UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                               Amendment No. 1 to
                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED September 30, 2006

                             Commission File Number
                                    000-28037

                            FIRST SOUTH BANCORP, INC.
                      (Exact Name of Small Business Issuer)

     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
                           (Issuer's Telephone Number)


Indicate by check mark  whether the issuer (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
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 { }  No {X}

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common equity,  as of the latest  practical  date:  Common Stock,  no par value,
2,133,476 shares outstanding on November 8, 2006.













<PAGE>










                            FIRST SOUTH BANCORP, INC.

                                   FORM 10-Q/A

                                      INDEX


PART I - FINANCIAL INFORMATION                                              Page

  Item 1.  Financial Statements

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

           Statements of Operations ....................................     4

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

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

           Statements of Changes in Shareholders' Equity ...............     7

           Notes to Unaudited Financial Statements .....................  8-10


  Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operation ...................................11-20

  Item 3.  Quantitative and Qualitative Disclosures About
             Market Risk ...............................................    21


  Item 4.  Controls and Procedures......................................    22

Part II -         OTHER INFORMATION ....................................    23

  Item 6.  Exhibits


SIGNATURES .............................................................    24



















                                       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)
                                                                                                   Sep. 30,                 Dec. 31,
                                                                                                     2006                     2005
                                                                                                     ----                     ----
Assets
<S>                                                                                              <C>                      <C>
Cash & due from banks ............................................................               $   2,320                $   5,022
Due from banks - interest bearing ................................................                  15,338                   13,510
 Investment securities:
    Securities held to maturity ..................................................                   9,954                    7,264
    Securities available for sale ................................................                  24,522                   22,097
Federal Home Loan Bank Stock .....................................................                     740                    1,269
Loans ............................................................................                 287,275                  268,033
      Less, allowance for loan losses ............................................                  (3,290)                  (3,000)
                                                                                                 ---------                ---------
Loans - net ......................................................................                 283,985                  265,033
Property & equipment, net ........................................................                   5,356                    5,289
Investment in FSBS Capital Trust .................................................                     155                      155
Other assets .....................................................................                   5,266                    5,093
                                                                                                 ---------                ---------
Total assets .....................................................................               $ 347,636                $ 324,732
                                                                                                 =========                =========

Liabilities
Deposits:
      Noninterest-bearing ........................................................               $  15,280                $  13,821
      Interest-bearing ...........................................................                 287,027                  251,904
                                                                                                 ---------                ---------
    Total deposits ...............................................................                 302,307                  265,725

Securities sold under repurchase agreements ......................................                   3,346                    5,740
Other borrowed funds .............................................................                       -                   15,000
Demand notes issued to the U.S. Treasury .........................................                     412                      298
Subordinated debt ................................................................                   5,155                    5,155
Other liabilities ................................................................                   1,615                    1,943
                                                                                                 ---------                ---------
    Total liabilities ............................................................                 312,835                  293,861

Shareholders' equity
Common stock - no par value; 36,000,000 authorized,
Outstanding 2,129,276 and 2,100,497 respectively
Paid-in capital ..................................................................                  19,601                   19,422
Retained Earnings ................................................................                  15,341                   11,624
Accumulated other comprehensive loss .............................................                    (141)                    (175)
                                                                                                 ---------                ---------
Total shareholders' equity .......................................................                  34,801                   30,871
                                                                                                 ---------                ---------

Total liabilities and shareholders' equity .......................................               $ 347,636                $ 324,732
                                                                                                 =========                =========
</TABLE>

See Notes to accompanying financial statements.




                                       3
<PAGE>

                     FIRST SOUTH BANCORP, INC AND SUBSIDIARY
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                                            (Unaudited)
                                                                                     Period ended September 30,
                                                                                     --------------------------
                                                                            Three Months                         Nine Months
                                                                            ------------                         -----------
                                                                        2006            2005                 2006           2005
                                                                        ----            ----                 ----           ----
                                                                                (Dollars in thousands, except per share)
Interest income
<S>                                                               <C>               <C>                <C>               <C>
               Loans, including fees ......................       $     6,542       $     4,953        $    19,014       $    14,012
               Investment securities ......................               419               231              1,172               653
               Interest bearing deposits ..................               120               133                418               321
                                                                  -----------       -----------        -----------       -----------

               Total interest income ......................             7,081             5,317             20,604            14,986
Interest expense
               Deposits and borrowings ....................             3,490             2,069              9,494             5,742
                                                                  -----------       -----------        -----------       -----------

Net interest income .......................................             3,591             3,248             11,110             9,244
               Provision for loan losses ..................                29                (5)               571               418
                                                                  -----------       -----------        -----------       -----------
Net interest income after provision .......................             3,562             3,253             10,539             8,826

Noninterest income
               Service charges on deposit accounts ........                75                67                210               222
               Other income ...............................               247               105                822               388
                                                                  -----------       -----------        -----------       -----------
               Total noninterest income ...................               322               172              1,032               610

Noninterest expense
               Salaries and benefits ......................             1,250               958              3,580             2,807
               Occupancy and equipment ....................               250               171                690               552
               Other expense ..............................               490               374              1,489             1,146
               Litigation Settlement ......................                 -                 -                  -             1,677
                                                                  -----------       -----------        -----------       -----------
               Total noninterest expense ..................             1,990             1,503              5,759             6,182
                                                                  -----------       -----------        -----------       -----------

Income before income taxes ................................             1,894             1,922              5,812             3,254
               Provision for income taxes .................               682               677              2,096             1,149
                                                                  -----------       -----------        -----------       -----------

Net income ................................................       $     1,212       $     1,245        $     3,716       $     2,105
                                                                  ===========       ===========        ===========       ===========

Basic per share earnings ..................................       $      0.57       $      0.62        $      1.76       $      1.02

Diluted earnings per share ................................       $      0.56       $      0.60        $      1.71       $      0.98


Weighted Average Shares Outstanding:
               Basic ......................................         2,123,938         2,018,988          2,115,068         2,061,902
               Diluted ....................................         2,173,757         2,089,303          2,174,183         2,141,857
</TABLE>

All share amounts reflect the 6 for 5 stock split distributed on May 5, 2006

See Notes to accompanying financial statements.



                                       4
<PAGE>


                     FIRST SOUTH BANCORP, INC AND SUBSIDIARY
                 Consolidated Statements of Comprehensive Income
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                               (Unaudited)                       (Unaudited)
                                                                            Three Months Ended                 Nine Months Ended
                                                                                September 30,                    September 30,
                                                                                -------------                    -------------
                                                                            2006            2005              2006            2005
                                                                            ----            ----              ----            ----
<S>                                                                      <C>              <C>              <C>              <C>
Net Income .....................................................         $ 1,212          $ 1,245          $ 3,716          $ 2,105

Other comprehensive income:

Change in unrealized holdings gains &
    losses on available for sale securities ....................             281              (44)              55             (120)

Income tax benefit (expense) on other
                comprehensive income  (loss) ...................            (107)              17              (21)              45
                                                                         -------          -------          -------          -------

Total other comprehensive income (loss) ........................             174              (27)              34              (75)
                                                                         -------          -------          -------          -------

Comprehensive income ...........................................         $ 1,386          $ 1,218          $ 3,750          $ 2,030
</TABLE>


 See Notes to accompanying financial statements.





















                                       5
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                                               (Unaudited)
                                                                                                            Nine Months Ended
                                                                                                              September 30,
                                                                                                              -------------
                                                                                                         2006                2005
                                                                                                         ----                ----
                                                                                                           (amounts in thousands)
Operating Activities
<S>                                                                                                   <C>                  <C>
Net income ...............................................................................            $  3,716             $  2,105

Adjustments to reconcile net income to net cash
           provided by operating activities
              Provision for loan losses ..................................................                 571                  418
              Gain on called Security ....................................................                   -                   (8)
              Depreciation ...............................................................                 314                  281
              Amortization ...............................................................                  10                   15
              Deferred Tax Provision .....................................................                  18                  230
              Increase in other assets ...................................................                (562)              (1,144)
              Decrease in accrued expenses and other liabilities .........................                (193)                (587)
                                                                                                      --------             --------

Net cash provided by operating activities ................................................               3,874                1,310
                                                                                                      --------             --------


Investing Activities
              Purchase of securities .....................................................             (11,498)              (7,992)
              Sale(Purchase) of restricted FHLB stock ....................................                 528                  (90)
              Proceeds from MBS principal paydowns .......................................                 441                  718
              Proceeds from called  securities ...........................................               6,000                4,375
              Origination of loans, net of principal collected ...........................             (19,248)              (3,664)
              Purchase of other real estate owned ........................................                 (86)                   -
              Purchase of premises and equipment .........................................                (378)                (342)
                                                                                                      --------             --------

Net cash used in investing activities ....................................................             (24,241)              (6,995)
                                                                                                      --------             --------

Financing Activities
              Net increase in deposits ...................................................              36,592               14,591
              Net decrease in retail repurchase agreements ...............................              (2,394)              (1,117)
              Proceeds from exercise of stock options ....................................                 180                  755
              Net increase (decrease) in other borrowings ................................             (14,886)                  37
                                                                                                      --------             --------

Net cash provided by financing activities ................................................              19,492               14,266
                                                                                                      --------             --------

Net increase(decrease) in cash and cash equivalents ......................................                (875)               8,581

Cash and cash equivalents, beginning .....................................................              18,532               13,292
                                                                                                      --------             --------

Cash and cash equivalents, ending ........................................................            $ 17,657             $ 21,873
                                                                                                      ========             ========
</TABLE>







 See Notes to accompanying financial statements.




                                       6
<PAGE>


                    FIRST SOUTH BANCORP INC., AND SUBISIDIARY
                  Statements of Changes in Shareholders' Equity
      Year-ended December 31, 2005 and Nine Months Ended September 30, 2006
                                   (Unaudited)

(dollars in thousands, except per share)
<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                                    SHARES OF                                            OTHER              TOTAL
                                                     COMMON            PAID-IN         RETAINED       COMPREHENSIVE    SHAREHOLDERS'
                                                      STOCK            CAPITAL         EARNINGS      INCOME/(LOSS)         EQUITY
                                                      -----            -------         --------      -------------         ------
<S>                                                 <C>            <C>               <C>              <C>              <C>
Balance at December 31, 2004 ...............        1,682,490      $ 18,637,856      $  8,224,862     $    (18,861)    $ 26,843,857

Net income .................................                                            3,400,004                         3,400,004

Exercised Stock Options ....................           67,954           783,778                                             783,778


Net change in
unrealized gain on
available for sale
securities, net of tax .....................                                                              (156,434)        (156,434)
                                                 ------------      ------------      ------------     ------------     ------------


Balance at December 31, 2005 ...............        1,750,444        19,421,634        11,624,866         (175,295)      30,871,205

Six for five(6 for 5) Common Stock Split ...          350,053
                                                 ------------      ------------      ------------     ------------     ------------

Beginning Balance January 1, 2006 ..........        2,100,497        19,421,634        11,624,866         (175,295)      30,871,205

Net income .................................                                            3,715,727                         3,715,727

Exercised Stock Options ....................           25,289           179,505                                             179,505

Six for five stock split
   for options exercised ...................            3,490

Net change in
unrealized gain on
available for sale
securities, net of tax .....................                                                                34,249           34,249
                                                 ------------      ------------      ------------     ------------     ------------

Balance at September 30, 2006 ..............        2,129,276      $ 19,601,139      $ 15,340,593     $   (141,046)    $ 34,800,686
                                                    =========      ============      ============     ============     ============
</TABLE>



                                       7
<PAGE>

FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited  Financial Statements

Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted  accounting  principles 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 notes required by generally accepted  accounting  principles
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 nine months ended  September 30, 2006
are not necessarily  indicative of the results that may be expected for the year
ended December 31, 2006. For further information,  please refer to the financial
statements  and notes thereto for the Company's  fiscal year ended  December 31,
2005, contained in the Company's annual report on Form 10-KSB.

The consolidated  financial  statements  include the accounts of the Company 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.

The Company implemented SFAS No. 123(R),Share-Based Payment, on January 1, 2006.
However,  actions by the board of directors  whereby the vesting of all unvested
stock options was accelerated to December 30, 2005, avoided  recognition of pre-
tax compensation expense by the Company related to the adoption of SFAS 123 (R).
As a result,  the  adoption  of SFAS No. 123 (R) has no impact on the  financial
presentation of results of operations of the Company.

Prior to the adoption of FAS 123(R),  the Company accounted for stock options in
accordance with APB Opinion No. 25, and accordingly, no compensation expense was
recorded for stock options.  The schedule  below reflects pro forma  information
had the Company  accounted for stock options in 2005 using the fair value method
under SFAS No.123.


      (Dollar amounts in thousands, except per share amounts)

                                                           Nine Months ended
                                                             September 30,
                                                             -------------
                                                                 2005
                                                                 ----

      Net income: As reported ..............................   $   2,105

      Deduct:  Total stock-based compensation cost
                   determined under the fair value
                   method net of tax .......................          76
                                                               ---------

      Pro forma ............................................   $   2,029
                                                               =========


      Basic earnings per share:
                   As reported .............................    $   1.02
                   Pro forma ...............................    $    .98

      Diluted earnings per share
                  As reported ..............................    $    .98
                  Pro forma ................................    $    .95



                                       8
<PAGE>


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions used for the nine-month  periods ended September 30, 2005;  dividend
yield of 0%, expected  volatility of 50%,  risk-free interest rates of 4.33% for
2005 and expected lives of 10 years for the options.

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, which
requires  the Company to present  basic and  diluted  net income per share.  The
assumed  conversion of stock options  creates the  difference  between basic and
diluted net income per share.  Income per share is  calculated  by dividing  net
income by the weighted  average number of common shares  outstanding for each of
the periods presented.

         The only  potentially  dilutive stock of the Company as defined in FASB
128, is stock options granted to various officers and employees of the Bank. The
following  is a summary of the diluted  earnings per share  calculation  for the
three and nine month periods ended September 30, 2006 and 2005.  (Dollars are in
thousands, except for per share data.)

<TABLE>
<CAPTION>
                                                                    Nine Months Ended                       Three Months Ended
                                                                      September 30,                            September 30,
                                                                      -------------                            -------------
                                                                 2006               2005                  2006               2005
                                                                 ----               ----                  ----               ----

<S>                                                           <C>                 <C>                 <C>                 <C>
Net Income (in thousands) ..........................          $    3,716          $    2,105          $    1,212          $    1,245
Weighted average outstanding shares ................           2,115,068           2,061,902           2,123,938           2,018,988

Basic Earnings Per Share ...........................          $     1.76          $     1.02          $     0.57          $     0.62

Weighted average outstanding shares ................           2,115,068           2,061,902           2,123,938           2,018,988
Dilutive effect of stock options ...................              59,115              79,955              49,820              70,315
                                                              ----------          ----------          ----------          ----------

Weighted average diluted shares ....................           2,174,183           2,141,857           2,173,757           2,089,303

Diluted earnings per share .........................          $     1.71          $     0.98          $     0.56          $     0.60
</TABLE>

All Share amounts reflect the 6 for 5 stock split distributed May 5, 2006

Note 3 - Litigation

The Company  recorded an expense of $1.7 million in June 2005 in connection with
the settlement of the lawsuit described in Item 3 of the Company's annual report
on Form 10-KSB for the year ended December 31, 2005.


Note 4 - Impact of Recently Issued Accounting Standards

In February  2006,  the FASB issued SFAS No. 155,  Accounting for Certain Hybrid
Financial  Instruments,  an amendment of FASB  Statements  No. 133 and 140. This
Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,  and SFAS  No.  140,  Accounting  for  Transfers  and  Servicing  of
Financial  Assets and  Extinguishment  of  Liabilities,  and resolves  issues in
Statement No. 133  Implementation  Issue No. D1, Application of Statement 133 to
Beneficial  Interests in Securitized  Financial  Assets.  The provisions of this
statement are effective for all financial  instruments  acquired or issued after
the beginning of an entity's  first fiscal year that begins after  September 15,
2006. The adoption of SFAS No. 155 is not expected to have a material  impact on
the consolidated financial statements of the Company.

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 FASB Statement 125 with respect
to the  accounting  for  separately  recognized  servicing  assets and servicing
liabilities.  The  provisions  of this  statement are effective for fiscal years
beginning after September 15, 2006. The adoption of SFAS No. 156 is not expected
to have a  material  impact  on the  consolidated  financial  statements  of the
Company.


                                       9
<PAGE>


In  September  2006,  the FASB issued SFAS No. 157,  "Fair Value  Measurements,"
which  establishes a framework for  measuring  fair value in generally  accepted
accounting  principles and expands  disclosures  about fair value  measurements.
SFAS No. 157 defines fair vale as the price that would be received to sell as an
asset or paid to transfer a liability in an orderly  transaction  between market
participants  at the  measurement  date. SFAS No. 157 is effective for financial
statements  issued for fiscal years  beginning  after  November  15,  2007,  and
interim  periods within those fiscal years.  The adoption of SFAS No. 157 is not
expected to have a material impact on the consolidated  financial  statements of
the Company.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit Pension and Other  Postretirement  Plans - an amendment of FASB
Stateement  NO. 87, 88, 106, and 132(R),"  which  requires a business  entity to
recognize  the over funded or under funded status of a  single-employer  defined
benefit  postretirement  plan as an  asset  or  liability  in its  statement  of
financial   position  and  to  recognize   changes  in  that  funded  status  in
comprehensive  income in the year in which the changes  occur.  SFAS No. 158also
requires a business  entity to measure the funded status of a plan s of the date
of its year-end statement of financial position,  with limited  exceptions.  The
provisions  of this  statement  are  effective as of the end of the first fiscal
year  ending  after  December  15,  2006.  The  adoption  of SFAS No. 158 is not
expected to have a material impact on the consolidated  financial  statements of
the Company.

In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an  interpretation  of FASB Statement No. 109,
"which established that the financial  statement effects of a tax position taken
or expected  to be take in a tax return are to be  recognized  in the  financial
statements when it is more likely than not, based on the technical merits,  that
the position will be sustained upon examination.  FIN 48 is effective for fiscal
years  beginning  after  December 15, 2006. The adoption of this new standard is
not expected to have a material impact on the consolidated  financial statements
of the Company.



                     FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

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

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

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

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

          o    the  effects of  competition  from other  financial  institutions
               operating in the Company's market areas and elsewhere,  including
               institutions  operating  locally,   regionally,   nationally  and
               internationally;

                                       10
<PAGE>

          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.

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

         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 2005 annual report on Form 10-KSB.  Because the Bank
is responsible for all of the Company's operations, the discussion will refer to
the results of operations of the Bank.


RESULTS OF OPERATIONS:  THREE MONTH PERIOD ENDED SEPTEMBER 30, 2006, COMPARED TO
THE SAME PERIOD ENDED  SEPTEMBER 30, 2005, AND NINE MONTH PERIOD ENDED SEPTEMBER
30, 2006, COMPARED TO SEPTEMBER 30, 2005.

Net Income

For the quarter ended September 30, 2006, First South Bancorp, Inc. earned a net
profit of $1,212,000, a  decrease of $33,000, or 2.7%, from  the  same period in
2005. Basic per share quarterly earnings were $.57 in 2006 and $.62 in 2005. The
decrease in earnings in 2006,  as compared to the same  quarter in 2005,  can be
primarily attributed to the $487,000, or 32.4%, increase in non-interest expense
discussed below. The increase in net interest income and non-interest income for
the third quarter of 2006, over the same period in 2005,  $343,000 and $150,000,
respectively,   reduced  the  negative   effect  on  earnings  the  increase  in
non-interest expense would have had otherwise.

For the nine month period ended on September 30, 2006,  the Company earned a net
profit of $3,716,000, a $1,611,000,  or 76.5%, increase over the same nine month
period in 2005.  Though changes  between the nine month periods of 2006 and 2005
in  all  income  and  expense  categories,  as  detailed  in  the  Statement  of
Operations,  contributed  to the net amount of the 2006  increase in net income,
the  $1,677,000  litigation  settlement  expense  in 2005,  which  substantially
reduced 2005 net profit,  was, by far, the most significant factor  contributing
the increase in net income in 2006.

Profitability

Earnings of financial  institutions  are often 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 September 30, 2006 were 1.39% and 14.00%,
respectively.  For the nine months ended  September 30, 2006, ROAA and ROAE were
1.44% and 15.04%. The percentages increase for the first nine months of 2006, as
compared to the same period in 2005, can be largely  attributed to the impact of
the  expense  in June of 2005  associated  with the  mediated  legal  settlement
referred to above.






                                       11
<PAGE>


<TABLE>
<CAPTION>

Table One                                             Selected Earnings Ratios

                                      For Three Months Ending         For Nine Months Ending
                                           September 30,                  September 30,
                                           -------------                  -------------
                                        2006           2005             2006          2005
                                        ----           ----             ----          ----
<S>                                    <C>            <C>              <C>            <C>
Return on Average Assets ...........    1.39%          1.62%            1.44%         0.92%

Return on Average Equity ...........   14.00%         16.89%           15.04%         9.88%

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

Average Stockholders Equity
as a Percentage of Average Assets ..    9.93%          9.59%            9.56%         9.30%
</TABLE>





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 September 30,2006  increased by $343,000,  or 10.6%, over the 2005
quarter.  Net  interest  income for the first nine months of 2006  increased  by
$1,866,000,or 20.2%, over the same period in 2005.

Several factors contributed to this increase including growth in average earning
assets,  increase in earning asset yield,  and increase in interest rate spread.
Average  earning  assets for the first nine  months of 2006  increased  by $39.0
million,  or 13.3%,  from the same nine month period in 2005. The earning assets
yield increased by 145 basis points from 6.82 % for the nine month period ending
September 30, 2005, to 8.27 % for the same period in 2006. With the overall cost
of interest-bearing  liabilities between these two nine month periods increasing
132 basis points,  from 2.98 % in 2005 to 4.30 % in 2006, the bank experienced a
13 basis points  improvement in the interest spread,  the difference between the
net yield on earning assets and the cost of interest-bearing liabilities.

 Table Two includes a detailed  comparison of the average  balances,  annualized
yields  and rates  for the  interest  sensitive  segments  of the  Corporation's
balance sheets for the nine months ended September 30, 2006 and 2005.


                                       12
<PAGE>


<TABLE>
<CAPTION>
Table Two                                                           Net Interest Income and Average Balance Analysis
                                                                          for the Nine Months Ended September 30,
                                                                                         2006 and 2005
                                                                                     (Amounts in thousands)

                                                                                              Interest                Average
                                                               Average Balance             Income/Expense            Yield/Cost
                                                               ---------------             --------------            ----------
Interest Earning Assets                                      2006          2005            2006         2005        2006        2005
                                                             ----          ----            ----         ----        ----        ----
<S>                                                      <C>             <C>             <C>           <C>           <C>       <C>
Int. Bearing Due from Banks ........................     $  11,679       $  14,739       $     418     $     321     4.79%     2.91%
Investments ........................................        33,861          23,199           1,172           653     4.63%     3.76%
Loans ..............................................       287,441         256,040          19,014        14,012     8.84%     7.32%
                                                         ---------       ---------       ---------     ---------     ----      ----
Total Interest Earning Assets ......................       332,981         293,978          20,604        14,986     8.27%     6.82%

Noninterest Earning Assets
Cash & Due From Banks ..............................         5,465           5,425
Allowance for Loan Losses ..........................        (3,224)         (3,046)
Investments: Fair Value Adjustment .................          (356)           (120)
Premises & Equipment ...............................         5,396           5,266
Investment in unconsolidated subsidiary ............           155             155
Interest Receivable & Other ........................         5,398           4,515
                                                         ---------       ---------
Total Noninterest Earning Assets ...................        12,834          12,195
                                                         ---------       ---------

TOTAL ASSETS .......................................     $ 345,815       $ 306,173
                                                         =========       =========

Interest Bearing Liabilities
NOW Accounts .......................................     $  31,896       $  39,151       $     838     $     706     3.51%     2.41%
Money Market & Savings .............................        51,849          50,952           1,670           927     4.31%     2.43%
Time Deposits & IRAs ...............................       193,741         148,035           6,262         3,463     4.32%     3.13%
Fed Funds Purchased & Repos ........................         4,817           4,426             150            80     4.16%     2.42%
Other borrowed funds ...............................         7,542          10,000             270           338     4.79%     4.52%
Subordinated debt ..................................         5,000           5,000             298           224     7.97%     5.99%
Demand Notes Issued to Treasury ....................           187             214               6             4     4.29%     2.50%
                                                         ---------       ---------       ---------     ---------     ----      ----
Total Interest Bearing Liabilities .................       295,032         257,778           9,494         5,742     4.30%     2.98%

Noninterest Bearing Liabilities
Demand Deposits ....................................        15,053          17,492
Interest Payable ...................................           990             682
Other Liabilities ..................................         1,701           1,733
                                                         ---------       ---------
Total Non Int Bearing Liabilities ..................        17,744          19,907

Stockholder's Equity ...............................        33,039          28,488
                                                         ---------       ---------

TOTAL LIABILITIES & EQUITY .........................     $ 345,815       $ 306,173
                                                         =========       =========

Net Interest Income ................................                                     $  11,110     $   9,244
                                                                                         =========     =========

  Net Yield on Earning Assets ......................                                                                 4.46%     4.20%
  Interest Rate Spread .............................                                                                 3.97%     3.84%
</TABLE>

Other Income

Total other, or  non-interest,  income for both the three and nine month periods
ending September 30, 2006,  increased over the same three and nine month periods
of 2005. The three month period  increase in 2006 was $149  thousand,  or 86.1%,
and nine month period  increase  was $422  thousand,  or 69.2%.  With changes in
service charge income for both the three and nine month periods on a comparative
basis being an insignificant  factor in the total increased  amounts,  the other
two categories of non-interest income clearly accounted for the difference.  The
Commissions and Fees category in both the three and nine month periods accounted
for the  greatest  portion  of the  increase  in 2006  over  that of 2005.  This
category of  non-interest  income  includes fees  received  from loan  brokerage
services,  which  increased by $96 thousand in third quarter of 2006 compared to
the same period in 2005 and by $222  thousand  for the nine month  period  ended
September 30, 2006, compared to the same period in 2005.

                                       13
<PAGE>

<TABLE>
<CAPTION>
Table Three                                           Summary of Total Noninterest Income

                                for the Nine Months Ended September 30,    for the Three Months Ended September 30,
                                             2006 and 2005                              2006 and 2005
                                             -------------                              -------------
                                         (Amounts in thousands)                      (Amounts in thousands)

                                             2006        2005                           2006        2005
                                             ----        ----                           ----        ----
<S>                                         <C>         <C>                             <C>         <C>
Service Charges .........................   $ 210       $ 222                           $ 75        $ 67
Commissions & Fees ......................     723         348                            229          95
Other Noninterest Income ................      99          40                             18          10
                                          -------       -----                          -----       ----
Total ................................... $ 1,032       $ 610                          $ 322       $ 172
</TABLE>

Other Expense

Other,  or  non-interest  expense,  excluding the $1,677  litigation  settlement
expense in 2005,  as  referenced  earlier  under the  Income  and  Profitability
headings, increased by $1.254 million during the nine months ended September 30,
2006, as compared to the same period in 2005.  $773 thousand,  or 61.6%,  of the
total  $1,254  adjusted  total  increase  was in the  category of  Salaries  and
Benefits  expense.  Of the total $773 thousand increase in salaries and benefits
expense, approximately $604 thousand, or 78.2%, resulted from an increase in the
number of full-time equivalent employees from 59 on September 30, 2005, to 67 on
September  30,  2006.  During  2006,  additional  space  was  leased in both the
Bluffton  and  Columbia  office  locations.  The  additional  expense  of  these
expansions,  as well as the opening of a loan  production  office in Greenville,
S.C. in July, were  significant  factors in the increased  Occupancy & Equipment
and Other non-interest  expense categories for the nine month period of 2006, as
compared to the same period in 2005.

The $487  thousand,  or 32.4%,  increase in  non-interest  expense for the three
month  period  ended  September  30,  2006,  as compared to the same three month
period  in 2005,  resulted  from the same  personnel,  premises,  and  equipment
additions noted in the above paragraph discussing the nine month comparison.

Table Four provides a comparison of various  categories of non-interest  expense
for the nine and three month periods ending September 30, 2006,  compared to the
same periods in 2005.

<TABLE>
<CAPTION>
Table Four                                                  Summary of Total Noninterest Expense

                                          For the Nine Months Ended September 30,    For the Three Months Ended September 30,
                                                    2006 and 2005                                2006 and 2005
                                                    -------------                                -------------
                                                (Amounts in thousands)                       (Amounts in thousands)

                                                   2006        2005                            2006         2005
                                                   ----        ----                            ----         ----

<S>                                             <C>         <C>                             <C>            <C>
Salaries & Employee Benefits ...............    $ 3,580     $ 2,807                         $ 1,250        $ 958
Occupancy & Equipment ......................        690         552                             250          171
Other expense ..............................      1,489       1,146                             490          374
Net Litigation Settlement ...................         -       1,677                               -            -
                                                -------     -------                         -------      -------
Total                                           $ 5,759     $ 6,182                         $ 1,990      $ 1,503
</TABLE>

Income Taxes

Provision  for income taxes for the nine months ended  September  30, 2006,  was
$2,096,000,  or 36% of the nine month period's pretax income of $5,812,000.  The
provision for income taxes for the three month period ending September 30, 2006,
was $682,000, or 36% of the three month period's pretax income of $1,894,000. In
2005 the nine and three month periods' income taxes were  $1,149,000,  or 35.3%,
and $677,000, or 35.2%, of pretax income, respectively.



                                       14
<PAGE>


CHANGES IN FINANCIAL POSITION

Investment portfolio

During the first nine months of 2006, $6,000,000 in government agency securities
with a  weighted  average  rate of 3.36%  matured.  During  the same nine  month
period, $11,498,150 in government agency securities with a weighted average rate
of 5.78% were  purchased.  During this nine month period,  $441,154 in principal
was received as payments on two GNMA issues.  On September 30, 2006,  $7,231,378
(Book Value) of investment portfolio holdings were pledged against Treasury, Tax
and Loan deposits and repurchase agreement accounts.

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

December 31, 2005                                                   Available-for-Sale                     Held-for-Investment
                                                                    ------------------                     -------------------
                                                                Amortized          Estimated           Amortized        Estimated
                                                                  Cost             Fair Value             Cost          Fair Value
                                                                  ----             ----------             ----          ----------
<S>                                                              <C>                 <C>                 <C>              <C>
Due in one year or less ............................             $ 9,000             $ 8,938             $     -          $     -
Due from one to five years .........................              10,491              10,327               4,000            3,990
Due from five to 10 years ..........................               1,000                 985               2,000            2,008
Due after ten years ................................               1,123               1,105                 481              634
Mortgage backed securities .........................                 766                 742                 783              795
                                                                 -------             -------             -------          -------
                                                                 $22,380             $22,097             $ 7,264          $ 7,427
                                                                 =======             =======             =======          =======

<CAPTION>
September 30, 2006                                                   Available-for-Sale                     Held-for-Investment
                                                                     ------------------                     -------------------
                                                                Amortized          Estimated           Amortized        Estimated
                                                                  Cost             Fair Value             Cost          Fair Value
                                                                  ----             ----------             ----          ----------

<S>                                                              <C>                 <C>                 <C>                 <C>
Due in one year or less ............................             $ 7,000             $ 6,947             $     -             $     -
Due from one to five years .........................               7,493               7,388               4,000               3,969
Due from five to 10 years ..........................               6,500               6,476               4,998               5,034
Due after ten years ................................               3,123               3,095                 482                 634
Mortgage backed securities .........................                 633                 616                 474                 480
                                                                 -------             -------             -------             -------

                                                                 $24,749             $24,522             $ 9,954             $10,117
                                                                 =======             =======             =======             =======
</TABLE>

Excludes  FHLB  equity  securities  of $1,269 on  December  31, 2005 and $740 on
September 30, 2006



Loan portfolio

From December 31, 2005 to September 30, 2006,  loans increased by $19.2 million,
or 7.2%. As is shown in Table Six, loans secured by real estate at September 30,
2006,  continued  to  comprise  a  substantial  percentage  of  the  total  loan
portfolio, 82.3% versus 83.0% at December 31, 2005. The Company's loan portfolio
at September 30, 2006, as shown in Table Seven,  is comprised of $227.8 million,
or 80.1%,  of variable rate loans,  a decrease from $238.9 million or 89.6 %, at
December 31, 2005.

                                       15
<PAGE>

<TABLE>
<CAPTION>
Table Six                                                                                 Analysis of Loans
                                                                                December 31, 2005 and September 30, 2006
                                                                                         (Dollars in thousands)
Real Estate:                                                               Sept. 30, 2006                        Dec. 31, 2005
                                                                           --------------                        -------------
<S>                                                             <C>                       <C>          <C>                   <C>
   Construction/Land Development .......................        $  22,931                   7.97%      $  14,041               5.23%
   1-4 Family Residential Properties ...................           62,429                  21.69%         65,187              24.28%
   Multifamily Residential Properties ..................            5,794                   2.01%          3,761               1.40%
   Nonfarm Nonresidential Properties ...................          142,727                  49.60%        136,692              50.90%
   Other Real Estate Loans .............................            2,965                   1.03%          3,211               1.20%
Commercial & Industrial ................................           50,345                  17.49%         45,230              16.84%
Consumer ...............................................              589                   0.20%            409               0.15%
                                                                ---------                              ---------

Total ..................................................        $ 287,780                  100.0%      $ 268,531              100.0%
                                                                                           =====                              =====

Less:  Allowance for Loan Losses .......................           (3,290)                                (3,000)
          Net Deferred Loan fees .......................             (505)                                  (498)
                                                                ---------                              ---------
                                                                $ 283,985                              $ 265,033
                                                                =========                              =========
</TABLE>

<TABLE>
<CAPTION>
Table Seven                                               Analysis of Loan Maturities and Repricing Frequency
                                                                          as of September 30, 2006
                                                                           (Dollars 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 ................        $227,771        $      -        $      -        $      -        $      -        $227,771

Fixed Rate Loans ...................           3,333          13,052          21,308          17,864             987          56,544
                                            --------        --------        --------        --------        --------        --------

Total Loans ........................        $231,104        $ 13,052        $ 21,308        $ 17,864        $    987        $284,315
</TABLE>

Excludes loans on non-accrural status of $3,465

Allowance for loan losses

The  allowance for loan losses is analyzed  monthly in  accordance  with a board
approved  plan.  This  judgmental  analysis is based upon a model that assigns a
risk rating on each  individual  loan and considers the loss risk  categories in
relation to the current and forecasted  economic  environment.  The Company also
monitors the overall portfolio,  as well as the level of reserves  maintained by
peer banks.  The monthly  provision for loan losses may  fluctuate  based on the
results of this analysis.  The increased  provision of $153,000 to the loan loss
reserve during the first nine months of 2006, as compared to the same nine month
period in 2005, was primarily due to an increase in non-performing loans in 2006
and to  maintain  the  reserve  balance  at a level  consistent  with the  level
determined by the applied  methodology.  Table Eight provides the details of the
activity  in the loan loss  reserve  account for the nine month  periods  ending
September 30, 2006 and 2005.

Table Eight                           Analysis of the Allowance for Loan Losses
                                         for the Nine Months Ended September 30
                                                   (Dollars in thousands)
                                                  2006               2005
                                                  ----               ----
Balance at Beginning of Year .................   $ 3,000          $ 2,900
Provision Charged to Operations ..............       571              418
Loans Charged-Off ............................      (305)            (328)
Loan Recoveries ..............................        24               10
                                                 -------          -------
Balance at End Of Period .....................   $ 3,290          $ 3,000


                                       16
<PAGE>

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 earning  assets and interest  bearing  liabilities  within defined
time periods is referred to as "gap" analysis.  The  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 September 30, 2006, the cumulative one
year gap was a negative gap, or liability sensitive position,  of $14.8 million.
At September 30, 2006,  the  cumulative  five year gap was a positive,  or asset
sensitive position,  of $22.1 million. A negative gap position means liabilities
would be expected to reprice  faster than assets and a positive gap means assets
would be expected to reprice faster than  liabilities if interest rates changed.
The  Company's  gap  position  at  September  30, 2006 is within  policy  limits
established to reduce the adverse impact on earnings which movements in interest
rates can cause.  Competition  in the  Company's  market  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 September 30, 2006.




                                       17
<PAGE>

<TABLE>
<CAPTION>
Table Nine                                                 Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
                                                                               Repricing Schedule as of September 30, 2006
                                                                                          (Dollars 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 .................................................       $  15,337         $       -        $       -        $  15,337
Investment Securities* .........................................           7,000            11,493           16,211           34,704
FHLB Stock .....................................................             740                 -                -              740
Loans** ........................................................         244,156            39,172              987          284,315
                                                                       =========         =========        =========        =========

Total ..........................................................       $ 267,233         $  50,665        $  17,198        $ 335,096
*Amortized Cost
**Excludes $3,465 in loans on non-accrural status

Interest Bearing Liabilities

NOW Accounts ...................................................       $  28,204         $       -        $       -        $  28,204
Savings & MMIA .................................................          60,061                 -                -           60,061
Time Deposits:$100 & > .........................................          67,099             5,656                -           72,755
Time Deposits: <$100 ...........................................         117,871             8,136                -          126,007
Repurchase Agreements ..........................................           3,346                 -                -            3,346
Subordinated Debt (Trust Preferred Sec.) .......................           5,000                 -                -            5,000
Other Borrowed Funds ...........................................             412                 -                -              412
                                                                       =========         =========        =========        =========

Total ..........................................................       $ 281,993         $  13,792        $       -        $ 295,785

Period Gap .....................................................       $ (14,760)        $  36,873        $  17,198        $  39,311

Cumulative Gap .................................................       $ (14,760)        $  22,113        $  39,311

Period Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ...............................            94.8%           367.4%               -

Cumulative Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ...............................            94.8%           107.5%           113.3%
</TABLE>


                                  3 Months   Over 3 Months   Over One
Time Deposits                      & Less    to 12 Months     Year        Total
                                   ------    ------------     ----        -----
$100 and Greater ...........      $15,321      $51,778      $ 5,656      $72,755



                                       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 that may be immediately
converted into cash at minimal cost(amounts due from banks and overnight invest-
ments).  However,  the most  manageable  sources of  liquidity  are  composed of
liabilities, with the primary focus on liquidity management being the ability to
obtain deposits in the Bank's service areas.  Core deposits (total deposits less
wholesale time deposits)  provide a relatively stable funding base. At September
30, 2006,  core deposits  equaled  approximately  72% of total  deposits.  Asset
liquidity is provided from several sources, including amounts due from banks and
overnight  investments,  and funds from maturing loans.  The Bank is a member of
the Federal  Home Loan Bank of Atlanta  and, as such,  has the ability to borrow
against the security of its 1-4 family residential mortgage loans and commercial
loans.  The Bank also has $12  million  available  through  lines of credit with
other banks as an additional source of liquidity  funding.  Management  believes
the  Company's  overall  liquidity  sources are  adequate to meet its  operating
needs.


Off-Balance Sheet Risk

Through its operations,  the Company has made contractual  commitments to extend
credit in the ordinary course of its business activities.  These commitments are
legally  binding  agreements  to  lend  money  to  the  Company's  customers  at
predetermined  interest  rates for a specified  period of time. At September 30,
2006, the Company had issued  commitments  to extend credit of  $47,617,000  and
standby  letters of credit of  $6,297,000  through  various  types of commercial
lending arrangements.  Approximately 91.0% of these commitments to extend credit
had variable rates.  Past  experience  indicates that many of the commitments to
extend  credit  will  expire not fully used.  As noted  under  "Liquidity",  the
Company  believes that it has adequate  sources of liquidity to fund commitments
drawn upon by borrowers.

Capital Resources

The Company  experienced a $3.895 million  increase in Tier 1 capital to $39.880
million  during the nine month period from  December  31, 2005 to September  30,
2006. The increase  resulted  exclusively from an increase in retained  earnings
$3.716  million  and $179  thousand  from the  exercise  of  stock  options.  At
September 30, 2006, the Bank had Tier 1 capital of $33.491 million.

The  Holding  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  Improvements 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 September 30, 2006, the
Bank met all of the minimum capital requirements to be well capitalized.

The Bank's and Company's September 30, 2006, capital ratios are presented in the
following  table,  compared  with the required  "well  capitalized"  and minimum
ratios under the FDIC regulatory definitions and guidelines:



                                       19
<PAGE>

<TABLE>
<CAPTION>
The Bank                                                                                              To Be Well
(Dollar Amounts in Thousands)                                                                      Capitalized Under
                                                                             For Capital           Prompt Corrective
                                                       Actual              Adequacy Purposes       Action Provisions
                                                       ------              -----------------       -----------------
                                                 Amount       Ratio       Amount       Ratio       Amount       Ratio
                                                 ------       -----       ------       -----       ------       -----

September 30, 2006
<S>                                              <C>          <C>         <C>           <C>        <C>           <C>
             Total Capital
             (To Risk Weighted Assets) .......   $41,681      14.20%      $23,482      >8.0%       $29,352      >10.0%
             Tier 1 Capital
             (To Risk Weighted Assets) .......   $33,491      11.41%      $11,741      >4.0%       $17,611      >6.0%
             Tier 1 Capital
             (To Average Assets) .............   $33,491      9.69%       $13,831      >4.0%       $17,289      >5.0%

<CAPTION>
The Holding Company
(Dollar Amounts in Thousands)
                                                                             For Capital
                                                       Actual             Adequacy Purposes
                                                       ------             -----------------
                                                 Amount       Ratio       Amount       Ratio
                                                 ------       -----       ------       -----

September  30, 2006
<S>                                              <C>          <C>         <C>           <C>
             Total Capital
             (To Risk Weighted Assets)           $43,285      14.75%      $23,495      >8.0%
             Tier 1 Capital
             (To Risk Weighted Assets)           $39,880      13.59%      $11,747      >4.0%
             Tier 1 Capital
             (To Average Assets)                 $39,880      11.53%      $13,836      >4.0%
</TABLE>

                                       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  risk,  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 September 30, 2006, the cumulative one year interest  sensitivity  GAP had
changed  from a positive or asset  sensitive  position  on December  31, 2005 of
$29.1 million to a negative or liability  sensitive  position of $14.8  million.
Management,  based on simulation model  projections of the adverse effect on the
Bank's Net interest income from a decline in interest  rates,  began at mid-year
to reposition the Bank's balance sheet to reduce the potential  negative  effect
on earnings of a decline in interest rates.




                                       21
<PAGE>



Item 4 - Controls and Procedures

(a) 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.

(b) 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.




                                       22
<PAGE>



                           PART II - OTHER INFORMATION

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
November 30, 2006                 ---------------------------------------------
                                  Barry L. Slider, President and Chief Executive
                                     Officer


                                  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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