UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-Q

                       QUARTERLY REPORT UNDER SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

                             Commission File Number
                                    000-28037

                            FIRST SOUTH BANCORP, INC.
             (Exact Name of registrant as specified in its charter)


    SOUTH CAROLINA                                   57-1086258
(State of Incorporation)                   (IRS Employer Identification) number)

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

                                 (864) 595-0455
                          (Registrant's Telephone Number)



Check whether the registrant (1) has filed all reports to be filed by Section 13
or 15(d) of the  Exchange  Act during  the past 12 months  (or for such  shorter
period  that the Issuer was  required  to file such  reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES (X) N0 ( )

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and a large  accelerated  filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ( ) Accelerated filer ( ) Non-accelerated filer (X)

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. ( ) Yes (X) No

State the number of shares  outstanding of each of the  registrant's  classes of
common equity,  as of the latest  practical  date:  Common Stock,  no par value,
2,161,038 shares outstanding on August 13, 2007.









<PAGE>




                            FIRST SOUTH BANCORP, INC.

                                   FORM 10-Q

                                      INDEX


PART I - FINANCIAL INFORMATION                                             Page

        Item 1.   Financial Statements (Unaudited)

                  Consolidated Balance Sheets.................................3

                  Consolidated Statements of Income...........................4

                  Consolidated Statements of Comprehensive Income.............5

                  Consolidated Statements of Cash Flows.......................6

                  Notes to Unaudited Consolidated Financial Statements......7-9


        Item 2.  Management's Discussion and Analysis of Financial Condition
                      and Results of Operations............................9-21


        Item 3.  Quantitative and Qualitative Disclosures about Market Risk..22

        Item 4.T Controls and Procedures ....................................23


Part II- OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holders........24

         Item 6.  Exhibits...................................................25









                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION
                          Item 1 - Financial Statements

   FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
         CONSOLIDATED BALANCE SHEETS
        (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                 (Unaudited)
                                                                                                    Jun. 30,              Dec. 31,
                                                                                                      2007                  2006
                                                                                                      ----                  ----
Assets:
<S>                                                                                                <C>                    <C>
Cash & due from banks ................................................................             $   5,642              $   5,032
Due from banks - interest bearing ....................................................                12,125                 10,650
  Investment securities:
      Securities held to maturity ....................................................                 9,796                  9,902
      Securities available-for-sale ..................................................                20,668                 23,293
Loans ................................................................................               310,535                296,465
           Less, allowance for loan losses ...........................................                (3,454)                (3,275)
                                                                                                   ---------              ---------
Loans - net ..........................................................................               307,081                293,190
Property & equipment, net ............................................................                 6,586                  5,290
Investment in FSBS Capital Trust .....................................................                   155                    155
Other assets .........................................................................                 5,454                  5,911
                                                                                                   ---------              ---------
Total assets .........................................................................             $ 367,507              $ 353,423
                                                                                                   =========              =========
Liabilities
Deposits
   Noninterest-bearing demand ........................................................             $  15,758              $  16,038
   Interest-bearing ..................................................................               290,784                292,019
                                                                                                   ---------              ---------
       Total deposits ................................................................               306,542                308,057
Securities sold under repurchase agreements ..........................................                 1,472                  2,171
Other borrowed funds .................................................................                15,000                      -
Demand notes issued to the U.S. Treasury .............................................                   154                    287
Subordinated debt ....................................................................                 5,155                  5,155
Other liabilities ....................................................................                 1,665                  1,798
                                                                                                   ---------              ---------
      Total liabilities ..............................................................               329,988                317,468
Shareholder's equity
Common stock, no par value;  36,000,000 shares authorized
2,161,038 and 2,155,538, respectively ................................................                     -                      -
Paid-in capital ......................................................................                19,923                 19,849
Retained earnings ....................................................................                17,770                 16,206
Accumulated other comprehensive loss .................................................                  (174)                  (100)
                                                                                                   ---------              ---------
Total shareholders' equity ...........................................................                37,519                 35,955
                                                                                                   ---------              ---------
Total liabilities and shareholders' equity ...........................................             $ 367,507              $ 353,423
                                                                                                   =========              =========
</TABLE>

See notes to unaudited consolidated financial statements.


                                       3
<PAGE>



                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                          (Unaudited)                          (Unaudited)
                                                                     Three Months ended                   Six Months ended
                                                                            June 30                             June 30
                                                                            -------                             -------
                                                                     2007              2006              2007               2006
                                                                     ----              ----              ----               ----
                                                                            (Dollars in thousands, except per share data)
Interest income
<S>                                                               <C>                <C>                <C>                <C>
    Loans, including fees ..............................          $  6,763           $  6,346           $ 13,516           $ 12,472
    Investment securities ..............................               405                397                831                753
    Interest bearing deposits ..........................               149                171                191                298
                                                                  --------           --------           --------           --------
      Total interest income ............................             7,317              6,914             14,538             13,523

Interest expense
    Deposits and borrowings ............................             3,821              3,210              7,467              6,004
                                                                  --------           --------           --------           --------

Net interest income ....................................             3,496              3,704              7,071              7,519
   Provision for loan losses ...........................              (461)              (227)              (901)              (542)
                                                                  --------           --------           --------           --------
Net interest income after provision ....................             3,035              3,477              6,170              6,977

Noninterest income
   Service charges on deposit accounts .................                60                 72                114                135
   Gain on sale of Bank owned assets ...................                69                 47                182                 47
   Other income ........................................                97                427                202                528
                                                                  --------           --------           --------           --------
     Total noninterest income ..........................               226                546                498                710
                                                                  --------           --------           --------           --------

Noninterest expenses
   Salaries and benefits ...............................             1,279              1,231              2,581              2,330
   Occupancy and equipment .............................               259                232                504                440
   Other expense .......................................               568                541              1,132                999
                                                                  --------           --------           --------           --------
     Total noninterest expense .........................             2,106              2,004              4,217              3,769
                                                                  --------           --------           --------           --------
Income before income taxes .............................             1,155              2,019              2,451              3,918
   Provision for income taxes ..........................               416                729                886              1,414

                                                                  --------           --------           --------           --------
Net income .............................................          $    739           $  1,290           $  1,565           $  2,504
                                                                  ========           ========           ========           ========

Basic per share earnings ...............................          $   0.34           $   0.61           $   0.72           $   1.19
                                                                  ========           ========           ========           ========

Diluted earnings per common share ......................          $   0.34           $   0.59           $   0.72           $   1.15
                                                                  ========           ========           ========           ========
</TABLE>


See notes to unaudited consolidated financial statements.



                                       4
<PAGE>



            FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
         Consolidated Statements of Comprehensive Income
                  (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                               (Unaudited)                        (Unaudited)
                                                                             Three Months ended               Six Months ended
                                                                                  June 30,                        June 30,
                                                                                  --------                        --------
                                                                           2007            2006             2007              2006
                                                                           ----            ----             ----              ----
<S>                                                                      <C>              <C>              <C>              <C>
Net income .....................................................         $   739          $ 1,290          $ 1,565          $ 2,504


Other comprehensive loss:

Change in unrealized holdings gains &
        losses on available for sale securities ................            (194)            (161)            (120)            (226)

Income tax expense benefit on other
                     comprehensive loss ........................              74               86               46               86
                                                                         -------          -------          -------          -------

Total other comprehensive loss .................................            (120)             (75)             (74)            (140)
                                                                         -------          -------          -------          -------

Comprehensive income ...........................................         $   619          $ 1,215          $ 1,491          $ 2,364
                                                                         =======          =======          =======          =======
</TABLE>



See notes to unaudited consolidated financial statements.

















                                       5
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                     Consolidated Statements of Cash Flows
                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                              (Unaudited)
                                                                                                           Six Months Ended
                                                                                                                June 30,
                                                                                                                --------
                                                                                                       2007                   2006
                                                                                                       ----                   ----

Operating Activities
<S>                                                                                                 <C>                    <C>
Net income ...........................................................................              $  1,565               $  2,504

Adjustments to reconcile net income to net cash provided
  by operating activities
     Provision for loan losses .......................................................                   901                    542
     Depreciation ....................................................................                   214                    208
     Gain on sale of bank owned assets ...............................................                    (3)                     -
     Net Amortization of Securities ..................................................                     8                      -
     Deferred Tax Asset ..............................................................                     -                     86
     Increase in cash surrender value of life insurance ..............................                   (17)                   (15)
     Increase (decrease) in other assets .............................................                   827                   (247)
     Decrease in accrued expenses
       and other liabilities .........................................................                  (148)                  (471)
                                                                                                    --------               --------
Net cash provided by operating activities ............................................                 3,347                  2,607
                                                                                                    --------               --------



Investing Activities
     Purchase of securities available for sale .......................................                (1,000)                (8,498)
     Purchase of restricted FHLB stock ...............................................                  (570)                   (57)
     Proceeds from MBS principal paydowns ............................................                   184                    326
     Proceeds from matured available for sale securities .............................                 4,000                  4,000
     Origination of loans, net of principal collected ................................               (15,109)               (28,027)
     Purchase of premises and equipment ..............................................                (1,493)                  (351)
                                                                                                    --------               --------
Net cash used in investing activities ................................................               (13,988)               (32,607)
                                                                                                    --------               --------

Financing Activities
     Net increase (decrease) in deposits .............................................                (1,516)                21,701
     Net decrease in retail repurchase agreements ....................................                  (699)                (2,013)
     Proceeds from exercise of stock options .........................................                    74                    137
     Net increase (decrease) in other borrowings .....................................                14,867                   (267)
                                                                                                    --------               --------
Net cash provided by financing activities ............................................                12,726                 19,558
                                                                                                    --------               --------
Net increase (decrease) in cash and cash equivalents .................................                 2,085                (10,442)

Cash and cash equivalents, beginning .................................................                15,682                 18,532
                                                                                                    --------               --------

Cash and cash equivalents, ending ....................................................              $ 17,767               $  8,090
                                                                                                    ========               ========
</TABLE>

See notes to unaudited consolidated financial statements.



                                       6
<PAGE>



                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1.  Basis of Presentation and Use of Estimates

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally accepted in the United States for interim
financial  information and with  instructions to Form 10-Q and Regulation S-X of
the Securities and Exchange Commission.  Accordingly, they do not contain all of
the  information  and  footnotes  required by  accounting  principles  generally
accepted in the United States for complete financial statements. However, in the
opinion  of  management,   all  adjustments  considered  necessary  for  a  fair
presentation have been included.  Operating results for the six and three months
ended June 30, 2007 are not  necessarily  indicative  of the results that may be
expected for the year ended December 31, 2007. For further  information,  please
refer to the financial  statements and footnotes  thereto for the  Corporation's
fiscal year ended December 31, 2006,  contained in the Corporation's 2006 Annual
Report on Form 10-K.

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

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

Note 2 - Earnings per Share

Earnings  per share has been  determined  under the  provisions  of statement of
Financial  Accounting  Standards No. 128,  Earnings Per Share.  For the quarters
ended June 30, 2007 and 2006,  basic  earnings per share has been computed based
upon the weighted average common shares  outstanding of 2,160,785 and 2,110,679,
respectively.

The only potential  dilutive  security of the Company as defined in Statement of
Financial  Accounting  Standards No. 128,  Earnings Per Share,  is stock options
granted  to  various  officers  and  employees  of the Bank  prior to 2006.  The
following  is a summary of the diluted  earnings per share  calculation  for the
three months ended June 30, 2007 and 2006  (Dollars in  thousands,  except share
and per share data):

<TABLE>
<CAPTION>
                                                                     Three Months ended                       Six Months ended
                                                                          June 30,                                June 30,
                                                                          --------                                --------
                                                                 2007               2006                 2007               2006
                                                                 ----               ----                 ----               ----
<S>                                                           <C>                 <C>                 <C>                 <C>
Net Income .........................................          $      739          $    1,290          $    1,565          $    2,504
Weighted average outstanding shares ................           2,160,785           2,110,679           2,158,176           2,110,679

Basic earnings per share ...........................          $     0.34          $     0.61          $     0.72          $     1.19

Weighted average outstanding shares ................           2,160,785           2,110,679           2,158,176           2,110,679
Dilutive effect of stock options ...................              28,769              63,762              29,094              63,762
                                                              ----------          ----------          ----------          ----------

Weighted average diluted shares ....................           2,189,554           2,174,441           2,187,270           2,174,441

Diluted earnings per share .........................          $     0.34          $     0.59          $     0.72          $     1.15
</TABLE>


                                       7
<PAGE>


Note 3 - Impact of Recently Issued Accounting Standards

In March  2006,  the FASB  issued  SFAS No. 156,  Accounting  for  Servicing  of
Financial  Assets, an amendment of FASB Statement No. 140. This statement amends
SFAS No. 140,  Accounting  for Transfers  and Servicing of Financial  Assets and
Extinguishments  of  Liabilities,  a replacement of SFAS No. 125 with respect to
the  accounting  for  separately   recognized  servicing  assets  and  servicing
liabilities. The provisions of this statement were effective as of the beginning
of the Company's  2007 fiscal year.  The adoption of SFAS No. 156 did not have a
material impact on the Company's financial position and results of operations.

In July 2006, FASB issued  Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes--an interpretation of SFAS No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions.  This interpretation  requires that
the Company recognize in its financial statements, the impact of a tax position,
if that position is more likely than not of being  sustained on audit,  based on
the technical merits of the position. The provisions of FIN 48 were effective as
of the beginning of the Company's 2007 fiscal year,  with the cumulative  effect
of the change in  accounting  principle  recorded  as an  adjustment  to opening
retained  earnings.  The Company  adopted FIN 48 effective  January 1, 2007. The
adoption  of FIN 48 did not have a material  impact on the  Company's  financial
position and results of operations.

In September  2006, FASB issued SFAS No. 157, "Fair Value  Measurements"  ("SFAS
No. 157"), which enhances existing guidance for measuring assets and liabilities
using fair value and requires additional  disclosure about the use of fair value
for measurement.  The Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal  years.  The Company  will be required to adopt SFAS No. 157 in the first
quarter of 2008, and is currently  evaluating the impact of the adoption of SFAS
No. 157 on its  financial  position  and results of  operations,  including  the
valuation methods and support for the assumptions that underlie the valuation.

During the first  quarter of 2007,  FASB issued  SFAS No.  159,  "The Fair Value
Option for Financial  Assets and  Financial  Liabilities"  ("SFAS  159"),  which
permits  entities to choose and measure many financial  instruments  and certain
other items at fair value. The Company will be required to adopt SFAS No. 159 in
the  first  quarter  of 2008,  and is  currently  evaluating  the  impact of the
adoption of SFAS No. 159 on its financial position and results of operations.

In  September  2006,  the  Emerging  Issues  Task Force  issued EITF Issue 06-4,
"Accounting  for Deferred  Compensation  and  Postretirement  Benefit Aspects of
Endorsement  Split-Dollar Life Insurance Arrangements" ("EITF Issue 06-4"). EITF
Issue 06-4 requires that, for endorsement  split-dollar  insurance  arrangements
that provide a benefit to an employee that extends to postretirement periods, an
employer  should  recognize a liability for future  benefits in accordance  with
SFAS No. 106 or APB No. 12 based on the  substantive  agreement of the employee.
If the  employer  has  effectively  agreed to maintain a life  insurance  policy
during postretirement periods, the costs of the life insurance policy during the
postretirement  periods  should  be  accrued  in  accordance  with  either  FASB
Statement  No. 106 or APB No. 12. If the  employer has agreed to provide a death
benefit,  the employer should recognize a liability for the future death benefit
in  accordance  with  either  SFAS No.  106 or APB No.  12.  EITF  Issue 06-4 is
effective for fiscal years  beginning  after  December 15, 2007.  The Company is
currently evaluating the impact of EITF Issue 06-4 on its financial statements.




                                       8
<PAGE>

Note 4 - Other Borrowed Funds

Other  borrowed  funds  consisted of a 10 year $10 million one year  convertible
advance  at 4.115%  issued on April 5, 2007 and a 10 year $5  million  six month
convertible  advance at 4.06% issued on April 5, 2007 from the Federal Home Loan
Bank of Atlanta

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

This discussion is intended to assist in understanding  the financial  condition
and results of operations of the Company, and should be read in conjunction with
the financial statements and related notes contained elsewhere herein and in the
Company's 2006 annual report on Form 10-K.  Because the Bank is responsible  for
all of the Company's  operations,  the  discussion  will refer to the results of
operations of the Bank.

Forward Looking Statements

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

     o    The Company's growth and ability to maintain growth;
     o    government  monetary and fiscal  policies,  as well as legislative and
          regulatory changes;
     o    the effect of interest  rate changes on our level and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;
     o    the effects of competition from other financial institutions operating
          in the Company's  market areas and elsewhere,  including  institutions
          operating locally, regionally, nationally and internationally;
     o    failure of assumptions  underlying the  establishment of the allowance
          for loan losses, including the value of collateral securing loans; and
     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

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

                                       9
<PAGE>


RESULTS OF OPERATIONS:  THREE MONTH PERIOD ENDED JUNE 30, 2007,  COMPARED TO THE
SAME PERIOD  ENDED JUNE 30,  2006,  AND SIX MONTH  PERIOD  ENDED JUNE 30,  2007,
COMPARED TO JUNE 30, 2006.


Net Income

For the quarter  ended June 30,  2007,  the Company  earned a net profit of $739
thousand,  a decrease of $551 thousand,  or 42.7%, from the same period in 2006.
Diluted per share  quarterly  earnings  were $.34 in 2007 and $.59 in 2006.  The
decrease in earnings in 2007,  as compared to the same  quarter in 2006,  can be
primarily  attributed to the $442 thousand,  or 12.7%,  decrease in net interest
income after provision,  the $320 thousand,  or 58.6%,  decrease in non-interest
income,  and the  $102  thousand,  or 5.1%,  increase  in  non-interest  expense
discussed below. Correspondingly,  the provision for income taxes for the second
quarter of 2007 has decreased $313 thousand as compared to the second quarter of
2006. This offsets the overall decrease to income before taxes of $864 thousand,
or 42.8%,  in the second  quarter of 2007 as compared  to the second  quarter of
2006.

For  the  first  six  months  of  2007,  the  Company  earned  a net  income  of
approximately   $1.565  million,   or  $.72  per  diluted  share,   compared  to
approximately $2.504 million, or $1.15 per diluted share, for the same period in
2006.  Earnings per share  decreased by 37.4% in the first six months of 2007 as
compared  to the same  period in 2006.  The  decrease  in net income of 37.5% is
attributed to several factors including a $807 thousand,  or 11.6%,  decrease in
net interest income after the provision,  a decrease in  non-interest  income of
$212  thousand,  or 29.9%,  and an  increase  in  non-interest  expense  of $448
thousand,  or 11.9%, during the first six months in 2007 as compared to the same
period in 2006.  Correspondingly,  the  provision for income taxes for the first
six months of 2007 has decreased  $528 thousand,  or 37.3%.  The decrease in the
provision  for the first six months of 2007 as  compared to the first six months
of 2006 offsets the overall  decrease in income before tax of $939 thousand,  or
37.5%, for the first six months of 2007 as compared to the same period in 2006.


Profitability

Earnings of  financial  institutions  are most  commonly  measured  through ROAA
(return on average  assets)  and ROAE  (return  on  average  equity).  Return on
average assets is the income for the period, annualized,  divided by the average
assets for the  period.  Return on average  equity is the income for the period,
annualized,  divided by the average equity for the period.  As is shown in Table
One,  ROAA and ROAE for the three month  period  ending June 30, 2007 were 0.83%
and 8.01%,  respectively.  For the first six months of 2007 as is shown in Table
One, ROAA and ROAE were 0.89% and 8.53%, respectively.

                                       10
<PAGE>

Table One

<TABLE>
<CAPTION>
                                                                                      Selected Earnings Ratios

                                                                     For three months ending            For six months ending
                                                                            June 30,                           June 30,
                                                                            --------                           --------
                                                                     2007              2006              2007              2006
                                                                     ----              ----              ----              ----
<S>                                                                  <C>               <C>               <C>               <C>
Return on Average Assets ...................................         0.83%             1.50%             0.89%             1.46%

Return on Average Equity ...................................         8.01%            15.66%             8.53%            15.59%

Dividend Payout Ratio ......................................          N/A               N/A               N/A               N/A

Average Shareholders' Equity
as a Percentage of Average Assets ..........................        10.42%             9.55%            10.42%             9.36%
</TABLE>


Performance results as measured by ROAA and ROAE can be primarily  attributed to
changes in the volume and  composition  of earning  assets and the interest rate
environment.  Details of these changes are provided in the following  discussion
of net interest income.


Net Interest Income

Net interest income, the major component of First South Bancorp's income, is the
amount by which interest and fees on earning assets exceeds the interest paid on
interest bearing  liabilities,  primarily deposits.  Net interest income for the
quarter ended June 30, 2007 decreased by $208 thousand,  or 5.6%, as compared to
the 2006 quarter. Net interest income for the first six months of 2007 decreased
by $448 thousand, or 6.0%, over the same period in 2006.

This  decrease  can  be  largely  attributed  to  the  change  in  the  economic
environment  between the first six months of 2006 and 2007. During the first six
months of 2006, interest rates were rising and the Company's earning assets were
repricing more rapidly than interest-bearing  liabilities.  During the first six
months of 2007 when  interest  rates were  stable,  the  repricing  frequency of
interest-bearing liabilities,  especially in the area of time deposits, exceeded
that of earning assets. The extent to which the earnings in 2007 were negatively
impacted  by the change in the  economic  environment  between the two first six
month  periods  is shown in Table  Two.  The  average  yield on  earning  assets
increased in 2007 over that of 2006 by 37 basis points (8.56%-8.19%),  while the
cost of interest-bearing  liabilities between the two periods increased 86 basis
points (4.97% - 4.11%). In addition,  contributing to the negative effect of the
change in the  economic  environment  between  the  periods  are  changes in the
Company's  balance sheet. The increase in average earning assets of $9.5 million
in the first six months as compared to the same period in 2006 exceeded the $7.9
million increase in interest-bearing  liabilities by $1.6 million.  Although the
growth in average earning assets exceeded interest bearing  liabilities,  it was
not  sufficient  to offset the pace of  repricing  for average  interest-bearing
liabilities.  The net effect of these combined changes between the two first six
month  periods  resulted  in a 49 basis  point  (3.59% - 4.08%)  decrease in the
interest  spread  from  2006 to 2007.

In addition,  the competition from new community banks and new branch offices of
older banks in the Spartanburg,  Columbia,  and Bluffton areas of South Carolina
has increased the interest expense of  interest-bearing  liabilities and reduced
the interest income of loans.

                                       11
<PAGE>

Table Two includes a detailed  comparison  of the average  balances,  yields and
rates for the interest  sensitive  segments of the Company's  balance sheets for
the six months ended June 30, 2007 and 2006.

Table Two        Net Interest Income and Average Balance Analysis
                        for the Six Months Ended June 30,
                                  2007 and 2006
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                Interest                  Average
                                                                Average Balance              Income/Expense            Yield/Cost(1)
                                                                ---------------              --------------            -------------
Interest-Earning Assets                                       2007           2006          2007          2006         2007     2006
                                                              ----           ----          ----          ----         ----     ----
<S>                                                       <C>            <C>            <C>          <C>             <C>      <C>
Due from Banks ........................................   $   7,463      $  12,904      $     191    $     298       5.16%    4.66%
Investments ...........................................      31,908         33,416            831          753       5.25%    4.54%
Loans .................................................     302,941        286,475         13,516       12,472       9.00%    8.78%
                                                          ---------      ---------      ---------    ---------
Total Interest Earning Assets .........................     342,312        332,795         14,538       13,523       8.56%    8.19%

Non-interest-Earning Assets
Cash & Due From Banks .................................       4,670          5,558
Allowance for Loan Losses .............................      (3,339)        (3,170)
Investments: Fair Value ...............................        (155)          (339)
Premises & Equipment ..................................       5,921          5,394
Investment in unconsolidated subsidiary ...............         155            155
Interest Receivable & Other ...........................       5,527          5,366
                                                          ---------      ---------
Total Noninterest-Earning Assets ......................      12,779         12,964
                                                          ---------      ---------
TOTAL ASSETS ..........................................   $ 355,091      $ 345,759
                                                          ---------      ---------
Interest-Bearing Liabilities
NOW Accounts ..........................................   $  28,102      $  32,979      $     510    $     567       3.66%    3.47%
Money Market & Savings ................................      61,935         49,339          1,435        1,001       4.67%    4.09%
Time Deposits & IRAs ..................................     197,231        192,919          5,094        3,929       5.21%    4.11%
Fed Funds and Purchased and Repos .....................       1,573          4,868             34           98       4.36%    4.06%
Other Borrowed Funds ..................................       8,525          9,475            185          213       4.38%    4.53%
Subordinated Debt .....................................       5,155          5,000            205          192       8.02%    7.74%
Demand Notes Issued to Treasury .......................         177            186              4            4       4.56%    4.34%
                                                          ---------      ---------      ---------    ---------
 Total Interest-Bearing Liabilities ...................     302,698        294,766          7,467        6,004       4.97%    4.11%

Noninterest-Bearing Liabilities
Demand Deposits .......................................      13,540         15,820
Interest Payable ......................................       1,130            996
Other Liabilities .....................................         721          1,801
                                                          ---------      ---------
Total Noninterest-Bearing Liabilities .................      15,391         18,617
                                                          ---------      ---------
Stockholders' Equity ..................................      37,002         32,376
                                                          ---------      ---------
TOTAL LIABILITIES & EQUITY ............................   $ 355,091      $ 345,759
                                                          ---------      ---------
Net Interest Income ...................................                                 $   7,071    $   7,519
                                                                                        ---------    ---------
  Net Yield on Earning Assets .........................                                                              4.17%    4.56%
  Interest Rate Spread ................................                                                              3.59%    4.08%
</TABLE>
(1) Annualized

                                       12
<PAGE>

Noninterest Income

Noninterest  income for the second quarter of 2007  decreased $320 thousand,  or
58.6%,  to $226  thousand for the second  quarter of 2007 from $546 thousand for
the  second  quarter of 2006.  The  decrease  is  primarily  composed  of a $177
thousand decrease in brokerage service commissions, and a $118 thousand decrease
in loan  brokerage  commissions  in the second  quarter of 2007  compared to the
second  quarter in 2006.  The Loan  Brokerage  department  was  terminated as of
December 2006, therefore no income from this activity has been reported in 2007.

Noninterest income for the first six months of 2007 decreased $212 thousand,  or
29.9%,  from the $710 thousand  amount  recorded  during the first six months in
2006.  This  decrease  is the net effect of an  increase  in Other  Non-interest
Income of $21 thousand, a decrease in Commission & Fees of $347 thousand,  and a
decrease in Service  Charges of $21 thousand.  The decrease in  Commissions  and
Fees is predominately a decrease in Brokerage  Service  Commissions of $166k and
Loan  Brokerage   Commissions  of  $130k.  The  Loan  Brokerage  department  was
terminated as of December 2006,  therefore no income from this activity has been
reported in 2007. As shown in Table Three,  service  charge income  decreased by
$21  thousand  from $135  thousand  during  the first six months of 2006 to $114
thousand during the same period in 2007. This decrease  resulted  primarily from
the  increase in 2007,  as  compared to that of the same period in 2006,  of the
earnings  allowance  interest rate which resulted in a larger credit to business
accounts as an offset against  service charges  determined  through full account
analysis.

Table Three  provides a three and six month 2007 to 2006  comparison  of various
categories of noninterest income.

<TABLE>
<CAPTION>
Table Three                                                                         Summary of Total Noninterest Income
                                                                      for the Three Months Ended         for the Six Months Ended
                                                                               June 30,                           June 30,
                                                                               --------                           --------
                                                                       (Amounts in thousands)              (Amounts in thousands)
                                                                       2007              2006              2007              2006
                                                                       ----              ----              ----              ----
<S>                                                                    <C>               <C>               <C>               <C>
Service Charges ............................................           $ 60              $ 72              $114              $135
Commissions & Fees .........................................             69               404               147               494
Gain on sale of bank owned assets ..........................             69                47               182                47
Other Non-interest Income ..................................             28                23                55                34
                                                                       ----              ----              ----              ----
Total ......................................................           $226              $546              $498              $710
</TABLE>

Noninterest Expense

Noninterest  expense for the second  quarter of 2007 increased by $102 thousand,
or 5.1% compared to the second quarter of 2006. The increase consisted primarily
of a $48 thousand increase in salaries and benefits, and a $23 increase for loss
on sale of bank  owned  assets.  As  discussed  below  increases  in salary  and
benefits  are related to  increases in the number of personnel at the end of the
second quarter of 2007 as compared to the end of the second quarter in 2006.

Noninterest expense for the first six months of 2007 increased by $448 thousand,
or 11.9%, over the first six months total in 2006 of $3.8 million.  The increase
in  salaries  and  employee  benefits,  and the  increase  in other  noninterest
expenses  were the  primary  reasons for the  overall  increase  in  noninterest
expense.  Salaries and benefits  increased  10.8% from the first six months 2006
total of $2.3 million.  This increase was primarily the result of an increase in


                                       13
<PAGE>

the number of employees  from 62 to 66 during the period ending June 30, 2006 to
June 30, 2007.  The increase in employees is consistent  with the bank's efforts
regarding future growth plans.  Other noninterest  expenses increased 13.3% from
the first six months 2006 total of $999 thousand. This increase is primarily the
result of an increase in loss on sale of bank owned  assets of $54  thousand and
an increase in other loan  related  fees of $29 for the first six months of 2007
from the first six months of 2006.


Table Four provides a three and six month 2007 to 2006 comparison of the various
categories of noninterest expense.


<TABLE>
<CAPTION>
Table Four                                                                         Summary of Total Noninterest Expense
                                                                  for the Three Months Ended               for the Six Months Ended
                                                                           June 30,                              June 30,
                                                                           --------                              --------
                                                                    (Amounts in thousands)                (Amounts in thousands)
                                                                   2007               2006                 2007             2006
                                                                   ----               ----                 ----             ----
<S>                                                               <C>                <C>                <C>                <C>
Salaries & Employee Benefits ...........................          $1,279             $1,231             $2,581             $2,330
Occupancy & Equipment ..................................             259                232                504                440
Other noninterest expense ..............................             568                541              1,132                999
                                                                  ------             ------             ------             ------
Total ..................................................          $2,106             $2,004             $4,217             $3,769
</TABLE>


Income Taxes

Provision  for income  taxes for the three  month  period  ending  June 30, 2007
decreased  $313, or 42.9%, to $416 compared to $729 thousand for the three month
period  ending June 30, 2006.  This  decrease  resulted  from the  corresponding
decrease  in income  before tax of $864  thousand,  or 42.8%  between the second
quarter of 2007 and 2006.  Provision  for income  taxes for the six months ended
June 30, 2007 was $886 thousand as compared to $1.414 million in 2006 during the
same period, a 37.3% decrease.  This decrease was due to the overall decrease in
income before taxes of $1.467 million,  or 37.4%, in 2007 as compared to that of
2006.

CHANGES IN FINANCIAL POSITION

Investment portfolio

During the first six months of 2007,  there  were $1  million in  purchases,  $4
million in  maturities,  and $184  thousand of paydowns.  There were no calls of
investment  portfolio  holdings during the first six months of 2007. As compared
to the same period in 2006, the annual yield of the investment  portfolio during
the first six months of 2007 increased by 71 basis points to 5.25% from 4.54%.


                                       14
<PAGE>

<TABLE>
<CAPTION>
Table Five                                                                   Analysis of Investment Securities
                                                                                  (Amounts in thousands)

December 31, 2006                                                Available-for-Sale                      Held-for-Investment
                                                                 ------------------                      -------------------
                                                            Amortized          Estimated            Amortized          Estimated
                                                              Cost               Value                 Cost              Value
                                                              ----               -----                 ----              -----
<S>                                                         <C>                 <C>                 <C>                 <C>
Due in one year or less ............................        $ 5,000             $ 4,961             $     -             $     -
Due from one to five years .........................          6,493               6,427               4,000               3,978
Due from five to 10 years ..........................          6,500               6,485               4,998               5,037
Due after ten years ................................          4,123               4,097                 482                 632
Mortgage backed securities .........................            597                 583                 421                 425
                                                            -------             -------             -------             -------
                                                            $22,713             $22,553             $ 9,901             $10,072
                                                            =======             =======             =======             =======
</TABLE>

<TABLE>
<CAPTION>
June 30, 2007                                                   Available-for-Sale                      Held-for-Investment
                                                                ------------------                      -------------------
                                                            Amortized          Estimated            Amortized          Estimated
                                                              Cost               Value                 Cost              Value
                                                              ----               -----                 ----              -----
<S>                                                         <C>                 <C>                 <C>                 <C>
Due in one year or less ............................        $ 1,000             $   992             $     -             $     -
Due from one to five years .........................          6,495               6,406               4,000               3,964
Due from five to 10 years ..........................          7,500               7,416               4,998               4,968
Due after ten years ................................          4,123               4,028                 483                 628
Mortgage backed securities .........................            519                 515                 315                 318
                                                            -------             -------             -------             -------
                                                            $19,637             $19,357             $ 9,796             $ 9,878
                                                            =======             =======             =======             =======
</TABLE>

Excludes  equity  securities  with no readily  deteminable  market value of $741
thousand on December 31, 2006 and $1.311 million on June 30, 2007.

Loan portfolio

From December 31, 2006 to June 30, 2007 total loans grew from $296.5  million to
$310.5 million, or 4.75%. The percentage  composition of the loan portfolio,  as
shown in Table Six,  changed  slightly as the  percentage  of real estate  loans
declined  by 1.10% of the total  portfolio  from 82.8% on  December  31, 2006 to
81.7% on June 30, 2007.  Commercial and industrial loans increased by 1.02% as a
percentage of the loan  portfolio  from 17.05% on December 31, 2006 to 18.07% as
of June 30, 2007.

As shown in Table Seven,  Variable Rate Loans  comprised 76.3% of the total loan
portfolio.

On June 30, 2007,  there were ten loans  totaling  $1.6  million on  non-accrual
status.

                                       15
<PAGE>

<TABLE>
<CAPTION>
Table Six                                                                         Analysis of Loans
                                                                                (Amounts in thousands)

Real Estate:                                                            June 30, 2007                 December 31, 2006
                                                                        -------------                 -----------------
<S>                                                             <C>               <C>            <C>              <C>
   Construction/Land Development .........................      $ 27,766            8.94%        $ 29,634           10.00%
   1-4 Family Residential Properties .....................        70,732           22.78%          67,063           22.62%
   Multifamily Residential Properties ....................         4,505            1.45%           6,987            2.36%
   Nonfarm Nonresidential Properties .....................       147,732           47.58%         138,752           46.80%
   Other Real Estate Loans ...............................         3,018            0.97%           3,078            1.04%
Commercial & Industrial ..................................        56,117           18.07%          50,556           17.05%
Consumer .................................................           665            0.21%             395            0.13%
                                                                --------          ------         --------          ------

Total ....................................................      $310,535          100.00%        $296,465          100.00%
                                                                ========          ======         ========          ======
</TABLE>







<TABLE>
<CAPTION>
Table Seven                                                 Analysis of Loan Maturities and Repricing Frequency
                                                                             as of June 30, 2007
                                                                            (Amounts in thousands)

                                             Within         >3 Months        >1 Year        >3 Years          Over
                                            3 Months        12 Months        3 Years         5 Years         5 Years         Total
                                            --------        ---------        -------         -------         -------         -----
<S>                                         <C>             <C>             <C>             <C>             <C>             <C>
Variable Rate Loans ................        $235,629        $      -        $      -        $      -        $      -        $235,629

Fixed Rate Loans ...................           7,736           9,096          30,889          23,807           1,780        $ 73,308
                                            --------        --------        --------        --------        --------        --------

Total Loans ........................        $243,365        $  9,096        $ 30,889        $ 23,807        $  1,780        $308,937
                                            --------        --------        --------        --------        --------        --------
</TABLE>


Excludes loans on non-accrual status of $1.6 million



                                       16
<PAGE>


The  allowance for loan losses is analyzed  monthly in  accordance  with a board
approved plan. This judgmental  analysis is based on a model that assigns a risk
rating to each individual loan and considers the loss risks  associated with the
various  categories  of loans in  relationship  to the  current  and  forecasted
economic  environment.  Management also monitors the overall loan portfolio,  as
well as the level of  reserves  being  maintained  by peer  banks.  The  monthly
provision for loan losses may fluctuate  based on the results of this  analysis.
Of the $901 thousand  provision  amount credited to the loan loss reserve during
the first six months of 2007,  $667 thousand or 74.0%, of the total was credited
as a replacement  of reserves  covering the amount of net loan losses during the
period.  $234 thousand,  or 26.0%, of the total provision amount credited during
the first six months was made to cover loan  growth.  Table Eight  provides  the
results of the year-to-date analysis for the six months ending June 30, 2007 and
2006,  as well as the amounts  charged to this reserve as a loss and credited to
this reserve as a recovery.

Table Eight                            Analysis of the Allowance for Loan Losses
                                           for the Six Months Ended June 30,
                                                (Amounts in thosands)

                                               2007             2006
                                               ----             ----
Balance at Beginning of Year ..............  $ 3,275          $ 3,000
Provision Charged to Operations ...........      901              542
Loans Charged-Off .........................     (736)            (206)
Loan Recoveries ...........................       14               14
                                             -------          -------
Balance at End Of Period ..................  $ 3,454          $ 3,350
                                             =======          =======


Interest rate risk

Financial  institutions  are  subject to  interest  rate risk to the degree that
their interest bearing liabilities (consisting principally of customer deposits)
mature or reprice more or less frequently,  or on a different basis,  than their
interest earning assets (generally consisting of intermediate or long-term loans
and  investment  securities).  The match  between the  scheduled  repricing  and
maturities of the Bank's earning assets and interest bearing  liabilities within
defined   time   periods  is   referred  to  as  "gap"   analysis.   The  Bank's
Asset/Liability  Management  Committee  is  responsible  for  managing the risks
associated  with  changing  interest  rates and their  impact on  earnings.  The
regular  evaluation  of the  sensitivity  of net  interest  income to changes in
interest rates is an integral part of interest rate risk management. At June 30,
2007,  the  cumulative  one-year  gap for the Bank was  negative,  or  liability
sensitive, $28.6 million. At June 30, 2007, the cumulative five-year gap for the
Bank was positive $39.4 million.  A positive gap means that assets would reprice
faster  than  liabilities  if interest  rates  changed,  while  interest-bearing
liabilities  reprice  faster than assets in a negative gap position.  The Bank's
gap is within policy limits which were  established to reduce the adverse impact
on earnings which movements in interest rates can cause.  Intense competition in
the Bank's  markets  continues  to pressure  quality loan rates  downward  while
conversely  pressuring  deposit rates upward.  Table Nine  demonstrates  how the
relationship between  interest-bearing  assets and interest-bearing  liabilities
was calculated for June 30, 2007.


                                       17
<PAGE>


<TABLE>
<CAPTION>
Table Nine                                       Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
                                                                      Repricing Schedule as of June 30, 2007
                                                                               (Amounts in thousands)

                                                               One Year           Over One Year             Over
                                                                or Less           to Five Years          Five Years           Total
                                                                -------           -------------          ----------           -----
Interest Earning Assets
<S>                                                            <C>                 <C>                 <C>                <C>
Due From Banks ......................................          $  12,125           $       -           $       -          $  12,125
Investment Securities* ..............................              1,000              10,495              17,938             29,433
FHLB Stock ..........................................              1,311                   -                   -              1,311
Loans** .............................................            252,461              54,696               1,780            308,937
                                                               ---------           ---------           ---------          ---------

Total ...............................................          $ 266,897           $  65,191           $  19,718          $ 351,806

Interest Bearing Liabilities

NOW Accounts ........................................          $  29,210           $       -           $       -          $  29,210
Savings & MMIA ......................................             61,059                   -                   -             61,059
Time Deposits:$100 & > ..............................             70,011               6,241                   -             76,252
Time Deposits: <$100m ...............................            113,601              10,664                   -            124,265
Repurchase Agreements ...............................              1,472                   -                   -              1,472
Other Borrowed Funds *** ............................             20,154                   -                   -             20,154
                                                               ---------           ---------           ---------          ---------

Total ...............................................          $ 295,507           $  16,905           $       -          $ 312,412

Period Gap ..........................................          $ (28,610)          $  48,286           $  19,718          $  39,394

Cumulative Gap ......................................          $ (28,610)          $  19,676           $  39,394

Period Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ....................              -90.3%              385.6%                0.0%

Cumulative Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ....................              -90.3%              106.3%              112.6%
</TABLE>

<TABLE>
<CAPTION>
                                                              3 Months          Over 3 Months          Over One
Time Deposits                                                  & Less            to 12 Months            Year                 Total
                                                               ------            ------------            ----                 -----

<C>                                                           <C>                  <C>                  <C>                  <C>
$100,000 and Greater ...........................              $15,882              $54,129              $ 6,241              $76,252
</TABLE>

* - Amortized Cost
** - Excludes $1.6 million in loans on non-accrural status.
*** - Net of investment in FSBS Capital Trust of $155 thousand.


                                       18
<PAGE>


Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation or the maturity of existing  assets or the acquisition of additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being the ability to
obtain  deposits  within the Bank's service area.  Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 63.1% of total  assets at June 30,  2007.  Asset  liquidity is provided
from several sources,  including  amounts due from banks and federal funds sold,
and funds from maturing loans. The Bank is a member of the FHLB of Atlanta,  and
the Bank's  borrowings  from that  institution  increased by $15 million for the
first six months of 2007.  These  borrowings were made on a variable rate (daily
rate) credit  basis.  The Bank also has $12 million  available  through lines of
credit with other banks as an additional source of liquidity funding. Management
believes  that the Bank's  overall  liquidity  sources are  adequate to meet its
operating needs.

Capital Resources

The  increase  in Tier 1 capital  for the  Company  during the six month  period
between  December  31,  2006 and  June 30,  2007  resulted  from a $1.6  million
increase in retained  earnings and the exercising of stock options in the amount
of $74.4 thousand.  The most significant  contributors to the difference between
Tier 1 Capital  between the Company  and the Bank at June 30,  2007,  are the $5
million Trust  Preferred  issuance  proceeds,  considered  Tier 1 Capital at the
holding  company  level and Tier 2 Capital  at the bank  level,  and the  $1.826
million received from the exercise of stock options, which is in compliance with
the Board's intention to keep at this time that amount of capital at the holding
company level.

The Company and the Bank are subject to regulatory  capital adequacy  standards.
Under these standards,  financial  institutions are required to maintain certain
minimum  capital  ratios of capital to  risk-weighted  assets and average  total
assets.  Under the  provisions  of the  Federal  Deposit  Insurance  Corporation
Improvement Act of 1991, federal financial  institutions  regulatory authorities
are  required  to  implement  prescribed  "prompt  corrective  action"  upon the
deterioration  of the capital  position of a bank. If the capital position of an
affected institution were to fall below certain levels,  increasingly  stringent
regulatory corrective actions are mandated. At June 30, 2007 the Company and the
Bank met all of their applicable capital requirements.

The Bank's and  Company's  June 30, 2007  capital  ratios are  presented  in the
following table,  compared with the "well  capitalized" and minimum ratios under
the FDIC regulatory definitions and guidelines:

                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                                                                            To Be Well
                                                                                                         Capitalized Under
                                                                                 For Capital             Prompt Corrective
The Bank                                                                       Adequacy Purposes         Action Provisions
As of June 30, 2007                                       Actual                    Minimum                   Minimum
                                                          ------                    -------                   -------
                                                  Amount         Ratio        Amount        Ratio       Amount        Ratio
                                                  ------         -----        ------        -----       ------        -----
<S>                                              <C>             <C>         <C>            <C>        <C>           <C>
Total Capital
(To Risk Weighted Assets) ..............         $44,289         14.04%      $25,228        8.00%      $31,535       10.00%
Tier I Capital
(To Risk Weighted Assets) ..............         $35,935         11.40%      $12,614        4.00%      $18,921        6.00%
Tier I Capital
(To Average Assets) ....................         $35,935          9.96%      $14,435        4.00%      $18,044        5.00%
</TABLE>

<TABLE>
<CAPTION>
The Company
As of June 30, 2007                                       Actual                    Minimum
                                                          ------                    -------
                                                  Amount         Ratio        Amount        Ratio
                                                  ------         -----        ------        -----
<S>                                              <C>             <C>          <C>           <C>
Total Capital
(To Risk Weighted Assets) ...............        $46,147         14.63%       $25,243       8.00%
Tier I Capital
(To Risk Weighted Assets) ...............        $42,693         13.53%       $12,621       4.00%
Tier I Capital
(To Average Assets) .....................        $42,693         12.02%       $14,204       4.00%
</TABLE>


Off-Balance Sheet Arrangements

The Company,  through the operations of the Bank, makes contractual  commitments
to  extend  credit in the  ordinary  course of its  business  activities.  These
commitments  are legally  binding  agreements  to lend money to customers of the
Bank at predetermined  interest rates for a specific period of time. At June 30,
2007,  the Bank had issued  commitments  to extend  credit of $62.5  million and
standby  letters  of credit of $1.6  million  through  various  types of lending
arrangements.  Of these commitments, 54.6 %, or $35.0 million, expire within one
year,  and 45.4 %, or $29.1  million,  expiring  in more  than  one  year.  Past
experience indicates that many of these commitments to extend credit will expire
unused.

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



                                       20
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company's  exposure to market risk is primarily  related to the risk of loss
from adverse  changes in market prices and rates.  This risk arises  principally
from interest rate risk inherent in the Company's lending, deposit gathering and
borrowing activities. Management actively monitors and manages its interest rate
risk exposure.  Although the Company manages other risks, such as credit quality
and  liquidity  risk in the  normal  course of  business,  management  considers
interest rate risk to be its most  significant  market risk, and this risk could
potentially  have  the  largest  material  effect  on  the  Company's  financial
condition  and  results of  operations.  Other  types of market  risks,  such as
commodity  price risk and foreign  currency  exchange  risk, do not arise in the
normal course of the Company's community banking operations.

The Company  periodically uses a simulation model to assist in the management of
interest rate risk. Since the model incorporates the use of estimated changes in
growth and mix of both  earning  assets and  interest-bearing  liabilities  over
established  time periods,  as well as projected  changes in interest rates, the
resulting  "What-if"  scenarios are heavily dependant on accurate  forecasts and
can not be relied on as indicative of actual future results.

As of  June  30,  2007,  there  was no  significant  change  from  the  interest
sensitivity  analysis  performed and disclosed in the 2006 Annual Report on Form
10-K filed with the Securities and Exchange Commission.


Item 4.T - Controls and Procedures

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

There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.




                                       21
<PAGE>



                           PART II - OTHER INFORMATION

Item 4 - Submission of Matters to a Vote of Security Holders

               a) The  Corporation  held its annual meeting of  shareholders  on
               June 27, 2007.

               b)  The  following  persons  were  elected  as  directors  of the
               Corporation,  each to serve a three  year term  until the  Annual
               Meeting of Shareholders in 2009.

            Shares Voted
                                                                      Broker
             Name                   For              Withold          Non-Votes
             ----                   ---              -------          ---------

          Harold E. Fleming     1,649,478           156,657              0
          Joel C. Griffin       1,649,478           156,567              0
          Barry L. Slider       1,645,098           161,037              0

          Other directors to continue serving after the meeting are:

          Roger A. F. Habisreutinger, Chandrakant V. Shanbhag, Herman E.
          Ratchford, and David G. White

     c)   Ratification of the selection of Cherry, Bekaert & Holland, L.L.P., as
          the registrant's  independent auditors was approved with the following
          vote of shares:
                                                                    Broker
             FOR           AGAINST            ABSTAIN              Non-Votes
            -----          -------            -------              ---------
          1,700,410        109,835              270                    0

















                                       22
<PAGE>




Item 6 - Exhibits

Exhibit No.   Description

31.1     13a-14(a)/15d-14(a) Certifications of Chief Executive Officer

31.2     13a-14(a)/15d-14(a) Certifications of Chief Financial Officer

32       Section 1350 Certifications














                                       23
<PAGE>


SIGNATURE

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                  First South Bancorp, Inc.

                                  s/Barry L. Slider
August 14, 2007                    -------------------------------------------
                                  Barry L. Slider, President and CEO


                                  s/V. Lewis Shuler
                                  ---------------------------------------------
                                  V. Lewis Shuler, Executive Vice President
                                            (Principal Accounting Officer)
















                                       24
<PAGE>



                                  Exhibit Index



Exhibit No.   Description


31.1     13a-14(a)/15d-14(a) Certifications of Chief Executive Officer

31.2     13a-14(a)/15d-14(a) Certifications of Chief Financial Officer

32       Section 1350 Certifications


























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