# MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purpose

The purpose of managements
discussion and analysis is to make the reader aware of the significant components, events,
and changes in the consolidated financial condition and results of operations of the
Company and its subsidiaries during the year ended December 31, 2007. The Companys
consolidated financial statements and related notes should also be considered.

Critical Accounting Policies

In the preparation of the
Companys consolidated financial statements, certain significant amounts are based
upon judgment and estimates. The most critical of these is the accounting policy related
to the allowance for loan losses. The allowance is based in large measure upon
managements evaluation of borrowers abilities to make loan payments, local and
national economic conditions, and other subjective factors. If any of these factors were
to deteriorate, management would update its estimates and judgments which may require
additional loss provisions.

Overview

The Company was incorporated on June
23, 1995, and serves as a financial holding company for The First, A National Banking
Association (The First), located in Hattiesburg, Mississippi. The First began
operations on August 5, 1996, from its main office in the Oak Grove community, which is on
the western side of Hattiesburg. The First currently operates its main office and two
branches in Hattiesburg, one in Laurel, one in Purvis, one in Picayune, one in Pascagoula,
one in Bay St. Louis, one in Wiggins and one in Gulfport, Mississippi. The Company and its
subsidiary bank engage in a general commercial and retail banking business characterized
by personalized service and local decision-making, emphasizing the banking needs of small
to medium-sized businesses, professional concerns, and individuals. The First is a
wholly-owned subsidiary bank of the Company.

The Companys primary source of
revenue is interest income and fees, which it earns by lending and investing the funds
which are held on deposit. Because loans generally earn higher rates of interest than
investments, the Company seeks to employ as much of its deposit funds as possible in the
form of loans to individuals, businesses, and other organizations. To ensure sufficient
liquidity, the Company also maintains a portion of its deposits in cash, government
securities, deposits with other financial institutions, and overnight loans of excess
reserves (known as Federal Funds sold) to correspondent banks. The revenue
which the Company earns (prior to deducting its overhead expenses) is essentially a
function of the amount of the Companys loans and deposits, as well as the profit
margin (interest spread) and fee income which can be generated on these
amounts.

---

The Company grew from approximately
$417.8 million in total assets, $287.9 million in loans, $351.7 million in deposits, and
$32.4 million in shareholders equity at December 31, 2006 to approximately $496.1
million in total assets, $371.2 million in loans, $386.2 million in deposits, and $36.3
million in shareholders equity at December 31, 2007. The First reported net income
of $4,031,000 and $3,697,000 for the years ended December 31, 2007, and 2006,
respectively. For the years ended December 31, 2007 and 2006, the Company reported
consolidated net income of $3,823,000 and $3,315,000, respectively. The following
discussion should be read in conjunction with the Selected Consolidated Financial
Data and the Companys Consolidated Financial Statements and the Notes thereto
and the other financial data included elsewhere.

The following table demonstrates the
Companys growth during each calendar year.

`SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
                                   (Dollars In Thousands, Except Per Share Data)

                                                                       December 31,
                                   --------------------------------------------------------------------------------------
                                        2007             2006              2005              2004             2003
                                   ---------------- ---------------- ----------------- ----------------- ----------------
Earnings:
   Net interest income               $  18,256        $  14,383         $  10,150         $   7,815        $   7,309
   Provision for loan Losses             1,321              800               921               672              468

   Noninterest income                    3,189            2,239             1,682             1,963            1,772
   Noninterest expense                  14,823           11,138             8,138             7,228            7,134
   Net income                            3,823            3,315             1,909             1,243            1,007

Per share data:
   Basic net income per Share        $    1.28        $    1.35         $     .81         $     .53        $     .43
   Diluted net income per Share           1.25             1.27               .77               .51              .41

Selected Year End
  Balances:
     Total assets                    $ 496,056        $ 417,769         $ 294,390         $ 212,396        $ 164,941
     Securities                         87,052           91,810            50,660            28,522           31,445
     Loans, net of Allowance           367,002          284,082           197,943           162,716          114,076
     Deposits                          386,168          351,722           241,949           156,830          121,698
     Stockholders' equity               36,281           32,365            18,478            16,740           15,651`

---

`Results of Operations

         The  following  is a summary of the results of  operations  by The First for the years ended  December 31,
2007 and 2006.

                                                 2007                2006
                                          -------------------------------------
                                                      (In thousands)

Interest income                              $   33,382          $   23,736
Interest expense                                 14,743               8,671
                                             ----------          ----------
    Net interest income                          18,639              15,065

Provision for loan losses                        1,321                 800
                                             ----------          ----------
Net interest income after
  provision for loan losses                      17,318              14,265
                                             ----------          ----------

Other income                                      2,880               2,005

Other expense                                    14,446              10,844

Income tax expense                                1,721               1,729
                                             ----------          ----------

    Net income                               $    4,031          $    3,697
                                             ==========          ==========

         The following reconciles the above table to the amounts reflected in the consolidated financial
statements of the Company at December 31, 2007 and 2006:


                                                 2007                2006
                                          ---------------------------------------
                                                      (In thousands)

Net interest income:
    Net income of subsidiary bank            $   18,639          $   15,065
    Intercompany eliminations                     (383)               (682)
                                              ---------           ---------
                                             $   18,256          $   14,383
                                              =========           =========

Net income:
    Net income of subsidiary bank            $    4,031          $    3,697
    Net loss of the Company, excluding
       Intercompany accounts                      (208)               (382)
                                              ---------           ---------
                                             $    3,823          $    3,315
                                              =========           =========`

---

Consolidated Net Income

The Company reported consolidated net
income of $3,823,000 for the year ended December 31, 2007, compared to a consolidated net
income of $3,315,000 for the year ended December 31, 2006. This was the result of an
increase in interest income of $9,640,000 due to the continued growth of earning assets.
The increase in income was partially offset by a net increase in noninterest expense of
$3,684,000, which was the result of anticipated staff additions and other operating costs
related to the growth of the subsidiary bank and the opening of the new location in
Gulfport.

Consolidated Net Interest
Income

The largest component of net income
for the Company is net interest income, which is the difference between the income earned
on assets and interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the rates earned on the Companys interest-earning
assets and the rates paid on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities, and the degree of mismatch and
the maturity and repricing characteristics of its interest-earning assets and
interest-bearing liabilities.

Consolidated net interest income was
$18,256,000 for the year ended December 31, 2007, as compared to $14,383,000 for the year
ended December 31, 2006. This increase was the direct result of an increase in average
earning assets for the year 2007 to $434,096,000 compared to $315,217,000 for the year
2006. This increase in earning assets was funded by an increase in deposits and by Federal
Home Loan Bank (FHLB) borrowings. Deposits at December 31, 2007, totaled $386,168,000
compared to $351,722,000 at December 31, 2006. Average interest-bearing liabilities for
the year 2007 were $366,567,000 compared to $262,165,000 for the year 2006. At December
31, 2007, the net interest spread, the difference between the yield on earning assets and
the rates paid on interest-bearing liabilities, was 3.56% compared to 3.96% at December
31, 2006. The net interest margin (which is net interest income divided by average earning
assets) was 4.21% for the year 2007 compared to 4.56% for the year 2006. Rates paid on
average interest-bearing liabilities increased from 3.58% for the year 2006 to 4.13% for
the year 2007. Interest earned on assets and interest accrued on liabilities is
significantly influenced by market factors, specifically interest rates as set by Federal
agencies. Average loans comprised 77.9% of average earning assets for the year 2007
compared to 75.4% for the year 2006.

---

Average Balances, Income and
Expenses, and Rates. The following tables depict, for the periods indicated, certain
information related to the average balance sheet and average yields on assets and average
costs of liabilities. Such yields are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been derived
from daily averages.

`Average Balances, Income and Expenses, and Rates

                                                                           Years Ended December 31,
                                --------------------------------------------------------------------------------------------------
                                              2007                              2006                              2005
                                --------------------------------------------------------------------------------------------------
                                Average     Income/     Yield/     Average    Income/     Yield/     Average    Income/     Yield/
                                 Balance    Expenses     Rate      Balance    Expenses     Rate      Balance    Expenses     Rate
                                --------------------------------------------------------------------------------------------------
Assets                                                                 (Dollars in thousands)
Earning Assets
      Loans (1)(2)               $338,368     $28,732      8.49%   $237,578     $19,976      8.41%   $189,187     $14,097    7.45%
                                   90,638       4,403      4.86%     65,795       3,195      4.86%     30,985       1,170    3.78%
Securities
      Federal funds sold            4,478         232      5.18%     11,000         545      4.95%     10,564         388    3.67%
      Other                           612          32      5.23%        844          44      5.21%        829          37    4.46%
                                 --------     -------     ------   --------     -------     ------   --------     -------   ------

    Total earning assets          434,096      33,399      7.69%    315,217      23,760      7.54%    231,565      15,692    6.78%
                                 --------     -------     ------   --------     -------     ------   --------     -------   ------

    Cash and due from banks         9,570                            10,352                             8,380
       Premises and equipment      15,553                             8,561                             8,478
       Other assets                 9,158                             9,158                             6,507
       Allowance for loan
          losses                   (4,160)                           (2,848)                           (2,017)
                                 --------                          --------                          --------
      Total assets               $464,217                          $340,440                          $252,913
                                 ========                          ========                          ========

Liabilities
      Interest-bearing
          liabilities            $366,567     $15,143      4.13%   $262,165     $ 9,377      3.58%   $195,382     $ 5,543    2.84%
                                              -------                           -------                           -------
      Demand deposits (1)          61,565                            55,639                            38,766
      Other liabilities             2,691                             2,282                             1,487

      Shareholders' equity         33,394                            20,354                            17,278
                                 --------                          --------                          --------

      Total liabilities and
      shareholders' equity       $464,217                          $340,440                          $252,913
                                 ========                          ========                          ========

           Net interest spread                             3.56%                             3.96%                           3.94%

   Net yield on interest-earning
   Assets                                     $18,256      4.21%                $14,383      4.56%                $10,149    4.38%
                                              =======                           =======                           =======

____________________
(1)  All loans and deposits were made to borrowers in the United States.  The Company had no significant nonaccrual loans
     during the periods presented.  Loans include held for sale loans.
(2)  Includes loan fees of $1,136, $976, and $755  respectively.`

---

Analysis of Changes in Net Interest
Income. The following table presents the consolidated dollar amount of changes in interest
income and interest expense attributable to changes in volume and to changes in rate. The
combined effect in both volume and rate which cannot be separately identified has been
allocated proportionately to the change due to volume and due to rate.

`Analysis of Changes in Consolidated Net Interest Income

                                            Year Ended December 31,         Year Ended December 31,
                                          -----------------------------   ----------------------------
                                                2007 versus 2006               2006 versus 2005
                                           Increase (decrease) due to     Increase (decrease) due to
                                          -----------------------------   ----------------------------
                                           Volume    Rate       Net       Volume     Rate      Net
                                          --------- -------- ----------   -------- --------- ---------
                                                            (Dollars in thousands)
Earning Assets
   Loans............................       $ 8,475   $  281   $  8,756    $ 3,605   $ 2,274   $ 5,879
   Securities.......................         1,206        2      1,208      1,316       709     2,025
   Federal funds sold ..............         (323)       10      (313)         16       141       157
   Other short-term investments ....          (12)       -        (12)          1         6         7
                                          --------- -------- ----------   -------- --------- ---------
     Total interest income .........         9,346      293      9,639      4,938     3,130     8,068
                                          --------- -------- ----------   -------- --------- ---------
Interest-Bearing Liabilities
   Interest-bearing transaction
      accounts......................           660      716      1,376        507        44       551
   Money market accounts............            60      251        311         51       224       275
   Savings deposits.................            50       22         72        129        80       209
   Time deposits....................         2,397    1,266      3,663      1,300     1,224     2,524
   Borrowed funds...................           549    (205)        344        118       156       274
                                          --------- -------- ----------   -------- --------- ---------
   Total interest expense...........         3,716    2,050      5,766      2,105     1,728     3,833
                                          --------- -------- ----------   -------- --------- ---------
   Net interest income..............       $ 5,630  $(1,757)  $  3,873    $ 2,833   $ 1,402   $ 4,235
                                          ========= ======== ==========   ======== ========= =========`

Interest Sensitivity. The Company
monitors and manages the pricing and maturity of its assets and liabilities in order to
diminish the potential adverse impact that changes in interest rates could have on its net
interest income. A monitoring technique employed by the Company is the measurement of the
Companys interest sensitivity gap, which is the positive or negative
dollar difference between assets and liabilities that are subject to interest rate
repricing within a given period of time. The Company also performs asset/liability
modeling to assess the impact varying interest rates and balance sheet mix assumptions
will have on net interest income. Interest rate sensitivity can be managed by repricing
assets or liabilities, selling securities available-for-sale, replacing an asset or
liability at maturity, or adjusting the interest rate during the life of an asset or
liability. Managing the amount of assets and liabilities repricing in the same time
interval helps to hedge the risk and minimize the impact on net interest income of rising
or falling interest rates. The Company evaluates interest sensitivity risk and then
formulates guidelines regarding asset generation and repricing, funding sources and
pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity
risk.

---

`The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated
cumulative gap position at December 31, 2005, 2006, and 2007.

                                                                    December 31, 2005
                                           ---------------------------------------------------------------------
                                                           After Three
                                                Within       Through      Within    Greater Than
                                                 Three       Twelve         One     One Year or
                                                Months       Months        Year     Nonsensitive       Total
                                                ------       ------        ----     ------------       -----
                                                                   (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................           81,679       29,211      110,890    $  89,419    $  200,309
      Securities (2).....................            9,110        5,650       14,760       35,750        50,510
      Funds sold and other...............           16,639          105       16,744            -        16,744
                                                ----------    ---------   ----------    ---------    ----------
        Total earning assets.............          107,428       34,966      142,394      125,169       267,563
                                                ----------    ---------   ----------    ---------    ----------

Liabilities
   Interest-bearing liabilities:
   Interest-bearing deposits:
      NOW accounts (1)...................        $       -    $  29,160    $  29,160      $     -     $  29,160
      Money market accounts..............           33,122            -       33,122            -        33,122
      Savings deposits (1) ..............                -       17,786       17,786            -        17,786
      Time deposits......................           11,832       74,169       86,001       26,295       112,296
                                                ----------    ---------   ----------    ---------    ----------
         Total interest-bearing deposits.           44,954      121,115      166,069       26,295       192,364
   Borrowed funds........................                -        3,999        3,999       21,466        25,465
                                                ----------    ---------   ----------    ---------    ----------
   Total interest-bearing liabilities               44,954      125,114      170,068       47,761       217,829
                                                ----------    ---------   ----------    ---------    ----------
      Interest-sensitivity gap per period...     $  62,474    $(90,148)    $(27,674)     $ 77,408     $  49,734
                                                ==========    =========   ==========    =========    ==========
     Cumulative gap at December 31, 2005....     $  62,474    $(27,674)    $(27,674)     $ 49,734     $  49,734
                                                ==========    =========   ==========    =========    ==========
     Ratio of cumulative gap to total
      earning assets at  December 31, 2005..         23.3%      (10.3%)      (10.3%)        18.6%

                                                                    December 31, 2006
                                           ---------------------------------------------------------------------
                                                           After Three
                                                Within       Through      Within    Greater Than
                                                 Three       Twelve         One     One Year or
                                                Months       Months        Year     Nonsensitive       Total
                                                ------       ------        ----     ------------       -----
                                                                   (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................        $  99,026    $  46,459   $  145,485   $  142,390   $  287,875
      Securities (2).....................            6,203        9,954       16,157       75,653       91,810
      Funds sold and other...............            9,225          219        9,444            -        9,444
                                                ----------    ---------   ----------    ---------    ----------
        Total earning assets.............          114,454       56,632      171,086      218,043      389,129
                                                ----------    ---------   ----------    ---------    ----------

Liabilities
   Interest-bearing liabilities:
   Interest-bearing deposits:
      NOW accounts (1)...................         $      -    $  61,673   $   61,673     $      -   $   61,673
      Money market accounts..............           35,592            -       35,592            -       35,592
      Savings deposits (1) ..............                -       20,621       20,621            -       20,621
      Time deposits......................           22,242      122,933      145,175       30,009      175,184
                                                ----------    ---------   ----------    ---------    ----------
         Total interest-bearing deposits.           57,834      205,227      263,061       30,009      293,070
   Borrowed funds........................              750        4,153        4,903       15,924       20,827
                                                ----------    ---------   ----------    ---------    ----------
   Total interest-bearing liabilities....           58,584      209,380      267,964       45,933      313,897
                                                ----------    ---------   ----------    ---------    ----------
   Interest-sensitivity gap per period...        $  55,870  $ (152,748)  $  (96,878)   $  172,010    $  75,132
                                                ==========    =========   ==========    =========    ==========
   Cumulative gap at December 31, 2006...        $  55,870  $  (96,878)  $  (96,878)    $  75,132    $  75,132
                                                ==========    =========   ==========    =========    ==========
   Ratio of cumulative gap to total earning
      assets at December 31, 2006 .......            14.4%      (24.9%)      (24.9%)        19.3%`

---

`December 31, 2006
                                           ---------------------------------------------------------------------
                                                           After Three
                                                Within       Through      Within    Greater Than
                                                 Three       Twelve         One     One Year or
                                                Months       Months        Year     Nonsensitive       Total
                                                ------       ------        ----     ------------       -----
                                                                   (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................        $140,579   $   59,868   $  200,447   $  170,776   $  371,223
      Securities (2).....................           8,011        6,721       14,732       72,320       87,052
      Funds sold and other...............             223          228          451            -          451
                                                ---------   ----------   ----------   ----------   ----------
        Total earning assets.............         148,813       66,817      215,630      243,096      458,726
                                                ---------   ----------   ----------   ----------   ----------
Liabilities
   Interest-bearing liabilities
   Interest-bearing deposits
      NOW accounts (1)...................        $      -    $  73,398    $  73,398     $      -    $  73,398
      Money market accounts..............          38,820            -       38,820            -       38,820
      Savings deposits (1) ..............               -       20,934       20,934            -       20,934
      Time deposits......................          58,049      123,616      181,665       16,002      197,667
                                                ---------   ----------   ----------   ----------   ----------
         Total interest-bearing deposits.          96,869      217,948      314,817       16,002      330,819
   Borrowed funds (3)....................          17,052       12,693       29,745       31,027       60,772
                                                ---------   ----------   ----------   ----------   ----------
   Total interest-bearing liabilities....         113,921      230,641      344,562       47,029      391,591
                                                ---------   ----------   ----------   ----------   ----------
   Interest-sensitivity gap per period...        $ 34,892   $(163,824)   $(128,932)     $196,067    $  67,135
                                                =========   ==========   ==========   ==========   ==========
   Cumulative gap at December 31, 2007...        $  34,892  $(128,932)   $(128,932)     $ 67,135    $  67,135
                                                =========   ==========   ==========   ==========   ==========
   Ratio of cumulative gap to total earning
      assets at December 31, 2007 .......             7.6%     (28.1%)      (28.1%)        14.6%

_________________________

(1)  NOW and savings accounts are subject to immediate withdrawal and repricing.  These deposits do not tend
     to immediately react to changes in interest rates and the Company believes these deposits are a stable and
     predictable funding source.  Therefore, these deposits are included in the repricing period that management
     believes most closely matches the periods in which they are likely to reprice rather than the period in
     which the funds can be withdrawn contractually.
(2)  Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.
(3)  Does not include subordinated debentures of $10,310,000.`

The Company generally would benefit
from increasing market rates of interest when it has an asset-sensitive gap and generally
from decreasing market rates of interest when it is liability sensitive. The Company
currently is liability sensitive within the one-year time frame. However, the
Companys gap analysis is not a precise indicator of its interest sensitivity
position. The analysis presents only a static view of the timing of maturities and
repricing opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a substantial
portion of core deposits may change contractually within a relatively short time frame,
but those rates are viewed by management as significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Accordingly, management
believes a liability sensitive-position within one year would not be as indicative of the
Companys true interest sensitivity as it would be for an organization which depends
to a greater extent on purchased funds to support earning assets. Net interest income is
also affected by other significant factors, including changes in the volume and mix of
earning assets and interest-bearing liabilities.

---

Provision and Allowance
for Loan Losses

The Company has developed policies
and procedures for evaluating the overall quality of its credit portfolio and the timely
identification of potential problem loans. Managements judgment as to the adequacy
of the allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may not prove to be accurate, particularly given the
Companys short operating history and rapid growth. Thus, there can be no assurance
that charge-offs in future periods will not exceed the allowance for loan losses or that
additional increases in the loan loss allowance will not be required.

Additions to the allowance for loan
losses, which are reported as the provision for loan losses on the Companys
consolidated statements of income, are made periodically to maintain the allowance at an
appropriate level based on managements analysis of the potential risk in the loan
portfolio. The allowance consists of two components: allocated and unallocated. The
allocated portion of the allowance is based upon specific allocations to specific loans,
including impaired loans, and upon historical loan loss experience of the bank and its
peer group ratios. Due to minimal loss history in various sections of the loan loss
portfolio, management has elected to integrate the loss experience of the banks peer
groups in determining an appropriate allowance based on the various loan types within the
banks loan portfolio.

The unallocated component reflects
managements estimate of the probable inherent but undetected losses within the
portfolio due to uncertainties about economic conditions, changes in collateral values and
borrower financial condition, expansion into new markets, as well as other risk factors
that have not yet manifested themselves.

The amount of the provision is a
function of the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the allowance
during a given period, and current and anticipated economic conditions.

At December 31, 2007 the consolidated
allowance for loan losses amounted to $4,221,000, or 1.14% of outstanding loans. At
December 31, 2006, the allowance for loan losses amounted to $3,793,000, which was 1.32%
of outstanding loans at December 31, 2006. The Companys provision for loan losses
was $1,321,000 for the year ended December 31, 2007, compared to $800,000 for the year
ended December 31, 2006. In each year, the provision was made based on managements
assessment of general loan loss risk and asset quality.

A loan is considered impaired when,
based on current information and events, it is probable that the Corporation will be
unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding
the loan and the borrower, including the length of the delay, the reasons for the delay,
the borrowers prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a loan by loan basis generally
using the fair value of the collateral if the loan is collateral dependent. At December
31, 2007 and 2006, loans considered impaired were the same as nonaccrual loans as
described in the following paragraph.

---

The Company discontinues accrual of
interest on loans when management believes, after considering economic and business
conditions and collection efforts, that a borrowers financial condition is such that
the collection of interest is doubtful. Generally, the Company will place a delinquent
loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a
loan is placed in nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported interest
income. No additional interest is accrued on the loan balance until the collection of both
principal and interest becomes reasonably certain. The Company had nonaccrual loans of
$2,429,000 and $1,789,000 and no restructured or other nonperforming loans at December 31,
2007 and 2006, respectively. At December 31, 2007 the Company had loans in the principal
amount of $4,686,000 delinquent 30 to 89 days, and loans of approximately $994,000 that
were delinquent 90 days or more and still accruing. At December 31, 2006, the Company had
loans in the principal amount of $3,035,000 delinquent by 30 to 89 days, and loans of
approximately $118,000 that were delinquent by 90 days and still accruing.

A potential problem loan is one in
which management has serious doubts about the borrowers future performance under the
terms of the loan contract. These loans are current as to principal and interest and,
accordingly, they are not included in nonperforming assets categories. The level of
potential problem loans is one factor used in the determination of the adequacy of the
allowance for loan losses. At December 31, 2007 and December 31, 2006, the subsidiary bank
had potential problem loans of $9,558,070 and $7,691,231, respectively. This represents an
increase of $1,866,839 which is attributable to one specific loan relationship. As of
March 14, 2008 problem loans decreased to $8,165,867.

Consolidated Allowance
For Loan Losses

`Years Ended December 31,
                                                              -------------------------------------------------------------------
                                                                   2007         2006         2005         2004         2003
                                                              -----------   ----------   ----------    ---------     ------------

Average loans outstanding........................              $  338,368   $  237,578   $  189,187    $ 140,052     $   112,468
                                                              ===========   ==========   ==========    =========     ============
Loans outstanding at period end..................              $  371,223   $  287,875   $  200,310      164,374     $   115,242
                                                              ===========   ==========   ==========    =========     ============
Total nonperforming loans........................                   2,429        1,789          283          361             197
                                                              ===========   ==========   ==========    =========     ============
Beginning balance of allowance...................                   3,793        2,367        1,659        1,166           1,228

Loans charged-off................................                   (950)        (186)        (303)        (291)           (603)
                                                              -----------   ----------   ----------    ---------     ------------
Total loans charged-off..........................                   (950)        (186)        (303)        (291)           (603)
                                                              -----------   ----------   ----------    ---------     ------------
Total recoveries.................................                      57          107           90          112              73
                                                              -----------   ----------   ----------    ---------     ------------
Net loans charged-off............................                   (893)         (79)        (213)        (179)           (530)
Acquisition......................................                       -          705            -            -               -

Provision for loan losses........................                   1,321          800       921             672             468
                                                              -----------   ----------   ----------    ---------     ------------
Balance at period end............................               $   4,221    $   3,793  $  2,367        $  1,659     $     1,166
                                                              ===========   ==========   ==========    =========     ============
Net charge-offs to average loans.................                    .26%         .03%         .11%         .13%            .47%
Allowance as percent of total loans..............                   1.14%        1.32%        1.18%        1.01%           1.01%
Nonperforming loans as a percentage of total loans                   .65%         .62%         .14%         .22%            .17%
Allowance as a multiple of nonperforming loans...                    1.7X         2.1X         8.4X         4.6X            5.9X`

---

`At December 31, 2007, the components of the allowance for loan losses consisted of the


                                                                                      Allowance
                                                                                      ---------
                                                                                   (In thousands)
                     Allocated:
                       Impaired loans                                                $    1,052
                       Graded loans                                                       3,169
                                                                                     ----------
                                                                                     $    4,221
                                                                                     ==========

Graded loans are those loans or pools of loans assigned a grade by internal loan review.`

Noninterest Income and Expense

Noninterest Income.     The
Companys primary source of noninterest income is service charges on deposit
accounts. Other sources of noninterest income include bankcard fees, commissions on check
sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life
insurance income.

Noninterest income increased by
$950,000 or 42.4% from $2,239,000 for the year ended December 31, 2006, to $3,189,000 for
the year ended December 31, 2007. The deposit activity fees were $1,878,000 for 2007
compared to $1,318,000 for 2006. Other service charges increased by $230,000 or 46.9% from
$490,000 for the year ended December 31, 2006, to $720,000 for the year ended December 31,
2007.

Noninterest expense increased from
$11.1 million for the year ended December 31, 2006 to $14.8 million for the year ended
December 31, 2007. The Company experienced increases in most expense categories, which
reflects the continued growth of the Company. The largest increase was in salary and
employee benefits, which increased by $2.3 million in 2007 as compared to 2006. This
increase included normal merit increases in salaries as well as the employment of
additional employees throughout 2007, as well as staffing a new location.

The following table sets forth the
primary components of noninterest expense for the periods indicated:

`Noninterest Expense

                                                                              Years ended December 31,
                                                                         --------------------------------
                                                                             2007        2006     2005
                                                                             ----        ----     ----
                                                                                  (In thousands)

Salaries and employee benefits....................................         $ 8,962    $ 6,613    $ 4,816
Occupancy.........................................................             983        746        585
Equipment.........................................................           1,008        858        768
Marketing and public relations....................................             323        320        207
Data processing...................................................              89        199        150
Supplies and printing.............................................             402        311        194
Telephone.........................................................             162        114         66
Correspondent services............................................             106        102         72
Deposit and other insurance.......................................             283        144        149
Professional and consulting fees..................................             506        407        287
Postage...........................................................             181        128        108
ATM fees..........................................................             204        110         77
Other.............................................................           1,614      1,086        659
                                                                          --------   --------    -------
     Total........................................................         $14,823   $ 11,138    $ 8,138
                                                                          ========   ========    =======`

Income Tax Expense

Income tax expense consists of two components.
The first is the current tax expense which represents the expected income tax to be paid
to taxing authorities. The Company also recognizes deferred tax for future deductible
amounts resulting from differences in the financial statement and tax bases of assets and
liabilities.

---

Analysis of Financial
Condition

Earning Assets

Loans.    
          Loans typically provide higher yields than the other types of earning assets,
          and thus one of the Companys goals is for loans to be the largest category
          of the Companys earning assets. At December 31, 2007 and 2006,
          respectively, loans accounted for 80% and 74% of earning assets. Management
          attempts to control and counterbalance the inherent credit and liquidity risks
          associated with the higher loan yields without sacrificing asset quality to
          achieve its asset mix goals. Loans averaged $338.4 million during 2007, as
          compared to $237.6 million during 2006, and $189.2 million during 2005,
          reflecting the substantial growth of the Company during the period.

The following table shows the
composition of the loan portfolio by category:

`Composition of Loan Portfolio

                                                                              December 31,
                                                  ----------------------------------------------------------------------
                                                            2007                   2006                   2005
                                                  -----------------------  ---------------------- -----------------------
                                                                 Percent                  Percent                Percent
                                                     Amount     Of Total     Amount      of Total     Amount    of Total
                                                  -----------------------  ----------------------   ---------------------
                                                                           (Dollars in thousands)

   Mortgage loans held for sale...................   $  5,664       1.5%      $  3,945       1.4%    $ 3,319       1.7%
   Commercial, financial and agricultural ........     46,633      12.6%        36,258      12.6%     30,576      15.3%
   Real Estate:
      Mortgage-commercial.........................     84,854      22.9%        63,698      22.2%     48,335      24.1%
      Mortgage-residential........................    112,676      30.3%        94,840      32.9%     68,148      34.0%
      Construction................................    100,634      27.1%        69,420      24.1%     37,660      18.8%
   Consumer and other.............................     20,762       5.6%        19,714       6.8%     12,271       6.1%
                                                  -----------------------  ----------------------   ---------------------
   Total loans....................................    371,223       100%       287,875       100%    200,309     100.0%
                                                                =========                 =======              ==========
   Allowance for loan losses......................    (4,221)                  (3,793)               (2,367)
                                                  -----------------------  ----------------------   ---------------------
   Net loans......................................  $ 367,002                 $284,082              $197,942
                                                  ===========              ===========              ========`

In the context of this discussion, a
real estate mortgage loan is defined as any loan, other than loans for
construction purposes, secured by real estate, regardless of the purpose of the loan. The
Company follows the common practice of financial institutions in the Companys market
area of obtaining a security interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood of the
ultimate repayment of the loan and tends to increase the magnitude of the real estate loan
portfolio component. Generally, the Company limits its loan-to-value ratio to 80%.
Management attempts to maintain a conservative philosophy regarding its underwriting
guidelines and believes it will reduce the risk elements of its loan portfolio through
strategies that diversify the lending mix.

Loans held for sale consist of
mortgage loans originated by the bank and sold into the secondary market. Commitments from
investors to purchase the loans are obtained upon origination.

---

The following table sets forth the
Companys commercial and construction real estate loans maturing within specified
intervals at December 31, 2007.

`Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

                                                                December 31, 2006
                                                ----------------------------------------------------
                                                             Over One Year
                                                 One Year       Through       Over Five
                     Type                        or Less       Five Years       Years       Total
----------------------------------------------- ----------   --------------   ----------   ---------
                                                              (Dollars in thousands)

Commercial, financial and agricultural........   $  24,844     $   20,543      $  1,246    $  46,633
Real estate - construction....................     100,634              -             -      100,634
                                                ----------   --------------   ----------   ---------
                                                 $ 125,478     $   20,543      $  1,246    $ 147,267
                                                ==========   ==============   ==========   =========

Loans maturing after one year with:
Fixed interest rates..........................                                             $  18,112
Floating interest rates.......................                                                 3,677
                                                                                           ---------
                                                                                           $  21,789
                                                                                           =========`

The information presented in the
above table is based on the contractual maturities of the individual loans, including
loans which may be subject to renewal at their contractual maturity. Renewal of such loans
is subject to review and credit approval, as well as modification of terms upon their
maturity.

Investment Securities.     The investment
securities portfolio is a significant component of the Companys total earning
assets. Total securities averaged $90.6 million in 2007, as compared to $65.8 million in
2006 and $31.0 million in 2005. This represents 20.9%, 20.9%, and 13.4% of the average
earning assets for the years ended December 31, 2007, 2006, and 2005, respectively. At
December 31, 2007, investment securities were $87.1 million and represented 19.0% of
earning assets. The Company attempts to maintain a portfolio of high quality, highly
liquid investments with returns competitive with short term U.S. Treasury or agency
obligations. This objective is particularly important as the Company continues to grow its
loan portfolio. The Company primarily invests in securities of U.S. Government agencies,
municipals, and corporate obligations with maturities up to five years.

The following table summarizes the
book value of securities for the dates indicated.

`Securities Portfolio

                                                                  December 31,
                                                     ---------------------------------------
                                                         2007          2006         2005
                                                         ----          ----         ----
                                                                 (In thousands)
Available-for-sale
    U. S. Government agencies.................        $ 58,080       $ 69,453    $ 39,904
    States and municipal subdivisions.........          21,224         15,474       5,879
    Corporate obligations.....................           3,859          3,448       2,760
      Mutual finds ...........................           1,156          1,105           -
                                                      --------       --------    --------
      Total available-for-sale................          84,319         89,480      48,543
                                                      --------       --------    --------
Held-to-maturity
    U.S. Government agencies..................              13             13          14
                                                      --------       --------    --------
Total.........................................        $ 84,332       $ 89,493    $ 48,557
                                                      ========       ========    ========`

---

`The following table shows, at carrying value, the scheduled maturities and average yields of securities
held at December 31, 2007.

                            Investment Securities Maturity Distribution and Yields (1)

                                                                        December 31, 2007
                                      ---------------------------------------------------------------------------------------
                                                               After One But         After Five But
                                        Within One Year      Within Five Years      Within Ten Years      After Ten Years
                                      -------------------   -------------------   -------------------   ---------------------
                                       Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield
                                      -------      ------   --------     ------   --------     ------   --------     --------
Held-to-maturity:
   U.S. Government agencies (2)...... $     -         -     $    -          -     $     -          -     $    -          -
Available-for-sale:

   U.S. Government agencies (3)...... $ 7,756      4.43%    $24,473      4.62%    $ 1,034      6.02%     $    -          -
   States and municipal subdivisions.     877      3.23%      7,152      3.63%      8,337      3.96%      4,858      4.32%
   Corporate obligations and other...       -          -        957      6.55%          -          -      4,059      6.89%
                                      -------      -----    -------     ------    -------      -----     ------      -----

Total investment securities
   available-for-sale................ $ 8,633               $32,582               $ 9,371                $8,917
                                      =======               =======               =======                ======

____________________
(1)  Investments with a call feature are shown as of the contractual maturity date.
(2)  Excludes mortgage-backed securities totaling $13 with a yield of 7.2%.
(3)  Excludes mortgage-backed securities totaling $24.8 million with a yield of 5.28% and
       mutual funds of $1.2 million.`

Short-Term Investments.     Short-term investments,
consisting of Federal Funds sold, averaged $4.5 million in 2007, $11.0 million in 2006,
and $10.6 million in 2005. At December 31, 2007, and December 31, 2006, short-term
investments totaled $223,000 and $8,772,000 respectively. These funds are a primary source
of the Companys liquidity and are generally invested in an earning capacity on an
overnight basis.

Deposits

Deposits.    
          Average total deposits increased $84.9 million, or 42.8% in 2006. Average total
          deposits increased $99.7 million, or 35.2% in 2007. At December 31, 2007, total
          deposits were $386.2 million, compared to $351.7 million a year earlier, an
          increase of 9.8%.

---

`The following table sets forth the deposits of the Company by category for the period indicated.

                                                                Deposits

                                                                                 December 31,
                                     --------------------- ---------------------- ---------------------
                                             2007                  2006                   2005
                                     --------------------- ---------------------- ---------------------
                                                  Percent                Percent               Percent
                                                    of                     of                    of
                                        Amount    Deposits    Amount     Deposits    Amount    Deposits
                                     ----------  --------- ----------   --------- ----------  ---------

Noninterest-bearing accounts.....     $ 55,349      14.3%    $58,652       16.7%    $49,585      20.5%
NOW accounts.....................       73,398      19.0%     61,673       17.5%     29,160      12.0%
Money market accounts............       38,820      10.2%     35,592       10.1%     33,122      13.7%
Savings accounts.................       20,934       5.4%     20,621        5.9%     17,786       7.4%
Time deposits less than
  $100,000.......................
Time deposits of $100,000 or            93,213      24.1%     92,364       26.3%     61,907      25.6%
  over...........................      104,454      27.0%     82,820       23.5%     50,389      20.8%
                                     ----------  --------- ----------   --------- ----------  ---------
    Total deposits...............     $386,168       100%   $351,722        100%   $241,949
                                                                                                  100%`

The Companys loan-to-deposit
ratio was 94.7% at December 31, 2007 and 80.7% at December 31, 2006. The loan-to-deposit
ratio averaged 88% during 2007. Core deposits, which exclude time deposits of $100,000 or
more, provide a relatively stable funding source for the Companys loan portfolio and
other earning assets. The Companys core deposits were $281.7 million at December 31,
2007 and $268.9 million at December 31, 2006. Management anticipates that a stable base of
deposits will be the Companys primary source of funding to meet both its short-term
and long-term liquidity needs in the future. The Company has purchased brokered deposits
from time to time to help fund loan growth. Brokered deposits and jumbo certificates of
deposit generally carry a higher interest rate than traditional core deposits. Further,
brokered deposit customers typically do not have loan or other relationships with the
Company. The Company has adopted a policy not to permit brokered deposits to represent
more than 10% of all of the Companys deposits.

The maturity distribution of the
Companys certificates of deposit of $100,000 or more at December 31, 2007, is shown
in the following table. The Company did not have any other time deposits of $100,000 or
more.

`Maturities of Certificates of Deposit
                                                of $100,000 or More

                                                            After Three
                                           Within Three       Through       After Twelve
                                              Months       Twelve Months       Months            Total
                                         ---------------- --------------- ---------------- ----------------

December 31, 2007....................        $  35,119      $   63,602        $   5,733       $  104,454`

---

Borrowed Funds

Borrowed funds consists of advances
from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase
agreements. At December 31, 2007, advances from the FHLB totaled $32.9 million compared to
$20.8 million at December 31, 2006. The advances are collateralized by a blanket lien on
the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock,
and amounts on deposit with the FHLB. Federal funds purchased totaled $12.9 million at
December 31, 2007 compared to none at December 31, 2006.

Reverse Repurchase Agreements
consists of three $5,000,000 agreements. These agreements are secured by securities with a
fair value of $16,451,000 at December 31, 2007. The maturity dates are from August 22,
2012 through September 26, 2017 with rates between 3.81% and 4.51%.

Subordinated Debentures

In 2002, the Company issued
subordinated debentures of $7,217,000 to The First Bancshares Statutory Trust I (the
Trust). The Company is the sole owner of the equity of the Trust. The Trust issued
$7,000,000 of preferred securities to investors. The Company entered into this arrangement
to provide funding for expected growth. These debentures were called on March 26, 2007.

In 2006, the Company issued
subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2
(Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued
$4,000,000 of preferred securities to investors. The Company makes interest payments and
will make principal payments on the debentures to the Trust 2. These payments will be the
source of funds used to retire the preferred securities, which are redeemable at any time
beginning in 2011 and mature in 2036. The Company entered into this arrangement to provide
funding for expected growth.

In 2007, the Company issued
subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3
(Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued
$6,000,000 of preferred securities to investors. The Company makes interest payments and
will make principal payments on the debentures to the Trust 3. These payments will be the
source of funds used to retire the preferred securities, which are redeemable at any time
beginning in 2012 and mature in 2037. The Company entered into this arrangement to provide
funding for expected growth.

Capital

Total shareholders equity as of
December 31, 2007, was $36.3 million, an increase of $3.9 million or approximately 12.1%,
compared with shareholders equity of $32.4 million as of December 31, 2006.

The Federal Reserve Board and bank
regulatory agencies require bank holding companies and financial institutions to maintain
capital at adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based
standard, capital is classified into two tiers. Tier 1 capital consists of common
shareholders equity, excluding the unrealized gain (loss) on available-for-sale
securities, minus certain intangible assets. Tier 2 capital consists of the general
reserve for loan losses subject to certain limitations. An institutions total
risk-based capital for purposes of its risk-based capital ratio consists of the sum of its
Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 4% for Tier
1 and 8% for total risk-based capital.

Bank holding companies and banks are
also required to maintain capital at a minimum level based on total assets, which is known
as the leverage ratio. The minimum requirement for the leverage ratio is 3%. All but the
highest rated institutions are required to maintain ratios 100 to 200 basis points above
the minimum. The Company and the subsidiary bank exceeded their minimum regulatory capital
ratios as of December 31, 2007 and 2006.

---

`Analysis of Capital


                                      Adequately      Well             The Company                   The First
Capital Ratios                        Capitalized  Capitalized         December 31,                 December 31,
-----------------------------        ------------  ------------   -----------------------      -----------------------
                                                                     2007        2006             2007        2006
                                                                     ----        ----             ----        ----

Leverage........................          4.0%        5.0%           9.1%       10.3%             8.7%        7.9%
Risk-based capital:
   Tier 1.......................          4.0%        6.0%          11.6%       13.7%            11.0%       10.6%
   Total........................          8.0%       10.0%          12.7%       15.0%            12.1%       11.9%


                                                            Ratios

                                                        2007         2006          2005
                                                        ----         ----          ----
Return on assets (net income divided by
    average total assets)                               .82%         .97%          .75%

Return on equity (net income divided by
    average equity)                                    11.4%        16.3%         11.0%

Dividend payout ratio (dividends per
    share divided by net income per share)             41.0%        11.9%         12.3%

Equity to asset ratio (average equity
    divided  by average total assets)                   7.2%         6.0%          6.8%`

Liquidity Management

Liquidity management involves
monitoring the Companys sources and uses of funds in order to meet its day-to-day
cash flow requirements while maximizing profits. Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Liquidity management is made more
complicated because different balance sheet components are subject to varying degrees of
management control. For example, the timing of maturities of the investment portfolio is
very predictable and subject to a high degree of control at the time investment decisions
are made. However, net deposit inflows and outflows are far less predictable and are not
subject to the same degree of control. Asset liquidity is provided by cash and assets
which are readily marketable, which can be pledged, or which will mature in the near
future. Liability liquidity is provided by access to core funding sources, principally the
ability to generate customer deposits in the Companys market area.

The Companys Federal Funds sold
position, which is typically its primary source of liquidity, averaged $4.5 million during
the year ended December 31, 2007 and totaled $223,000 at December 31, 2007. Also, the
Company has available advances from the Federal Home Loan Bank. Advances available are
generally based upon the amount of qualified first mortgage loans which can be used for
collateral. At December 31, 2007, advances available totaled approximately $120.7 million
of which $52.9 million had been drawn, or used for letters of credit.

Management regularly reviews the
liquidity position of the Company and has implemented internal policies which establish
guidelines for sources of asset-based liquidity and limit the total amount of purchased
funds used to support the balance sheet and funding from non-core sources.

Subprime Assets

The Bank does not engage in subprime
lending activities targeted towards borrowers in high risk categories.

Accounting Matters

Information on new accounting matters
is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in
this report. This information is incorporated herein by reference.

Impact of Inflation

Unlike most industrial companies, the
assets and liabilities of financial institutions such as the Company are primarily
monetary in nature. Therefore, interest rates have a more significant effect on the
Companys performance than do the effects of changes in the general rate of inflation
and change in prices. In addition, interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. As discussed
previously, management seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide interest rate fluctuations, including
those resulting from inflation.

---

`REPORT OF
                                         INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Audit Committee of the
Board of Directors and Stockholders
The First Bancshares, Inc.
Hattiesburg, Mississippi


We have audited the accompanying  consolidated balance sheets of The First Bancshares,  Inc., and subsidiary as of December 31,
2007 and 2006, and the related  consolidated  statements of income,  changes in  stockholders'  equity,  and cash flows for the
years then ended.  These financial  statements are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public Company  Accounting  Oversight  Board (United  States).
Those  standards  require  that we plan and perform  the audits to obtain  reasonable  assurance  about  whether the  financial
statements are free of material  misstatement.  The Company is not required to have,  nor were we engaged to perform,  an audit
of its internal  control over  financial  reporting.  Our audits  included  consideration  of internal  control over  financial
reporting as a basis for designing  audit  procedures  that are  appropriate in the  circumstances,  but not for the purpose of
expressing  an opinion on the  effectiveness  of the Company's  internal  control over  financial  reporting.  Accordingly,  we
express no such opinion.  An audit includes  examining,  on a test basis,  evidence  supporting the amounts and  disclosures in
the 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  financial  statements  referred to above  present  fairly,  in all material  respects,  the  consolidated
financial  position of The First  Bancshares,  Inc., and  subsidiary as of  December 31,  2007 and 2006,  and the  consolidated
results of their operations and their cash flows for the years then ended, in conformity with accounting  principles  generally
accepted in the United States of America.


                                                       /s/ T. E. LOTT & COMPANY


Columbus, Mississippi
March 28, 2008`

---

`THE FIRST BANCSHARES, INC.
                                                  CONSOLIDATED BALANCE SHEETS
                                                  DECEMBER 31, 2007 AND 2006

       ASSETS                                                                                    2007                 2006
                                                                                          ----------------     ----------------

Cash and due from banks                                                                      $ 10,890,248         $  9,743,065
Interest-bearing deposits with banks                                                              227,853              672,137
Federal funds sold                                                                                223,000            8,772,000
                                                                                          ----------------     ----------------
    Total cash and cash equivalents                                                            11,341,101           19,187,202
Held-to-maturity securities (fair value of  $13,130 in
    2007 and $13,539 in 2006)                                                                      12,932               13,363
Available-for-sale securities                                                                  84,319,208           89,480,015
Other securities                                                                                2,719,950            2,316,500
                                                                                          ----------------     ----------------
    Total securities                                                                           87,052,090           91,809,878
Loans held for sale                                                                             5,663,813            3,944,818
Loans, net of allowance for loan losses of $4,221,240
    in 2007 and $3,792,937 in 2006                                                            361,337,973          280,137,343
Interest receivable                                                                             3,538,560            2,905,133
Premises and equipment                                                                         15,622,426            9,953,178
Cash surrender value of life insurance                                                          5,461,938            5,247,889
Goodwill                                                                                          702,213              782,420
Other assets                                                                                    5,336,164            3,800,942
                                                                                          ----------------     ----------------
Total assets                                                                                $ 496,056,278        $ 417,768,803

       LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
    Noninterest-bearing                                                                      $ 55,349,239         $ 58,651,631
    Interest-bearing                                                                          330,818,605          293,070,049
                                                                                          ----------------     ----------------
       Total deposits                                                                         386,167,844          351,721,680
Interest payable                                                                                1,284,550            1,021,194
Borrowed funds                                                                                 60,772,520           20,827,427
Subordinated debentures                                                                        10,310,000           11,341,000
Other liabilities                                                                               1,240,705              492,697
                                                                                          ----------------     ----------------
       Total liabilities                                                                      459,775,619          385,403,998
Stockholders' Equity:
    Preferred stock, par value $1 per share, 10,000,000
       shares authorized; no shares issued and outstanding                                              -                    -
    Common stock, par value $1 per share: 10,000,000 shares
       authorized; 3,015,045 and 2,884,902 shares issued
       In 2007 and 2006, respectively                                                           3,015,045            2,884,902
    Additional paid-in capital                                                                 22,929,333           22,344,734
    Retained earnings                                                                          10,306,336            7,629,275
    Accumulated other comprehensive income (loss)                                                 493,590             (30,461)
    Treasury stock, at cost                                                                     (463,645)            (463,645)
                                                                                          ----------------     ----------------
       Total stockholders' equity                                                              36,280,659           32,364,805
                                                                                          ----------------     ----------------

Total liabilities and stockholders' equity                                                  $ 496,056,278        $ 417,768,803
                                                                                          ================     ================


                               The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                               CONSOLIDATED STATEMENTS OF INCOME
                                            YEARS ENDED DECEMBER 31, 2007 AND 2006

INTEREST INCOME                                                                                   2007                 2006
                                                                                         -----------------     -----------------
    Interest and fees on loans                                                              $  28,731,899        $  19,976,374
    Interest and dividends on securities
       Taxable interest and dividends                                                           3,669,168            2,932,262
       Tax-exempt interest                                                                        734,373              262,469
    Interest on federal funds sold                                                                231,706              544,880
    Interest on deposits in banks                                                                  32,218               43,557
                                                                                         -----------------     -----------------
    Total interest income                                                                      33,399,364           23,759,542

INTEREST EXPENSE
    Interest on time deposits of $100,000 or more                                               3,066,445            1,830,773
    Interest on other deposits                                                                  9,942,972            5,755,611
    Interest on borrowed funds                                                                  2,134,196            1,789,894
                                                                                         -----------------     -----------------
       Total interest expense                                                                  15,143,613            9,376,278
                                                                                         -----------------     -----------------
    Net interest income                                                                        18,255,751           14,383,264
    Provision for loan losses                                                                   1,320,914              800,361
                                                                                         -----------------     -----------------
       Net interest income after provision for loan losses                                     16,934,837           13,582,903
                                                                                         -----------------     -----------------
OTHER INCOME
    Service charges on deposit accounts                                                         1,877,952            1,318,244
    Other service charges and fees                                                                720,461              490,421
    Bank owned life insurance income                                                              213,699              194,078
    Other gains                                                                                   198,682              224,315
    Gain(loss) on other real estate                                                                37,322             (39,993)
    Other                                                                                         141,019               52,129
                                                                                         -----------------     -----------------
       Total other income                                                                       3,189,135            2,239,194
                                                                                         -----------------     -----------------
OTHER EXPENSE
    Salaries                                                                                    7,550,615            5,507,187
    Employee benefits                                                                           1,411,188            1,105,907
    Occupancy                                                                                     967,425              745,981
    Furniture and equipment                                                                       917,197              858,205
    Supplies and printing                                                                         402,125              311,111
    Professional and consulting fees                                                              505,908              407,004
    Marketing and public relations                                                                322,593              319,786
    Data processing                                                                               206,772              198,798
    Other                                                                                       2,538,807            1,684,278
                                                                                         -----------------     -----------------
       Total other expense                                                                     14,822,630           11,138,257
                                                                                         -----------------     -----------------

Income before income taxes                                                                      5,301,342            4,683,840
Income taxes                                                                                    1,478,669            1,368,826
                                                                                         -----------------     -----------------

Net income                                                                                   $  3,822,673         $  3,315,014
                                                                                         =================     =================
Net income per common share:
    Basic                                                                                    $       1.28         $       1.35
    Diluted                                                                                          1.25                 1.27


                               The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                            YEARS ENDED DECEMBER 31, 2007 AND 2006

                                                                                          Accumulated
                                                                                             Other
                           Compre-                      Additional                        Compre-
                           hensive        Common          Paid-in        Retained         hensive        Treasury
                            Income         Stock          Capital        Earnings      Income (Loss)      Stock           Total
                         ------------ --------------- --------------- --------------- --------------- -------------- --------------
Balance,
  January 1, 2006                       $ 1,213,844    $ 13,220,940     $ 4,694,292     $ (187,831)  $   (463,645)    $ 18,477,600

Comprehensive
income:
    Net income 2006        $3,315,014             -               -       3,315,014               -              -       3,315,014
    Net change in
      unrealized gain
      on available-
      For-sale
      securities,
      Net of tax              157,370             -               -               -         157,370              -         157,370
                         ------------
Comprehensive
  Income                   $3,472,384
                         ============
Stock Sale                                  365,000       7,820,355               -               -              -       8,185,355
2 for 1 stock split                       1,187,600     (1,187,600)               -               -              -               -
Exercise of stock
  Options                                     9,277          58,011               -               -              -          67,288
Adoption of SFAS
  123R                                            -           9,211               -               -              -           9,211
Stock issued in
  acquisition                               109,181       2,423,817               -               -              -       2,532,998
Cash dividend
  Declared, $.16
  per share                                       -               -       (380,031)               -              -       (380,031)
                                      --------------- --------------- --------------- --------------- -------------- --------------
Balance,
  December 31, 2006                       2,884,902      22,344,734       7,629,275        (30,461)      (463,645)      32,364,805
                                      --------------- --------------- --------------- --------------- -------------- --------------
Comprehensive
  Income:
    Net income 2007        $3,822,673             -               -       3,822,673               -              -       3,822,673
    Net change in
      unrealized gain
      on available-
      For-sale
      securities,
      Net of tax              524,051             -               -               -         524,051              -         524,051
                         ------------
Comprehensive
  Income                   $4,346,724
                         ============
Exercise of stock
  Options                                   130,143         582,322               -               -              -         712,465
Stock option expense                              -           2,277               -               -              -           2,277
Tax benefit on
  Options                                         -               -         418,543               -              -         418,543
Cash dividend
  Declared, $.525
  per share                                       -               -     (1,564,155)               -              -     (1,564,155)
                                      --------------- --------------- --------------- --------------- -------------- --------------
Balance,
  December 31, 2007                     $ 3,015,045    $ 22,929,333    $ 10,306,336      $  493,590    $ (463,645)    $ 36,280,659
                                      =============== =============== =============== =============== ============== ==============

                             The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            YEARS ENDED DECEMBER 31, 2007 AND 2006

                                                                                                 2007                 2006
                                                                                         -----------------     -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                               $  3,822,673         $  3,315,014
    Adjustments to reconcile net income to net cash:
       Depreciation and amortization                                                              978,964              676,074
       Stock option expense                                                                         2,277                9,211
       FHLB Stock dividends                                                                      (75,600)             (72,800)
       Provision for loan losses                                                                1,320,914              800,361
       Deferred income taxes                                                                      210,766               20,186
       Increase in cash value of life insurance                                                 (214,049)            (193,728)
       Securities, amortization and accretion, net                                                 75,958              127,940
       Other gains                                                                              (198,682)            (224,315)
       (Gain)loss on other real estate                                                           (37,322)               39,993
       Changes in:
          Loans held for sale                                                                 (1,718,995)            (625,825)
          Interest receivable                                                                   (633,427)            (782,616)
          Other assets                                                                          (477,809)            (510,874)
          Interest payable                                                                        263,356              455,273
          Other liabilities                                                                       748,008            (425,738)
                                                                                         -----------------     -----------------
    Net cash provided by operating activities                                                   4,067,032            2,608,156
                                                                                         -----------------     -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Cash received in excess of cash paid for acquisition                                                -            1,833,291
    Purchases of available-for-sale securities                                               (24,340,284)         (47,441,689)
    Purchases of other securities                                                             (1,239,250)            (444,350)
    Proceeds from maturities and calls of available-for-sale securities                        29,906,029           28,102,155
    Proceeds from sales of securities available-for-sale                                                -            2,457,620
    Proceeds from redemption of other securities                                                  911,400              303,350
    Proceeds from sale of lease/land                                                              352,669              532,755
    Proceeds from sale of other real estate                                                        96,511              492,670
    Increase in loans                                                                        (83,940,396)         (69,404,210)
    Additions to premises and equipment                                                       (6,586,922)          (1,672,841)
                                                                                         -----------------     -----------------
    Net cash used in investing activities                                                    (84,840,243)         (85,241,249)
                                                                                         -----------------     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Increase in deposits                                                                       34,446,164           65,573,596
    Proceeds from borrowed funds                                                               44,875,000           10,000,000
    Repayment of borrowed funds                                                               (4,929,907)         (14,637,845)
    Exercise of stock options                                                                     712,465               67,288
    Dividends paid on common stock                                                            (1,564,155)            (380,031)
    Issuance of subordinated debentures                                                         6,186,000            4,124,000
    Repayment of subordinated debentures                                                      (7,217,000)                    -
    Tax benefit on non-incentive stock options                                                    418,543                    -
    Issuance of common stock                                                                            -            8,185,355
                                                                                         -----------------     -----------------
    Net cash provided by financing activities                                                  72,927,110           72,932,363
                                                                                         -----------------     -----------------

                               The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                            YEARS ENDED DECEMBER 31, 2007 AND 2006

                                                                                                 2007                 2006
                                                                                          -----------------    -----------------

Net increase (decrease) in cash and cash equivalents                                          (7,846,101)          (9,700,730)
Cash and cash equivalents at beginning of year                                                 19,187,202           28,887,932
                                                                                          -----------------    -----------------
Cash and cash equivalents at end of year                                                     $ 11,341,101         $ 19,187,202
                                                                                          =================    =================
Cash paid during the year for:
    Interest                                                                                 $ 14,880,257         $  8,807,553
    Income taxes                                                                                1,907,080            2,457,655

Non-cash activities:
    Transfers of loans to other real estate                                                     1,542,644              739,030
    Issuance of stock in acquisition                                                                    -            2,532,998


                               The accompanying notes are an integral part of these statements.`

---

NOTE A  NATURE OF
BUSINESS

The First Bancshares, Inc. (the
Company) is a financial holding company whose business is primarily conducted by its
wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank
provides a full range of banking services in its primary market area of South Mississippi.
The Company, as a financial holding company, is regulated by the Federal Reserve Bank. Its
subsidiary bank is subject to the regulation of the Office of the Comptroller of the
Currency (OCC).

NOTE B  SUMMARY OF
ACCOUNTING POLICIES

The Company and its subsidiary follow
accounting principles generally accepted in the United States of America including, where
applicable, general practices within the banking industry.

1.     Principles of
Consolidation

The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.

2.     Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and the
valuation of deferred tax assets.

3.     Cash and Due From Banks

Included in cash and due from banks
are legal reserve requirements which must be maintained on an average basis in the form of
cash and balances due from the Federal Reserve. The reserve balance varies depending upon
the types and amounts of deposits. At December 31, 2007, the required reserve balance on
deposit with the Federal Reserve Bank was approximately $25,000.

4.     Securities

Investments in securities are
accounted for as follows:

Available-for-Sale
Securities

Securities classified as
available-for-sale are those securities that are intended to be held for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including movements in
interest rates, liquidity needs, security risk assessments, changes in the mix of assets
and liabilities and other similar factors. These securities are carried at their estimated
fair value, and the net unrealized gain or loss is reported in stockholders equity,
net of tax, until realized. Premiums and discounts are recognized in interest income using
the interest method. Gains and losses on the sale of available-for-sale securities are
determined using the adjusted cost of the specific security sold.

---

Securities to be
Held-to-Maturity

Securities classified as
held-to-maturity are those securities for which there is a positive intent and ability to
hold to maturity. These securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, computed by the interest method.

Trading Account Securities

Trading account securities are those
securities which are held for the purpose of selling them at a profit. There were no
trading account securities on hand at December 31, 2007 and 2006.

Other Securities

Other securities are carried at cost
and are restricted in marketability. Other securities consist of investments in the
Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers
Bankshares, Inc.

5.    
          Loans held for sale

The Company originates fixed rate
single family, residential first mortgage loans on a presold basis. The Company issues a
rate lock commitment to a customer and concurrently locks in with a secondary
market investor under a best efforts delivery mechanism. Such loans are sold without the
servicing retained by the Company. The terms of the loan are dictated by the secondary
investors and are transferred within several weeks of the Company initially funding the
loan. The Company recognizes certain origination fees and service release fees upon the
sale which are included in interest and fees on loans in the consolidated statements of
income. Between the initial funding of the loans by the Company and the subsequent
purchase by the investor, the Company carries the loans held for sale at the lower of cost
or fair value in the aggregate as determined by the outstanding commitments from
investors.

6.     Loans

Loans are carried at the principal
amount outstanding, net of the allowance for loan losses. Interest income on loans is
recognized based on the principal balance outstanding and the stated rate of the loan.
Loan origination fees and certain direct origination costs are deferred and recognized as
an adjustment of the related loan yield using the interest method.

A loan is considered impaired when,
based upon current events and information, it is probable that the scheduled payments of
principal or interest will not be collected in accordance with the contractual terms of
the loan agreement. Factors considered by management in determining impairment include
payment status, collateral values, and the probability of collecting scheduled payments of
principal and interest when due. Generally, impairment is measured on a loan by loan basis
using the fair value of the supporting collateral.

Loans are generally placed on a
nonaccrual status when principal or interest is past due ninety days or when specifically
determined to be impaired. When a loan is placed on nonaccrual status, interest accrued
but not received is generally reversed against interest income. If collectibility is in
doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded
in interest income. Past due status is determined based upon contractual terms.

---

7.     Allowance for Loan
Losses

For financial reporting purposes, the
provision for loan losses charged to operations is based upon managements
estimations of the amount necessary to maintain the allowance at an adequate level.
Allowances for any impaired loans are generally determined based on collateral values.
Loans are charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.

Management evaluates the adequacy of
the allowance for loan losses on a regular basis. These evaluations are based upon a
periodic review of the collectibility considering historical experience, the nature and
value of the loan portfolio, underlying collateral values, internal and independent loan
reviews, and prevailing economic conditions. In addition, the OCC, as a part of the
regulatory examination process, reviews the loan portfolio and the allowance for loan
losses and may require changes in the allowance based upon information available at the
time of the examination. The allowance consists of two components: allocated and
unallocated. The components represent an estimation done pursuant to either Financial
Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies, or FASB
Statement No. 114, Accounting by Creditors for Impairment of a Loan. The allocated
component of the allowance reflects expected losses resulting from an analysis developed
through specific credit allocations for individual loans, including any impaired loans,
and historical loan loss history. The analysis is performed quarterly, and loss factors
are updated regularly.

The unallocated portion of the
allowance reflects managements estimate of probable inherent but undetected losses
within the portfolio due to uncertainties in economic conditions, changes in collateral
values, unfavorable information about a borrowers financial condition, and other
risk factors that have not yet manifested themselves. In addition, the unallocated
allowance includes a component that explicitly accounts for the inherent imprecision in
the loan loss analysis.

8.     Premises and Equipment

Premises and equipment are stated at
cost, less accumulated depreciation. The depreciation policy is to provide for
depreciation over the estimated useful lives of the assets using the straight-line method.
Repairs and maintenance expenditures are charged to operating expenses; major expenditures
for renewals and betterments are capitalized and depreciated over their estimated useful
lives. Upon retirement, sale, or other disposition of property and equipment, the cost and
accumulated depreciation are eliminated from the accounts, and any gains or losses are
included in operations.

9.     Other Real Estate

Other real estate consists of
properties acquired through foreclosure and, as held for sale property, is recorded at the
lower of the outstanding loan balance or current appraisal less estimated costs to sell.
Any write-down to fair value required at the time of foreclosure is charged to the
allowance for loan losses. Subsequent gains or losses on other real estate are reported in
other operating income or expenses. At December 31, 2007 and 2006, other real estate
totaled $1,758,968 and $557,089, respectively.

---

10.     Goodwill and
Intangible Assets

The following table summarizes the
changes in goodwill and core deposit intangible asset for the year ended December 31,
2007.

`Core deposit
(Dollars in thousands)                                               Goodwill                intangible
                                                             -----------------------    -----------------------

Balance, January 1, 2007                                               $  782                  $  676
Adjustments                                                              (80)                       -
Amortization                                                                -                      70
                                                                      --------                ---------
Balance, December 31, 2007                                             $  702                  $  606
                                                                      ========                =========`

Acquired goodwill and core deposit
intangible are related to the acquisition of First National Bank of Wiggins on October 1,
2006. Adjustments to goodwill were the result of the finalization of values subsequent to
January 1, 2007.

The following table presents the
forecasted core deposit intangible asset amortization expense for 2008 through 2012.

`(Dollars in thousands)                          Full year
                                                                          expected
                          Year                                          Amortization
                          ----                                          ------------
                          2008                                               $69
                          2009                                               $69
                          2010                                               $69
                          2011                                               $69
                          2012                                               $69`

11.     Other Assets and Cash
Surrender Value

Financing costs related to the
issuance of junior subordinated debentures are being amortized over the life of the
instruments and are included in other assets. The Company invests in bank owned life
insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a
chosen group of employees. The Company is the owner of the policies and, accordingly, the
cash surrender value of the policies are reported as an asset, and increases in cash
surrender values are reported as income.

12.     Stock Options

Prior to January 1, 2006, the
Companys stock option plans were accounted for under the recognition and measurement
provisions of APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees,
and related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure) (collectively SFAS 123). No stock-based employee
compensation cost was recognized in the Companys consolidated statements of earnings
through December 31, 2005, as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of the grant.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123 (R), Share-Based Payment (SFAS 123R), using the
modified-prospective-transition method. Under that transition method, compensation cost
recognized in 2006 includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant fair value
calculated in accordance with the original provisions of SFAS 123, and (b) compensation
cost for all share-based payments granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.

As of December 31, 2007, only 2,308
stock options were not fully vested and no stock options were granted during the twelve
months ended December 31, 2007.

---

13.     Income Taxes

Income taxes are provided for the tax
effects of the transactions reported in the financial statements and consist of taxes
currently payable plus deferred taxes related primarily to differences between the bases
of assets and liabilities as measured by income tax laws and their bases as reported in
the financial statements. The deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.

The Company and its subsidiary file
consolidated income tax returns. The subsidiary provides for income taxes on a separate
return basis and remits to the Company amounts determined to be payable.

Effective January 1, 2007, the
Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (the
Interpretation). This Interpretation provides guidance on financial statement recognition
and measurement of tax positions taken, or expected to be taken, in tax returns. The
initial adoption of this Interpretation had no impact on the consolidated financial
statements.

14.     Advertising Costs

Advertising costs are expensed in the
period in which they are incurred. Advertising expense for the years ended December 31,
2007 and 2006, was approximately $221,616 and $263,644, respectively.

15.     Statements of Cash
Flows

For purposes of reporting cash flows,
cash and cash equivalents include cash, amounts due from banks, interest-bearing deposits
with banks and federal funds sold. Generally, federal funds are sold for a one to seven
day period.

16.     Off-Balance Sheet
Financial Instruments

In the ordinary course of business,
the subsidiary bank enters into off-balance sheet financial instruments consisting of
commitments to extend credit, credit card lines and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are exercised.

17.     Per Share Amounts

Per share amounts are presented in
accordance with FASB Statement No. 128, Earnings Per Share. Under Statement No. 128, two
per share amounts are considered and presented, if applicable. Basic per share data is
calculated based on the weighted-average number of common shares outstanding during the
reporting period. Diluted per share data includes any dilution from potential common stock
outstanding, such as exercise of stock options.

---

The following table discloses the
reconciliation of the numerators and denominators of the basic and diluted computations:

`For the Year Ended                                       For the Year Ended
                                       December 31, 2007                                        December 31, 2006
                          ---------------------------------------------------   ---------------------------------------------------
                                Net                                                  Net
                               Income            Shares         Per Share          Income              Shares        Per Share
                            (Numerator)       (Denominator)       Amount         (Numerator)        (Denominator)      Amount

Basic per share              $3,822,673         2,980,566        $  1.28        $ 3,315,014           2,450,988       $  1.35
                                                                 =======                                              =======

Effect of dilutive
    Shares:
        Stock options                              81,089                                               158,156
                                                ---------                                             ---------
                             $3,822,673         3,061,655        $   .25        $ 3,315,014           2,609,144       $  1.27
                             ==========         =========        =======        ===========           =========       =======`

The diluted per share amounts were
computed by applying the treasury stock method.

18.     Reclassifications

Certain reclassifications have been
made to the 2006 financial statements to conform with the

19.     Accounting
Pronouncements

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. This Statement defines fair value,
establishes a framework for measuring fair value in accounting principles generally
accepted in the United States of America, and expands disclosures about fair value
measurements. This Statement is effective for years beginning after December 15, 2007. The
adoption of this standard is not expected to have a material effect on the Companys
results of operations or financial position.

SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities  Including an amendment of
FASB Statement No. 115. SFAS 159 permits entities to choose to measure eligible
items at fair value at specified election dates. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each subsequent
reporting date. The fair value option (i) may be applied instrument by instrument, with
certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is
applied only to entire instruments and not to portions of instruments. SFAS 159 is
effective for the Company on January 1, 2008 and is not expected to have a significant
impact on the Corporations financial statements.

Emerging Issues Task Force
(EITF) Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements EITF 06-4 requires the recognition of a liability and related
compensation expense for endorsement split-dollar life insurance policies that provide a
benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life
insurance policies purchased for the purpose of providing such benefits do not effectively
settle an entitys obligation to the employee. Accordingly, the entity must recognize
a liability and related compensation expense during the employees active service
period based on the

future cost of insurance to be
incurred during the employees retirement. If the entity has agreed to provide the
employee with a death benefit, then the liability for the future death benefit should be
recognized by following the guidance in SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. The Company expects to adopt EITF 06-4
effective as of January 1, 2008 as a change in accounting principle through a
cumulative-effect adjustment to retained earnings. The amount of the adjustment is not
expected to be significant.

---

NOTE C  ACQUISITION

On October 1, 2006, the Company
completed a merger transaction in which it acquired First National Bank of Wiggins
(Wiggins), headquartered in Wiggins, Mississippi. This acquisition was
consistent with the Companys strategy of expanding its operations and market share
in Mississippi. The results of operations of Wiggins have been included in the
Companys consolidated financial statements since the acquisition date.

The aggregate purchase price for the
acquisition was $5.0 million which included cash of $2.1 million, direct merger costs of
$.4 million, and approximately 109,000 shares of common stock with an aggregate fair value
of $2.5 million. The aggregate value of the common stock was calculated for this purpose
using a $23.20 per share value based on the closing price of First Bancshares stock on the
acquisition announcement date.

The transaction was accounted for
under the purchase method of accounting, with Wiggins assets and liabilities being
recorded at their estimated fair values. Wiggins allowance for loan losses was
recorded at the carrying value and contained no specific reserves. The purchase price in
excess of the net fair value of the assets and liabilities acquired was recorded as
goodwill. The amount of goodwill recorded was $.7 million. The goodwill is not tax
deductible for federal income tax purposes.

The following table summarizes the
preliminary estimated fair value of assets and liabilities purchased at the date of
acquisition.

`(Dollars in thousands)
            ----------------------
                Assets acquired:
                     Cash and cash equivalents                                                             $     4,268
                     Investment securities                                                                      23,981
                     Loans, net                                                                                 17,649
                Premises and equipment, net                                                                        832
                     Core deposit intangible                                                                       693
                     Goodwill                                                                                      702
                     Other assets, net                                                                           1,121
                                                                                                           ------------
                           Total assets acquired                                                           $    49,246
                                                                                                           ============
                Liabilities assumed:
                     Deposits                                                                              $    44,199
                     Other liabilities                                                                             203
                                                                                                           ------------
                           Total liabilities assumed                                                       $    44,402
                                                                                                           ------------
                           Net assets purchased                                                            $     4,844
                                                                                                           ============`

The Company is amortizing the
resulting core deposit intangible of $693,000 using the straight-line method over ten
years.

---

The following unaudited summary
information presents the consolidated results of operations of the Company on a pro forma
basis for the year ended December 31, 2006 as if the First National Bank of Wiggins had
been acquired on January 1, 2006.

`Year Ended December 31, 2006
                                        -------------------------------------------------

                                        Interest income                       $  25,888
                                        Interest expense                         10,180
                                            Net income                            2,721

                                        Net income per share:
                                            Basic                             $    1.07
                                            Diluted                                1.01`

NOTE D  SECURITIES

A summary of the amortized cost and
estimated fair value of available-for-sale securities and held-to-maturity securities at
December 31, 2007 and 2006, follows:

`December 31, 2007
                                                        -----------------------------------------------------------------------
                                                                               Gross             Gross           Estimated
                                                           Amortized         Unrealized        Unrealized           Fair
                                                              Cost             Gains             Losses            Value
                                                        --------------     ----------------   ---------------   ---------------
   Available-for-sale securities:
      Obligations of U.S. Government
         Agencies                                          $32,774,364         $ 491,294         $   3,007       $33,262,651
      Tax-exempt and taxable
         obligations of states and
         municipal subdivisions                             21,148,995           218,846           144,021        21,223,820
       Mortgage-backed securities                           24,597,996           230,483            11,424        24,817,055
       Corporate obligations                                 3,891,491             8,972            40,993         3,859,470
       Other                                                 1,158,492                 -             2,280         1,156,212
                                                        --------------     ----------------   ---------------   ---------------
                                                           $83,571,338        $  949,595         $ 201,725       $84,319,208
                                                        ==============     ================   ===============   ===============
   Held-to-maturity securities:
       Mortgage-backed securities                          $    12,932        $      198         $       -       $    13,130
                                                        ==============     ================   ===============   ===============`

---

`December 31, 2006
                                                        -----------------------------------------------------------------------
                                                                                   Gross            Gross           Estimated
                                                               Amortized         Unrealized       Unrealized          Fair
                                                                 Cost              Gains           Losses             Value
                                                        ------------------   ----------------   ----------------   -------------
   Available-for-sale securities:
      Obligations of U.S. Government
         Agencies                                            $45,766,878          $  53,137        $ 198,001       $45,622,014
      Tax-exempt and taxable
         obligations of states and
         municipal subdivisions                               15,393,960            132,295           52,420        15,473,835
       Mortgage-backed securities                             23,809,129             88,553           66,127        23,831,555
       Corporate obligations                                   3,451,390                490            4,072         3,447,808
       Other                                                   1,104,803                  -                -         1,104,803
                                                        ------------------   ----------------   ----------------   -------------
                                                             $89,526,160         $  274,475        $ 320,620       $89,480,015
                                                        ==================   ================   ================   =============
   Held-to-maturity securities:
       Mortgage-backed securities                            $    13,363         $      176        $       -       $    13,539
                                                        ==================   ================   ================   =============

The scheduled maturities of securities at December 31, 2007, were as follows:

                                                                Available-for-Sale                    Held-to-Maturity
                                                       ---------------------------------------  --------------------------------
                                                                               Estimated                           Estimated
                                                           Amortized             Fair            Amortized           Fair
                                                              Cost               Value              Cost             Value
                                                       ------------------    -----------------  ----------------   -------------

      Due less than one year                                 $  8,624,347        $ 8,633,164         $       -        $       -
      Due after one year through five years                    32,079,268         32,582,068                 -                -
      Due after five years through ten years                    9,306,833          9,370,053                 -                -
      Due after ten years                                       8,962,894          8,916,868                 -                -
      Mortgage-backed securities                               24,597,996         24,817,055            12,932           13,130
                                                       ------------------    -----------------  ----------------   -------------
                                                             $ 83,571,338        $84,319,208         $  12,932        $  13,130
                                                       ==================    =================  ================   =============`

Actual maturities can differ from
contractual maturities because the obligations may be called or prepaid with or without
penalties.

No gains or losses were realized on
available-for-sale securities in 2007 or 2006.

Securities with a carrying value of $49,721,719
and $39,773,897 at December 31, 2007 and 2006, respectively, were pledged to secure public
deposits, repurchase agreements, and for other purposes as required or permitted by law.

---

`The    details    concerning    securities    classified    as    available-for-sale    with    unrealized    losses   as   of
December 31, 2007 and 2006, were as follows:

                                                                          2007
                                 ------------------------------- -------------------------------- -------------------------------
                                       Losses < 12 Months             Losses 12 Months or >                   Total
                                 ------------------------------- -------------------------------- -------------------------------
                                                     Gross                            Gross                           Gross
                                      Fair         Unrealized         Fair         Unrealized          Fair         Unrealized
                                     Value           Losses          Value           Losses           Value           Losses
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
Obligations of U.S.
   Government agencies                $ 499,530        $    107      $3,246,800        $   2,900      $3,746,330       $   3,007
Tax-exempt and tax-
     able obligations of
     states and municipal
     subdivisions                     3,276,146          96,615       4,508,389           47,406       7,784,535         144,021
Mortgage-backed
     Securities                       1,414,177           2,200       1,094,802            9,224       2,508,979          11,424
Corporate obligations                 1,317,201          40,993               -                -       1,317,201          40,993
Other                                 1,156,212           2,280               -                -       1,156,212           2,280
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
                                     $7,663,266       $ 142,195      $8,849,991        $  59,530     $16,513,257       $ 201,725
                                 =============== =============== =============== ================ =============== ===============



                                                                           2006
                                 ------------------------------- -------------------------------- -------------------------------
                                       Losses < 12 Months             Losses 12 Months or >                   Total
                                 ------------------------------- -------------------------------- -------------------------------
                                                     Gross                            Gross                           Gross
                                      Fair         Unrealized         Fair         Unrealized          Fair         Unrealized
                                     Value           Losses          Value           Losses           Value           Losses
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
Obligations of U.S.
   Government agencies              $12,516,448       $  35,403     $13,356,106        $ 162,598     $25,872,554       $ 198,001
Tax-exempt and tax-
     able obligations of
     states and municipal
     subdivisions                     4,801,648          25,135       2,122,409           27,285       6,924,057          52,420
Mortgage-backed
     Securities                       4,097,314          11,463       3,299,976           54,664       7,397,290          66,127
                                      1,303,272           4,072               -                -       1,303,272           4,072
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
                                    $22,718,682       $  76,073     $18,778,491        $ 244,547     $41,497,173       $ 320,620
                                 =============== =============== =============== ================ =============== ===============`

Approximately 28.8% of the number of
securities in the investment portfolio at December 31, 2007 reflected an unrealized loss.
Management is of the opinion the Company has the ability to hold these securities until
such time as the value recovers or the securities mature. Management also believes the
deterioration in value is attributable to changes in market interest rates and not to the
credit quality of the issuer.

---

`NOTE E - LOANS

    Loans outstanding included the following types at December 31, 2007 and 2006:

                                                                                                 2007                2006
                                                                                           ----------------    ----------------
                                                                                                     (In thousands)

      Commercial, financial and agricultural                                                   $  46,633          $  36,258
      Real estate - construction                                                                 100,634             69,420
      Real estate - mortgage                                                                     197,530            158,538
      Installment loans to individuals                                                            20,391             19,525
      Overdrafts                                                                                     371                189
                                                                                           ----------------    ----------------
                                                                                                 365,559            283,930
      Allowance for loan losses                                                                  (4,221)            (3,793)
                                                                                           ----------------    ----------------
                                                                                              $  361,338         $  280,137
                                                                                           ================    ================

    Transactions in the allowance for loan losses for the years ended December 31, 2007 and 2006, were as follows:
                                                                                                  2007               2006
                                                                                           ----------------    ----------------

      Balance at beginning of year                                                            $ 3,792,937        $ 2,366,773

      Additions:
          First National Bank of Wiggins acquisition                                                    -            704,707
          Provision for loan losses charged to operations                                       1,320,914            800,361
          Recoveries                                                                               57,222            107,386
                                                                                           ----------------    ----------------
                                                                                                5,171,073          3,979,227
      Deductions:
          Loans charged off                                                                       949,833            186,290
                                                                                           ----------------    ----------------
      Balance at end of year                                                                  $ 4,221,240        $ 3,792,937
                                                                                           ================    ================


    As of December 31, 2007 and 2006,  impaired loans totaled  $2,429,000  and  $1,789,000,  respectively.  As of December 31,
    2007 and 2006, $1,052,000 and $75,000, respectively of the allowance for loan losses was allocated to impaired loans.

    At December 31, 2007 and 2006, the Company had nonaccrual loans and loans past due 90 days or more as follows:

                                                                                                2007                 2006
                                                                                           ----------------    ----------------
                                                                                                      (In thousands)

      Nonaccrual loans                                                                        $   2,429           $  1,789
      Past due 90 days or more and still accruing                                                   994                118


NOTE F - PREMISES AND EQUIPMENT

    Premises and equipment are stated at cost, less accumulated depreciation and amortization as follows:

                                                                                                 2007               2006
                                                                                           ----------------    ----------------
      Premises:
          Land                                                                               $ 4,605,270        $ 3,205,280
          Buildings and improvements                                                           7,471,558          6,462,212
      Equipment                                                                                4,936,037          4,287,101
      Construction in progress                                                                 3,291,769             18,529
                                                                                           ----------------    ----------------
                                                                                              20,304,634         13,973,122
      Less accumulated depreciation and amortization                                         (4,682,208)        (4,019,944)
                                                                                           ----------------    ----------------
                                                                                             $15,622,426        $ 9,953,178
                                                                                           ================    ================

    The amounts charged to operating expense for depreciation were $763,687 and $573,471 in 2007 and 2006, respectively.`

---

`NOTE G - DEPOSITS

    The  aggregate  amount of time  deposits  in  denominations  of $100,000 or more as of  December  31,  2007,  and 2006 was
    $104,453,577 and $82,820,395, respectively.

    At December 31, 2007, the scheduled maturities of time deposits included in interest-bearing  deposits were as follows (in
    thousands):

                                                        Year             Amount
                                                        ----             ------

                                                        2008            $181,720
                                                        2009               8,226
                                                        2010               4,699
                                                        2011               1,250
                                                        2012               1,772
                                                                        --------
                                                                        $197,667
                                                                        ========


NOTE H - BORROWED FUNDS

    Borrowed funds consisted of the following:

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                2007                 2006
                                                                                         -----------------    -----------------

      Reverse Repurchase Agreement                                                           $15,000,000                  -
      Federal Funds Purchased                                                                 12,875,000                  -
      FHLB advances                                                                           32,897,520         20,827,427
                                                                                         -----------------    -----------------
                                                                                             $60,772,520        $20,827,427
                                                                                         =================    =================

    Advances from the FHLB have maturity dates ranging from  January, 2008 through  June,  2013.  Interest  is payable monthly
    at rates ranging from 2.651% to 5.920%.  Advances due to the FHLB are  collateralized by a blanket lien on first mortgage
    loans in the amount of the  outstanding  borrowings,  FHLB capital stock,  and amounts on deposit with the FHLB.  At
    December 31, 2007, FHLB advances available and unused totaled $67.8 million.

    Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2007, were as follows:

                                                 Year                             Amount
                                                 ----                             ------

                                                 2008                         $ 16,870,246
                                                 2009                            7,990,192
                                                 2010                            7,430,185
                                                 2011                               75,064
                                                 2012                              261,060
                                              Thereafter                           270,773
                                                                              ------------
                                                                              $ 32,897,520
                                                                              ============

    Reverse Repurchase  Agreements  consists of three $5,000,000  agreements.  The agreements are secured by securities with a
    fair value of $16,451,000  at December 31, 2007.  The maturity  dates are from August 22, 2012 through  September 26, 2017
    with rates between 3.81% and 4.51%.`

---

NOTE I  REGULATORY
MATTERS

The Company and its subsidiary bank
are subject to regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and its
subsidiary bank must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative
judgment by regulators about components, risk weightings, and other related factors.

To ensure capital adequacy,
quantitative measures have been established by regulators, and these require the Company
and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and
of Tier I capital to adjusted total assets (leverage). Management believes, as of December
31, 2007, that the Company and its subsidiary bank exceed all capital adequacy
requirements.

At December 31, 2007 and 2006, the
subsidiary bank was categorized by regulators as well-capitalized under the regulatory
framework for prompt corrective action. A financial institution is considered to be
well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I
risk-based capital ratio of 6% or more, and has a Tier I leverage capital ratio of 5% or
more. There are no conditions or anticipated events that, in the opinion of management,
would change the categorization.

The actual capital amounts and ratios
at December 31, 2007 and 2006, are presented in the following table. No amount was
deducted from capital for interest-rate risk exposure.

`Company                             Subsidiary
                                                           (Consolidated)                         The First
                                               ------------------------------------    ----------------------------------
                                                      Amount              Ratio          Amount              Ratio
                                                      ------              -----          ------              -----
      December 31, 2007
          Total risk-based                           $49,051              12.7%          $46,684             12.1%
          Tier I risk-based                           44,830              11.6%           42,463             11.0%
          Tier I leverage                             44,830               9.1%           42,463              8.7%

      December 31, 2006
          Total risk-based                           $45,627              15.0%          $36,027             11.9%
          Tier I risk-based                           41,834              13.7%           32,234             10.6%
          Tier I leverage                             41,834              10.3%           32,234              7.9%

    The minimum  amounts of capital and ratios as  established  by banking  regulators at December 31, 2007 and 2006,  were as
    follows:

                                                              Company                             Subsidiary
                                                           (Consolidated)                         The First
                                               ------------------------------------    ----------------------------------
                                                      Amount              Ratio          Amount              Ratio
                                                      ------              -----          ------              -----
      December 31, 2007
          Total risk-based                           $30,860               8.0%          $30,771              8.0%
          Tier I risk-based                           15,430               4.0%           15,385              4.0%
          Tier I leverage                             19,598               4.0%           19,554              4.0%

      December 31, 2006
          Total risk-based                           $24,473               8.0%          $24,372              8.0%
          Tier I risk-based                           12,236               4.0%           12,185              4.0%
          Tier I leverage                             16,287               4.0%           16,237              4.0%

    The Company's dividends,  if any, are expected to be made from dividends received from its subsidiary bank. The OCC limits
    dividends of a national  bank in any calendar  year to the net profits of that year combined with the retained net profits
    for the two preceding years.`

---

`NOTE J - COMPREHENSIVE INCOME

    The Company and its  subsidiary  bank  report  comprehensive  income as  required  by FASB  Statement  No. 130,  Reporting
    Comprehensive  Income.  In accordance with this statement,  unrealized  gains and losses on securities  available-for-sale
    are included in other comprehensive income.

    In the  calculation of  comprehensive  income,  certain  reclassification  adjustments  are made to avoid double  counting
    amounts that are displayed as part of net income for a period that also had been displayed as part of other  comprehensive
    income.  The disclosure of the reclassification amounts is as follows:
                                                                                               Years Ended December 31,
                                                                                         --------------------------------------
                                                                                                  2007               2006
                                                                                         ------------------- ------------------

      Unrealized holdings gains (losses) on available-for-
          sale securities                                                                      $794,016          $ 238,439
      Reclassification adjustment for (gains) losses
          realized in income                                                                          -                  -
                                                                                             ----------         -----------
      Net unrealized gains (losses)                                                             794,016            238,439
      Tax effect                                                                              (269,965)           (81,069)
                                                                                             ----------         -----------
      Net unrealized gains (losses), net of tax                                                $524,051          $ 157,370
                                                                                             ==========         ===========

NOTE K - INCOME TAXES

    The components of income tax expense are as follows:

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2007               2006
                                                                                         ------------------- ------------------

      Current:
          Federal                                                                             $1,560,595         $1,243,198
          State                                                                                  128,840            145,814
      Deferred                                                                                 (210,766)           (20,186)
                                                                                              ----------         -----------
                                                                                              $1,478,669         $1,368,826
                                                                                              ==========         ===========

    The Company's  income tax expense differs from the amounts  computed by applying the federal income tax statutory rates to
    income before income taxes.  A reconciliation of the differences is as follows:

                                                                               Years Ended December 31,
                                                        -----------------------------------------------------------------------
                                                                            2007                                     2006
                                                        ------------------------------------ ----------------------------------
                                                                Amount                  %            Amount                %
                                                                ------                 ---           ------               ---

              Income taxes at statutory rate                  $1,802,456                34%      $ 1,592,506               34%
              Tax-exempt income                                (323,197)               (6)%        (155,459)              (3)%
              State income tax, net of federal
                  Tax effect                                      85,034                 2%           96,237                2%
              Tax credits                                      (139,850)               (3)%        (121,414)              (3)%
              Other, net                                          54,226                 1%         (43,044)              (1)%
                                                             ------------             ------    ------------             ------
                                                              $1,478,669                28%      $ 1,368,826               29%
                                                             ============             ======    ============             ======`

---

`The components of deferred income taxes included in the consolidated financial statements were as follows:

                                                                                                    December 31,
                                                                                         -----------------------------------
                                                                                                2007               2006
                                                                                         ----------------    ---------------
      Deferred tax assets:
          Allowance for loan losses                                                          $ 1,099,576         $  916,228
          Unrealized loss on available-for-sale securities                                             -             15,690
          Net operating loss carryover                                                         1,040,746            990,688
          Other                                                                                   94,653             21,292
                                                                                         ----------------    ---------------
                                                                                               2,234,975          1,943,898
                                                                                         ----------------    ---------------

      Deferred tax liabilities:
          Securities                                                                           (112,799)           (92,719)
          Unrealized gain on available-for-sale securities                                     (254,276)                  -
          Premises and equipment                                                               (828,186)          (726,417)
          Core deposit intangible                                                              (226,178)          (252,027)
                                                                                         ----------------    ---------------
                                                                                             (1,421,439)        (1,071,163)
                                                                                         ----------------    ---------------
      Net deferred tax asset                                                                 $   813,536        $   872,735
                                                                                         ================    ===============`

With the acquisition of Wiggins, the
Company assumed a federal tax net operating loss carryover. This net operating loss is
available to the Company through the year 2026.

NOTE L  EMPLOYEE
BENEFITS

The Company and its subsidiary bank
provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a
percentage of their compensation. For employee contributions of three percent or less, the
Company and its subsidiary bank provide a matching contribution. Contributions totaled
$114,397 in 2007 and $90,148 in 2006.

The Company sponsors an Employee
Stock Ownership Plan (ESOP) for employees who have completed one year of service for the
Company and attained age 21. Employees become fully vested after five years of service.
Contributions to the plan are at the discretion of the Board of Directors. At December 31,
2007, the ESOP held 6,946 shares of Company common stock and had no debt obligation. All
shares held by the plan were considered outstanding for net income per share purposes.
Total ESOP expense was $75,000 for 2007 and $85,000 for 2006, respectively.

The Company and its subsidiary bank
have employment agreements with certain executive officers. These agreements contain
provisions concerning salaries, bonuses, incentive programs, and benefits related to a
change in control.

NOTE M  STOCK PLANS

In 1997, the Company adopted the 1997
Stock Option Plan (1997 Plan) which provides for the granting of options to purchase up to
144,370 shares of Company common stock by directors and key employees of the Company and
its subsidiary. Options granted under the 1997 Plan were exercisable at December 31, 1999,
and expired ten years after the grant date. As of December 31, 2007, all shares had been
exercised or forfeited. All options expired and were void unless exercised on or before
March 18, 2007. The options were exercisable at not less than the market value of the
Companys stock at the grant date.

On May 27, 1999, the Companys
shareholders approved the 1999 Stock Incentive Plan (1999 Plan). The 1999 Plan provides
for the granting of options to purchase up to 213,376 shares of the Companys common
stock by the Companys and its subsidiarys directors, key employees, and
management. Under the 1999 Plan, the Company may grant either incentive stock options or
nonqualified stock options. Options granted to directors and employees vest in equal
amounts over three years. Stock options granted to management vest based on annual
performance goals or after nine years and eleven months, if still employed. At December
31, 2007, 213,356 options had been granted, and 92,580 had been exercised or forfeited.
All options expire and are void unless exercised on or before April 15, 2009. The options
are exercisable at not less than the market value of the Companys stock at the grant
date.

---

`A summary of the status of the stock option plans as of December  31, 2007 and 2006,  and changes  during the years ending
    on those dates is presented below:


                                                                                     December 31,
                                                        -----------------------------------------------------------------------
                                                                            2007                                     2006
                                                        ------------------------------------ ----------------------------------
                                                                              Weighted                            Weighted
                                                                              Average                             Average
                                                                              Exercise                            Exercise
                                                            Shares              Price            Shares            Price
                                                        -------------      ----------------  --------------   -----------------

   Options outstanding at beginning of year                  251,585         $        7          261,112         $       7
   Options granted                                                 0                                   0
   Options exercised                                       (130,143)         $        5          (9,527)         $       7
   Options forfeited                                           (666)         $       12                0
                                                        -------------                        --------------
   Options outstanding at end of year                        120,776         $        8          251,585         $       7
                                                        =============                        ==============
   Options exercisable at end of year                        118,468         $        8          246,302         $       7
                                                        =============                        ==============

    The following table summarizes information about stock options at December 31, 2007:

                                                                              Remaining
                                               Number                        Contractual                       Number
          Exercise Price                     Outstanding                    Life in Years                    Exercisable
          --------------                     -----------                    -------------                    -----------
           $7.50 - 8.75                        114,847                           1.3                           114,847
              $12.50                             5,929                           1.3                             3,621`

NOTE N 
SUBORDINATED DEBENTURES

The Company issued $7,217,000 of
floating rate junior subordinated deferrable interest debentures to The First Bancshares
Statutory Trust I, a Connecticut business trust, in which the Company owns all of the
common equity. The debentures are the sole asset of the Trust. The Trust issued $7,000,000
of Trust Preferred Securities (TPSs) to investors. The Companys obligations under
the debentures and related documents, taken together, constitute a fully and unconditional
guarantee by the Company of the Trusts obligations under the preferred securities.
These debentures were called on March 26, 2007. On June 30, 2006, The Company issued
$4,124,000 of floating rate junior subordinated deferrable interest debentures to The
First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The
debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred
Securities (TPSs) to investors. The Companys obligations under the debentures and
related documents, taken together, constitute a fully and unconditional guarantee by the
Company of the Trusts obligations under the preferred securities. The preferred
securities are redeemable by the company in 2011, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as Tier I capital is no
longer permitted, or certain other contingencies arise. The preferred securities must be
redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is
the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly.
The terms of the subordinated debentures are identical to those of the preferred
securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior
subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in
which the Company owns all of the common equity. The debentures are the sole asset of
Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors.
The Companys obligations under the debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the Trusts
obligations under the preferred securities. The preferred securities are redeemable by the
Company in 2012, or earlier in the event the deduction of related interest for federal
income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain
other contingencies arise. The preferred securities must be redeemed upon maturity of the
debentures in 2037. Interest on the preferred securities is the three month LIBOR plus
1.40% and is payable quarterly. The terms of the subordinated debentures are identical to
those of the preferred securities. In accordance with the provisions of FASB
Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities, An
Interpretation of ARB No. 51, the trusts are not included in the consolidated
financial statements.

---

NOTE O  TREASURY
STOCK

Shares held in treasury totaled
26,494 at December 31, 2007, and 2006.

NOTE P  RELATED
PARTY TRANSACTIONS

In the normal course of business, the
Bank makes loans to its directors and executive officers and to companies in which they
have a significant ownership interest. In the opinion of management, these loans are made
on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other parties, are consistent with
sound banking practices, and are within applicable regulatory and lending limitations.
Such loans amounted to approximately $6,955,000 and $7,046,000 at December 31, 2007 and
2006, respectively. The activity in loans to current directors, executive officers, and
their affiliates during the year ended December 31, 2007, is summarized as follows (in
thousands):

`Loans outstanding at beginning of year                               $ 7,046
           New loans                                                              2,573
           Repayments                                                           (2,664)
                                                                                -------
           Loans outstanding at end of year                                     $ 6,955
                                                                                =======`

During 2007, the Company purchased a
building from one of its directors for approximately $600,000.

NOTE Q 
COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK

In the normal course of business,
there are outstanding various commitments and contingent liabilities, such as guaranties,
commitments to extend credit, etc., which are not reflected in the accompanying financial
statements. The subsidiary bank had outstanding letters of credit of $1,168,000 and
$1,679,000 at December 31, 2007 and 2006, respectively, and had made loan commitments of
approximately $47,402,000 and $57,114,000 at December 31, 2007 and 2006, respectively.

Commitments to extend credit and
letters of credit include some exposure to credit loss in the event of nonperformance of
the customer. Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit policies and procedures for such commitments are the
same as those used for lending activities. Because these instruments have fixed maturity
dates and because a number expire without being drawn upon, they generally do not present
any significant liquidity risk. No significant losses on commitments were incurred during
the two years ended December 31, 2007, nor are any significant losses as a result of these
transactions anticipated.

The primary market area served by the
Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties
within South Mississippi. Management closely monitors its credit concentrations and
attempts to diversify the portfolio within its primary market area. As of December 31,
2007, management does not consider there to be any significant credit concentrations
within the loan portfolio. Although the Banks loan portfolio, as well as existing
commitments, reflects the diversity of its primary market area, a substantial portion of a
borrowers ability to repay a loan is dependent upon the economic stability of the
area.

The Company has four leases for
facilities. The first lease expires May 31, 2008. Monthly lease payments are $2,392. The
second lease requires monthly payments of $3,013 through June, 2012. One five-year renewal
option is included in the lease term. The third lease expires in December, 2008. Monthly
lease payments are $1,293. Lease payments increase 3% every twelve month period. The
fourth lease expires in June, 2008. Monthly lease payments are $6,045. The lease allows
two six month options to renew. Three of the four leases are to related parties. Rent
expense for 2007 to the related parties amounted to $117,160.02.

---

Rental expense for premises and
equipment for the years ended December 31, 2007 and 2006 was approximately $208,000 and
$177,000, respectively.

On October 8, 2007 The First
Banchsares, Inc. (the Company) and its subsidiary, The First, A National
Banking Association (the Bank) were formally named as defendants.

The allegations against the Company
and the Bank include counts of 1) Intentional Misrepresentation and Omission; 2) Negligent
Misrepresentation and/or Omission; 3) Breach of Fiduciary Duty; 4) Breach of Duty of Good
Faith and Fair Dealing; and 5) Civil Conspiracy. The First Amended Complaint seeks damages
from all the defendants, including $2,420,775, annual dividends for the year 2006 in the
amount of $.30 per share, punitive damages, and attorneys fees and costs. The
Company and the Bank deny any liability, and they intend to defend vigorously against this
lawsuit.

NOTE R  DISCLOSURE
ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosure of the
estimated fair value of financial instruments is made in accordance with FASB Statement
No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.

The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value:

Cash and Cash Equivalents  For
such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities  For securities held
as investments, fair value equals market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar securities.

Loans  The fair value of loans
is estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same remaining
maturities.

Deposits  The fair values of
demand deposits are, as required by Statement No. 107, equal to the carrying value of such
deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts,
NOW accounts, and money market demand accounts. The fair value of variable rate term
deposits, those repricing within six months or less, approximates the carrying value of
these deposits. Discounted cash flows have been used to value fixed rate term deposits and
variable rate term deposits repricing after six months. The discount rate used is based on
interest rates currently being offered on comparable deposits as to amount and term.

Short-Term Borrowings  The
carrying value of any federal funds purchased and other short-term borrowings approximates
their fair values.

FHLB and Other Borrowings  The
fair value of the fixed rate borrowings are estimated using discounted cash flows, based
on current incremental borrowing rates for similar types of borrowing arrangements. The
carrying amount of any variable rate borrowings approximates their fair values.

Subordinated Debentures  The
subordinated debentures bear interest at a variable rate and the carrying value
approximates the fair value.

Off-Balance Sheet Instruments 
Fair values of off-balance sheet financial instruments are based on fees charged to enter
into similar agreements. However, commitments to extend credit do not represent a
significant value until such commitments are funded or closed. Management has determined
that these instruments do not have a distinguishable fair value and no fair value has been
assigned.

---

`For the Year Ended             For the Year Ended
                                                                        December 31, 2007             December 31, 2006
                                                                    ---------------------------   ----------------------------
                                                                     Carrying       Estimated      Carrying        Estimated
                                                                      Amount       Fair Value       Amount        Fair Value
                                                                    -----------   -------------   -----------   --------------
                                                                                         (In thousands)
        Financial Instruments:
            Assets:
                Cash and cash equivalents                              11,341         11,341         19,187           19,187
                Securities available-for-sale                          84,319         84,319         89,480           89,480
                Securities held-to-maturity                                13             13             13               14
                Other securities                                        2,720          2,720          2,317            2,317
                Loans                                                 367,002        381,149        284,082          289,282

            Liabilities:
                Noninterest-bearing
                   Deposits                                            55,349         55,349         58,652           58,652
                Interest-bearing deposits                             330,819        332,837        293,070          293,132
                Subordinated debentures                                10,310         10,310         11,341           11,341
                FHLB and other borrowings                              60,773         60,773         20,827           20,827`

NOTE S  STOCK SPLIT

On February 22, 2006, the
Companys board of directors declared a two-for-one stock split effected in the form
of a 100% stock dividend. The record date for the shareholders entitled to receive the
additional shares was March 1, 2006. The stock split resulted in the issuance of
approximately 1,187,600 shares of common stock and was accounted for by the transfer of
approximately $1,187,600 from additional paid-in capital to common stock. All per share
amounts have been changed to reflect the stock split.

NOTE T  EQUITY
OFFERING

On November 21, 2006, the Company
closed on a public offering of its common stock. As a result of this offering, 365,000
shares were sold at a price of $22.50 per share, with net proceeds of approximately $8.2
million. Some of these proceeds were used to fund the acquisition of the First National
Bank of Wiggins and the remainder will be used for general corporate purposes.

NOTE U  PARENT
COMPANY FINANCIAL INFORMATION

The balance sheets, statements of
income and cash flows for The First Bancshares, Inc. (parent only) follow.

`Condensed Balance Sheets

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                2007               2006
                                                                                         -----------------   ------------------
      Assets:
          Cash and cash equivalents                                                        $    928,329       $  8,693,312
          Investment in subsidiary bank                                                      44,224,553         33,775,619
          Investments in statutory trusts                                                       310,000            341,000
          Other securities                                                                      100,000            100,000
          Premises and equipment                                                                368,623            368,623
          Other                                                                                 660,875            453,435
                                                                                         -----------------   ------------------
                                                                                           $ 46,592,380       $ 43,731,989
                                                                                         =================   ==================
      Liabilities and Stockholders' Equity:
          Subordinated debentures                                                            10,310,000         11,341,000
          Other                                                                                   1,721             26,184
          Stockholders' equity                                                               36,280,659         32,364,805
                                                                                         -----------------   ------------------
                                                                                           $ 46,592,380       $ 43,731,989
                                                                                         =================   ==================`

---

`Condensed Statements of Income

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2007               2006
                                                                                         -----------------    -----------------
      Income:
          Interest and dividends                                                               $ 180,191         $  102,106
          Other gains                                                                            198,682            224,315
          Other                                                                                    1,875             10,191
                                                                                         -----------------    -----------------
                                                                                                 380,748            336,612
      Expenses:
          Interest on borrowed funds                                                             563,806            783,657
          Other                                                                                  267,943            294,955
                                                                                         -----------------    -----------------
                                                                                                 831,749          1,078,612
      Loss before income taxes and equity in undistributed income of
          Subsidiary                                                                           (451,001)          (742,000)
      Income tax benefit                                                                       (242,332)          (360,435)
                                                                                         -----------------    -----------------
      Loss before equity in undistributed income of subsidiary                                 (208,669)          (381,565)
      Equity in undistributed income of subsidiary                                             4,031,342          3,696,579
                                                                                         -----------------    -----------------

      Net income                                                                              $3,822,673         $3,315,014
                                                                                         =================    =================


                                              Condensed Statements of Cash Flows

                                                                                                     Years Ended
                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2007               2006
                                                                                         -----------------    -----------------
      Cash flows from operating activities:
          Net income                                                                          $3,822,673        $ 3,315,014
          Adjustments to reconcile net income to net cash and cash
              Equivalents:
                 Equity in undistributed income of subsidiary                                (4,031,342)        (3,696,579)
                 Other gains                                                                   (198,682)          (224,315)
                 Other, net                                                                    (385,890)            253,628
                 Stock option expense                                                              2,277              9,211
                                                                                         -----------------    -----------------
                    Net cash used in operating activities                                      (790,964)          (343,041)
                                                                                         -----------------    -----------------

      Cash flows from investing activities:
          Investment in subsidiary bank                                                      (5,893,541)        (5,215,782)
          Other, net                                                                              31,000           (74,000)
          Proceeds from sale of lease and land                                                   352,669            532,755
                                                                                         -----------------    -----------------
                Net cash used in investing activities                                        (5,509,872)        (4,757,027)
                                                                                         -----------------    -----------------

      Cash flows from financing activities:
          Dividends paid on common stock                                                     (1,564,155)          (380,031)
          Issuance of subordinated debentures                                                  6,186,000          4,124,000
          Tax benefit of non-incentive stock options                                             418,543                  -
          Repayment of subordinated debentures                                               (7,217,000)                  -
          Exercise of stock options                                                              712,465             67,288
          Issuance of common stock                                                                     -          8,185,355
                                                                                         -----------------    -----------------
                Net cash provided by (used in) financing activities                          (1,464,147)         11,996,612
                                                                                         -----------------    -----------------
      Net increase (decrease) in cash and cash equivalents                                   (7,764,983)          6,896,544

      Cash and cash equivalents at beginning of year                                           8,693,312          1,796,768
                                                                                         -----------------    -----------------
      Cash and cash equivalents at end of year                                                 $ 928,329         $8,693,312
                                                                                         =================    =================`

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`NOTE V - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE AMOUNTS (UNAUDITED)

                                                                                       Three Months Ended
                                                                 --------------------------------------------------------------
                                                                   March 31          June 30        Sept. 30        Dec. 31
                                                                 ------------     ------------    -------------  --------------
                                                                            (In thousands, except per share amounts)
        2007
        Total interest income                                      $  7,513       $  8,219        $  8,909       $  8,758
        Total interest expense                                        3,344          3,603           3,987          4,208
                                                                 ------------     ------------    -------------  --------------
            Net interest income                                       4,169          4,616           4,922          4,550
        Provision for loan losses                                       330            320             316            355
                                                                 ------------     ------------    -------------  --------------
            Net interest income after provision for
                loan losses                                           3,839          4,296           4,606          4,195
        Total non-interest income                                       654            707             966            862
        Total non-interest expense                                    3,506          3,550           3,783          3,984
        Income tax expense                                              276            341             496            366
                                                                 ------------     ------------    -------------  --------------

        Net income                                                 $    711       $  1,112        $  1,293       $    707
                                                                 ============     ============    =============  ==============

        Per share:
            Net income, basic                                      $    .24       $    .37        $    .43       $    .24
            Net income, diluted                                         .23            .36             .42            .24
            Cash dividends declared                                     .30           .075            .075           .075

        2006
        Total interest income                                      $  4,843       $  5,548        $  6,079       $  7,289
        Total interest expense                                        1,802          2,014           2,382          3,178
                                                                 ------------     ------------    -------------  --------------
            Net interest income                                       3,041          3,534           3,697          4,111
        Provision for loan losses                                        84            209             289            218
                                                                 ------------     ------------    -------------  --------------
            Net interest income after provision for
                loan losses                                           2,957          3,325           3,408          3,893
        Total non-interest income                                       447            676             509            607
        Total non-interest expense                                    2,308          2,662           2,864          3,304
        Income tax expense                                              377            351             322            359
                                                                 ------------     ------------    -------------  --------------

        Net income                                                  $   759        $   988         $   731        $   837
                                                                 ============     =============   =============  ==============

        Per share:
            Net income, basic                                       $   .32        $   .42         $   .31        $   .30
            Net income, diluted                                         .30            .39             .29            .29
            Cash dividends declared                                     .16              -               -              -`