
--------------------------          Director                   March 26, 2008
David G. White
                                       66
<PAGE>

EXHIBIT INDEX

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           February 2008 Salary  Continuation  Agreement between First South
               Bank and Barry L. Slider
10.4.1         February 2008 Endorsement  Split Dollar  Agreement  between First
               South Bank and Barry L. Slider
10.4.2         June 21, 1996 Split Dollar Agreement between First South Bank and
               Barry L. Slider,  as amended June 3, 1999,  with note executed by
               Barry L. Slider

10.4.3         June 21, 1996 Split Dollar Agreement between First South Bank and
               V. Lewis Shuler,  as amended July 23, 1999, with note executed by
               V. Lewis Shuler
10.4.4         November 19, 1999 Salary  Continuation  Agreement  between  First
               South Bank and Barry L.  Slider,  as  amended on April 27,  2000,
               June 19, 2001, March 20, 2007, and September 28, 2007
10.4.5         November 19, 1999 Split Dollar Agreement between First South Bank
               and  the  Trustee  of  the  Barry  L.  Slider  Irrevocable  Trust
               Agreement
10.4.6         November 19, 1999 Salary  Continuation  Agreement  between  First
               South Bank and V.  Lewis  Shuler,  as amended on April 27,  2000,
               June 19, 2001, March 20, 2007, and September 28, 2007
10.4.7         November 19, 1999 Split Dollar Agreement between First South Bank
               and V. Lewis Shuler
10.5           Amended  and  Restated   Declaration   of  the  Trust  among  the
               Registrant, Wells Fargo Delaware Trust Company, Wells Fargo Bank,
               National Association,  Barry L. Slider and V. Lewis Shuler, dated
               as of January 30, 2004. (4)
10.6           Indenture  between  Registrant  and Wells  Fargo  Bank,  National
               Association, dated as of January 30, 2004. (4)
10.7           Guarantee  Agreement between the Registrant and Wells Fargo Bank,
               National Association, dated as of January 30, 2004. (4)
10.8           Registrant's Junior Subordinated Debt Security Due 2034. (4)
10.9           First South Bancorp, Inc., Incentive Stock Option Plan (5)
10.10          Employment Agreement among First South Bancorp, Inc., First South
               Bank, and Barry L. Slider



                                       67
<PAGE>

10.11          Form of Director  Retirement  Agreement  between First South Bank
               and each of Barry L.  Slider  and  each of  Directors  Harold  E.
               Fleming, Joel C. Griffin,  Roger A. F. Habisreutinger,  Herman E.
               Ratchford, Chandrakant V. Shanbhag, and David G. White.
21             Subsidiaries of Registrant (3)
23             Consent of Independent Registered Public Accounting Firm
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
(4)  Incorporated  by reference  to Form 10-QSB for the quarter  ended March 31,
     2004.
(5)  Incorporated  by  reference  to Exhibit  4.2 to  Registrant's  registration
     statement on Form S-8, Registration No. 333-128522

                                       68