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, 2006

                             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,
2,122,937 shares outstanding on August 7, 2006.









<PAGE>










                            FIRST SOUTH BANCORP, INC.

                                   FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>

PART I - FINANCIAL INFORMATION                                                            Page

         Item 1.  Financial Statements

<S>                                                                                       <C>
                  Consolidated Balance Sheets.................................................3

                  Consolidated Statements of Operations.......................................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 or Operations Plan.................11-20

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

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


Part II- OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holders........................22

         Item 6.  Exhibits...................................................................22
</TABLE>




















                                       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)
                                                                                                  June 30,                 Dec. 31,
                                                                                                    2006                     2005
                                                                                                    ----                     ----
Assets
<S>                                                                                              <C>                      <C>
Cash & due from banks ............................................................               $   4,864                $   5,022
Due from banks - interest bearing ................................................                   3,225                   13,510
 Investment securities:
    Securities held to maturity ..................................................                  10,033                    7,264
    Securities available for sale ................................................                  23,276                   22,097
    Federal Home Loan Bank Stock .................................................                   1,326                    1,269
Loans ............................................................................                 296,559                  268,033
      Less, allowance for loan losses ............................................                  (3,350)                  (3,000)
                                                                                                   -------                  -------
Loans - net ......................................................................                 293,209                  265,033
Property & equipment, net ........................................................                   5,431                    5,289
Investment in FSBS Capital Trust .................................................                     155                      155
Other assets .....................................................................                   5,087                    5,093
                                                                                                 ---------                ---------
Total assets .....................................................................               $ 346,606                $ 324,732
                                                                                                 =========                =========

Liabilities
Deposits:
      Noninterest-bearing ........................................................               $  14,064                $  13,821
      Interest-bearing ...........................................................                 273,121                  251,904
                                                                                                 ---------                ---------
    Total deposits ...............................................................                 287,185                  265,725

Securities sold under repurchase agreements ......................................                   3,727                    5,740
Other borrowed funds .............................................................                  15,000                   15,000
Demand notes issued to the U.S. Treasury .........................................                      31                      298
Subordinated debt ................................................................                   5,155                    5,155
Other liabilities ................................................................                   2,136                    1,943
                                                                                                 ---------                ---------
    Total liabilities ............................................................                 313,234                  293,861

Shareholders' equity Common stock  - no par value;
   36,000,000 authorized, outstanding 2,122,577
   and 2,100,532 respectively
Paid-in capital ..................................................................                  19,558                   19,422
Undivided profits ................................................................                  14,129                   11,624
Accumulated other comprehensive income/(loss) ....................................                    (315)                    (175)
                                                                                                 ---------                ---------
Total shareholders' equity .......................................................               $  33,372                $  30,871
                                                                                                 =========                =========

Total liabilities and shareholders' equity .......................................               $ 346,606                $ 324,732
                                                                                                 =========                =========
</TABLE>
See Notes to Consolidated Unaudited Financial Statements

                                       3
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                                                    (Unaudited)
                                                                                                Period ended June 30,
                                                                                                ---------------------
                                                                                        Three Months                 Six Months
                                                                                     2006        2005            2006        2005
                                                                                     ----        ----            ----        ----
                                                                                       (Dollars in thousands, except per share)
Interest income
<S>                                                                               <C>           <C>            <C>           <C>
                                        Loans, including fees .............       $ 6,346       $ 4,669        $12,472       $ 9,059
                                        Investment securities .............           397           220            753           422
                                        Interest bearing deposits .........           171           105            298           188
                                                                                  -------       -------        -------       -------

                                        Total interest income .............         6,914         4,994         13,523         9,669
Interest expense
                                        Deposits and borrowings ...........         3,210         1,943          6,004         3,673
                                                                                  -------       -------        -------       -------

Net interest income .......................................................         3,704         3,051          7,519         5,996
                                        Provision for loan losses .........           227           136            542           423
                                                                                  -------       -------        -------       -------
Net interest income after provision .......................................         3,477         2,915          6,977         5,573

Noninterest income
                                        Service charges on
                                          deposit accounts ................            72            84            135           155
                                        Other income ......................           474           137            575           283
                                                                                  -------       -------        -------       -------
                                        Total noninterest income ..........           546           221            710           438

Noninterest expense
                                        Salaries and benefits .............         1,231           920          2,330         1,849
                                        Occupancy and equipment ...........           232           179            440           381
                                        Other expense .....................           541           401            999           772
                                        Litigation
                                        settlement ........................             -         1,677              -         1,677
                                                                                  -------       -------        -------       -------
                                        Total noninterest expense .........         2,004         3,177          3,769         4,679

Income before income taxes ................................................         2,019           (41)         3,918         1,332
                                        Provision for income taxes ........           729           (27)         1,414           472
                                                                                  -------       -------        -------       -------

Net income (loss)..........................................................       $ 1,290       $   (14)       $ 2,504       $   860
                                                                                  =======       =======        =======       =======

Basic per share earnings ..................................................       $  0.61       $ (0.01)       $  1.18       $  0.50

Diluted earnings per share ................................................       $  0.59       $ (0.01)       $  1.15       $  0.48
</TABLE>

See Notes to Consolidated Unaudited Financial Statements





                                       4
<PAGE>







                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

                 Consolidated Statements of Comprehensive Income
                          (Dollar amounts in thousands)



                                                              (Unaudited)
                                                           Six Months Ended
                                                                June 30
                                                                -------
                                                            2006         2005
                                                            ----         ----

Net Income .........................................      $ 2,504       $   860

Other comprehensive  (loss):

Change in unrealized holdings gains &
    losses on available for sale securities ........         (226)          (76)

Income tax benefit on other
    comprehensive income (loss) ....................           86            29
                                                          -------       -------

Total other comprehensive  (loss) ..................         (140)          (47)
                                                          -------       -------

Comprehensive income ...............................      $ 2,364       $   813



















See Notes to Consolidated Unaudited 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,
                                                                                                                     --------
                                                                                                               2006            2005
                                                                                                               ----            ----
                                                                                                                    (amounts in
                                                                                                                    thousands)
Operating Activities
<S>                                                                                                         <C>            <C>
                Net income ...........................................................................      $  2,504       $    860

                Adjustments to reconcile net income to net cash
                                  provided by operating activities
                              Provision for loan losses ..............................................           542            423
                              Depreciation ...........................................................           208            183
                              Amortization ...........................................................             -             10
                              Deferred Tax Asset .....................................................            86            260
                              (Increase)/decrease in cash surrender value of life insurance ..........           (15)           (15)
                              Decrease (increase) in other assets ....................................          (247)        (1,123)
                              Increase (decrease) in accrued expenses and other liabilities ..........          (471)         1,536
                                                                                                            --------       --------

                Net cash provided by operating activities ............................................         2,607          2,134
                                                                                                            --------       --------


                Investing Activities
                              Purchase of securities .................................................        (8,498)        (6,000)
                              Purchase of restricted FHLB stock ......................................           (57)           (90)
                              Proceeds from MBS principal paydowns ...................................           326            495
                              Proceeds from matured  securities ......................................         4,000          1,375
                              Origination of loans, net of principal collected .......................       (28,027)         1,378
                              (Purchase) of premises and equipment ...................................          (351)          (195)
                                                                                                            --------       --------

                Net cash used in investing activities ................................................       (32,607)        (3,037)
                                                                                                            --------       --------

                Financing Activities
                              Net increase in deposits ...............................................        21,701          9,177
                              Net increase (decrease) in retail repurchase agreements ................        (2,013)           663
                              Proceeds from exercise of stock options ................................           137            755

                              Net increase (decrease) in other borrowings ............................          (267)          (303)
                                                                                                            --------       --------

                Net cash provided by financing activities ............................................        19,558         10,292
                                                                                                            --------       --------

                Net increase/(decrease) in cash and cash equivalents .................................       (10,442)         9,389

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

                Cash and cash equivalents, ending ....................................................      $  8,090       $ 22,681
                                                                                                            ========       ========
</TABLE>

See Notes to Consolidated Unaudited 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 months ended June
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 footnotes  thereto for the Company's fiscal year ended
December 31, 2005, contained in the Company's 2005 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.

Note 2.  Accounting for Stock-Based Compensation

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.

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)

<TABLE>
<CAPTION>
                                                         Six Months
                                                             ended
                                                            June 30,
                                                            --------
                                                             2005
                                                             ----

<S>                                                        <C>
Net income: As reported ..............................     $   860

Deduct:  Total stock-based compensation cost
             determined under the fair value
             method net of tax .......................          60
                                                           -------

Pro forma ............................................     $   800
                                                           =======

Basic earnings per share:
             As reported .............................     $  0.50
             Pro forma ...............................     $  0.47

Diluted earnings per share:
            As reported ..............................     $  0.48
            Pro forma ................................     $  0.45
</TABLE>

                                       7
<PAGE>
                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY


In 2005 the fair value of each option  grant was  estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions  used for the  three-month  periods ended March 31, 2005; a dividend
yield of 0%, expected  volatility of 50%,  risk-free interest rate of 4.33%, and
expected lives of 10 years for the options.


Note 3 - 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 six months
ended June 30, 2006 and 2005,  basic  earnings per share has been computed based
upon the weighted average common shares  outstanding of 2,114,169 and 1,703,059,
respectively. Earnings per share for the second quarter of 2006 compared to that
of the second quarter of 2005, $.60 versus ($.01), respectively, is discussed in
the Net Income section under the Management's Discussion and Analysis or Plan of
Operation heading.

The only  potential  stock 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.  The following is a summary of the
diluted  earnings per share  calculation  for the six months ended June 30, 2006
and 2005 (Dollars in thousands, except share and per share data):

                                                           Six Months Ended
                                                              June 30,
                                                              --------
                                                         2006             2005
                                                         ----             ----

Net Income (in thousands) ....................       $    2,504       $      860
Weighted average outstanding shares ..........        2,114,169        1,703,059

Basic Earnings Per Share .....................       $     1.18       $     0.50

Weighted average outstanding shares ..........        2,114,169        1,703,059
Dilutive effect of stock options .............           53,992           84,777
                                                     ----------       ----------

Weighted average diluted shares ..............        2,168,161        1,787,836

Diluted earnings per
share ........................................       $     1.15       $     0.48


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.



                                       8
<PAGE>
                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

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.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on the  consolidated  financial
statements upon adoption.


Note 5 - Stock Split

On April 3, 2006, the Board of Directors of the Company approved a six-for-five
split of  the  common  stock  effected  in  the  form  of  a stock dividend for
shareholders of record on April 20, 2006.  Accordingly, all share and per share
information presented throughout the financial statements have been restated to
reflect the effect of the stock split.








                                       9

<PAGE>

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

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

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

                                       10
<PAGE>

Item 2.  Management's Discussion and Analysis or Plan 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:

Net Income
For the first six months of 2006, First South Bancorp,  Inc. earned a net income
of  approximately  $2.504  million,  or $ 1.15 per  diluted  share,  compared to
approximately $860 thousand,  or $ .50 per diluted share, for the same period in
2005.  Earnings per share  increased by 130%. The 191% increase in net income is
attributed to several factors  including a 25.4% increase in net interest income
from $5.996 million during the first six months in 2005 to $7.519 million during
the same  period  in 2006.  The  provision  for loan  losses  increased  by $119
thousand,  or 28.1%,  from $423 thousand in the first six months of 2005 to $542
thousand during the same period in 2006.  Non-interest income increased by 62.1%
from $438 thousand in 2005 to $710 thousand during the first six months of 2006.
Most of the $272 thousand  increase  resulted from a $72.4 thousand  increase in
loan  brokerage  fees and a $134.2  thousand  increase in  investment  brokerage
service fees.  Non-interest expense during the first six months decreased 19.4%,
from $4.679 million in 2005 to $3.769  million in the same period in 2006.  With
all of the standard  major  categories  of  non-interest  expense,  salaries and
benefits,  $481 thousand,  occupancy,  $59 thousand,  and other operating,  $227
thousand,  experiencing an combined increase of $767 thousand,  the overall $910
thousand  non-interest  expense  decrease  clearly  resulted from the litigation
settlement expense of $1.677 million recorded in June of 2005.

For the three month  period  ending June 30,  2006,  First South  Bancorp,  Inc.
earned a net income of approximately $1.291 million, or $ .60 per diluted share,
compared to an approximate  loss of $14 thousand,  or a loss just under $.01 per
diluted  share,  for the same  period  in  2005.  Though  a  number  of  factors
contributed  to the $1.305  million net  difference  between the second  quarter
income  of 2006  and  2005,  specifically  non-interest  income  increased  $325
thousand in 2006, salaries and benefits expense increased $311 thousand in 2006,
occupancy  expense increased $53 thousand in 2006, net interest income increased
$653 thousand in 2006 and provision for income taxes  increased $757 thousand in
2006, the most significant contributing factor to this difference was the $1.677
million litigation  settlement  expense recorded in June of 2005.

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 first six  months  of 2006  were  1.46% and  15.59%,
respectively.



                                       11
<PAGE>



Table One
                                           Selected Earnings Ratios
                                  at or for the Six Months Ending June 30,
                                  ----------------------------------------
                                          2006             2005
                                          ----             ----
Return on Average Assets ...........     1.46%             0.57%

Return on Average Equity ...........    15.59%             6.19%

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

Average Stockholders Equity
  as a Percentage of Average
  Assets ...........................     9.36%             9.13%

Excluding  periods  when other than  ordinary  course of  business  revenues  or
expenditures  are recorded,  such as the litigation  expense  experienced by the
Company  in  2005,  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
first six  months  of 2006  increased  over  that of the same  period in 2005 by
$1.523 million,  or 25.4%. This increase was almost exclusively the result of an
economic  environment  in which  interest  rates were  rising and the  Company's
earning  assets were  repricing  higher and more rapidly  than  interest-bearing
liabilities.


Total average earning assets exceeded total average interest-bearing liabilities
during the first six months of 2006 by $38.029  million,  as compared to $36.302
million  during the same period in 2005. The yield on earning assets for the six
month period ending in 2006,  as compared to the same period in 2005,  increased
157 basis points.  The funding cost of  interest-bearing  liabilities during the
first six months of 2006, as compared to the same period in 2005,  increased 124
basis  points,  or 33 basis  points  less than  increase in the yield on earning
assets.  The net result of the volume and rate changes between the two first six
month  periods was an  improvement  of 33 basis  points in the  interest  spread
between earning assets and interest-bearing liabilities for the first six months
of 2006.

The increase in net interest  income in the second  quarter of 2006, as compared
to that of the same  period in 2005,  resulted  from a  combination  of factors.
Average  earning  assets  during the second  quarter  of 2006  exceeded  average
interest-bearing  liabilities by $39.5 million compared to a difference  between
earning assets and interest-bearing liabilities in the second quarter of 2005 of
$35.1 million.  The volume differential coupled with an increase in the interest
spread in 2006 of 11 basis points, from 3.77% in 2005 to 3.88% in 2006, combined
to produce a 2006 second  quarter  increase in net interest  income over that of
the same period in 2005 of $653 thousand.


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, 2006 and 2005.




                                       12
<PAGE>

<TABLE>
<CAPTION>
Table Two                                                     Net Interest Income and Average Balance Analysis
                                                                      for the Six Months Ended June 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 .........................    $ 12,904      $ 14,125      $   298     $  188      4.66%    2.68%
Investments .........................................      33,416        22,552          753        422      4.54%    3.77%
Loans ...............................................     286,475       258,067       12,472      9,059      8.78%    7.08%
                                                         --------      --------      -------     ------
Total Interest Earning Assets .......................     332,795       294,744       13,523      9,669      8.19%    6.62%

Noninterest Earning Assets
Cash & Due From Banks ...............................       5,558         5,438
Allowance for Loan Losses ...........................      (3,170)       (3,069)
Investments: Fair Value .............................        (339)         (101)
Premises & Equipment ................................       5,394         5,255
Investment in unconsolidated subsidiary .............         155           155
Interest Receivable & Other .........................       5,366         4,451
                                                         --------      --------
Total Noninterest Earning Assets ....................      12,964        12,129
                                                         --------      --------

TOTAL ASSETS ........................................    $345,759      $306,873
                                                         ========      ========


Interest Bearing Liabilities
NOW Accounts ........................................    $ 32,979      $ 38,616      $  567      $  448      3.47%    2.34%
Money Market & Savings ..............................      49,339        52,475       1,001         610      4.09%    2.34%
Time Deposits & IRAs ................................     192,919       147,835       3,929       2,200      4.11%    3.00%
Fed Funds Purchased & Repos .........................       4,868         4,308          98          47      4.06%    2.20%
Other borrowed funds ................................       9,475        10,000         213         224      4.53%    4.52%
Subordinated debt ...................................       5,000         5,000         192         142      7.74%    5.73%
Demand Notes Issued to Treasury .....................         186           208           4           2      4.34%    1.94%
                                                         --------      --------      ------      ------
Total Interest Bearing Liabilities ..................     294,766       258,442       6,004       3,673      4.11%    2.87%

Noninterest Bearing Liabilities
Demand Deposits .....................................      15,820        18,101
Interest Payable ....................................         996           663
Other Liabilities ...................................       1,801         1,652
                                                         --------      --------
Total Non Int Bearing Liabilities ...................      18,617        20,416

Stockholder's Equity ................................      32,376        28,015
                                                         --------      --------

TOTAL LIABILITIES & EQUITY ..........................    $345,759      $306,873
                                                         ========      ========

Net Interest Income .................................                                $7,519      $5,996
                                                                                     ======      ======

  Net Yield on Earning Assets .......................                                                        4.56%    4.10%
  Interest Rate Spread ..............................                                                        4.08%    3.75%
</TABLE>



                                       13
<PAGE>

Non-interest Income
Non-interest  income for the first six months of 2006 increased $272 thousand to
$710 from $438  thousand  during  the same  period  in 2005,  a 62.1%  increase.
Service  charges  decreased by $20 thousand from $155 thousand  during the first
six  months  of 2005 to $135  thousand  during  the same  period  in 2006.  This
decrease resulted  primarily from the increase in 2006 of the earnings allowance
interest rate which resulted in a larger credit against business account service
charges determined through full account analysis. The largest dollar increase in
any of the three major categories of non-interest  income was experienced in the
area of commissions  and fees. The $241 thousand  increase in total  commissions
and  fees in 2006  over  the same six  month  period  in 2005 was most  directly
related to the $72.4  thousand  increase in loan  brokerage  fees and the $134.2
thousand increase in investment brokerage service fees.

Non-interest  income in the  second  quarter of 2006  exceeded  that of the same
period in 2005 by $325  thousand.  Though  service  charge income  decreased $12
thousand in the second  quarter of 2006,  as compared to that of the same period
in 2005, all other categories of non-interest income, but primarily  commissions
and fees,  increased  in 2006 over 2005.  The  category of  commission  and fees
experienced the greatest  increase,  from $137 thousand in the second quarter of
2005 to $474  thousand  during  the same  period in 2006.  Commissions  and fees
resulting from mortgage loan, investment brokerage, and loans brokerage services
accounted for $239 thousand, or 71%, of the total $337 thousand increase.

Table Three provides a six month 2006 to 2005  comparison of various  categories
of non-interest income.

Table Three                                 Summary of Total Noninterest Income
                                             for the Six Months Ended June 30,
                                                       2006 and 2005
                                                  (Amounts in thousands)

                                                  2006                  2005
                                                  ----                  ----
Service Charges .............................     $135                  $155
Commissions & Fees ..........................      494                   253
Other Noninterest Income ....................       81                    30
                                                  ----                  ----
Total .......................................     $710                  $438

Non-interest Expense
Non-interest  expense  for the first six months of 2006  decreased  19.4%,  from
$4.679 million in 2005 to $3.769  million in 2006.  With increases in all of the
standard major  categories of non-interest  expense,  salaries & benefits - $481
thousand,  occupancy  - $59  thousand,  and  other  operating  - $227  thousand,
experiencing  a combined  increase of $767  thousand,  the overall $910 thousand
decrease  clearly  resulted from the expense incurred in June of 2005 related to
the $1.677 million litigation settlement expense.

Non-interest expense for the second quarter of 2006, compared to the same period
in 2005,  declined  by $910  thousand.  Exclusive  of the  unusual  non-interest
expense in the second quarter of 2005 associated with the litigation  settlement
expense  of $1.677  million,  which  alone  was the basis for the $910  thousand
decrease in  non-interest  expense in the second quarter of 2006 compared to the
same period in 2005, all standard  categories of non-interest  expense increased
in 2006.  Compared to the second quarter of 2005, expenses in the second quarter
of 2006 for salaries and benefits increased $311 thousand,  or 33.8%,  occupancy
expense increased $53 thousand, or 29.6%, other operating expense $140 thousand,
or 34.9% The major contributing factors to the 2006 increase in each category of
non-interest  expense were the addition of two  additional  employees and office
expansions in the Columbia and Bluffton branch locations.


                                       14
<PAGE>

Table Four provides a six month 2006 to 2005 comparison of various categories of
non-interest expense.

Table Four                                 Summary of Total Non-interest Expense
                                             For the Six Months Ended June 30,
                                                       2006 and 2005
                                                  (Amounts in thousands)

                                                    2006                 2005
                                                    ----                 ----

Salaries & Employee Benefits ..................   $2,330               $1,849
Occupancy & Equipment .........................      440                  381
Other expense .................................      999                  772
Net Litigation Settlement .....................        -                1,677
                                                  ------               ------
Total .........................................   $3,769               $4,679

Income Taxes

The provision for income taxes for the six months ended June 30, 2006 was $1.414
million as compared to $472 thousand during the same six month period in 2005, a
199.6%  increase.  This  increase  was due to the  $2.586  million,  or  194.1%,
increase in pretax income in 2006.

CHANGES IN FINANCIAL POSITION

Investment portfolio

During the first six months of 2006,  nine  government  agency  issues  totaling
$8,500,000  were  purchased.   The  average  annual  yield  on  these  purchased
investments  is 5.68 %. During the same period,  two  government  agency  issues
totaling  $4,000,000  with an average annual yield of 3.02% matured.  During the
same period, $326.4 in principal pay-downs with an average coupon yield of 4.99%
were recorded on mortgage-backed investments.

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


December 31, 2005                           Available-for-Sale                            Held-for-Investment
                                            ------------------                            -------------------
                                   Amortized Cost      Estimated Fair Value    Amortized Cost      Estimated 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
                                     -------                 -------               ------                   ------
</TABLE>


                                       15
<PAGE>

<TABLE>
<CAPTION>

June 30, 2006                               Available-for-Sale                            Held-for-Investment
                                            ------------------                            -------------------


                                   Amortized Cost      Estimated Fair Value      Amortized Cost      Estimated Fair Value
                                   --------------      --------------------      --------------      --------------------
<S>                                  <C>                     <C>                  <C>                      <C>
Due in one year or less .........    $ 9,000                 $ 8,901              $     -                  $     -
Due from one to five years ......      7,492                   7,284                4,000                    3,908
Due from five to 10 years .......      5,500                   5,381                4,998                    4,937
Due after ten years .............      1,123                   1,069                  481                      627
Mortgage backed securities ......        669                     641                  554                      558
                                     -------                 -------              -------                  -------

                                     $23,784                 $23,276              $10,033                  $10,030
                                     -------                 -------              -------                  -------
</TABLE>

*Excludes equity securities with no readily  determinable market value of $1.269
million on December 31, 2005 and $1.326 million on June 30, 2006.


Loan portfolio
During the twelve  month period  between June 30, 2005 and June 30, 2006,  loans
increased by $43.1 million,  or 17.0%.  The  percentage  composition of the loan
portfolio,  as shown in Table Six, changed slightly with the percentage of total
real  estate  loans to  total  loans  increasing  by .6% and the  percentage  of
commercial and industrial loans to total loans decreasing by .6%.

As shown in Table Seven, on June 30, 2006 Variable Rate Loans comprised 78.7% of
the total loan portfolio.  On June 30, 2006,  there were thirteen loans totaling
$3.2 million on non-accrual status.

<TABLE>
<CAPTION>
Table Six                                                          Analysis of Loans
                                                                        Balances
                                                                 (Amounts in thousands)
Real Estate:                                              June 30, 2006             December 31, 2005
                                                              ----                       ----
<S>                                                    <C>          <C>            <C>          <C>
   Construction/Land Development ..................    $ 19,293     6.51%          $ 14,041     5.23%
   1-4 Family Residential Properties ..............      68,559    23.12%            65,187    24.28%
   Multifamily Residential Properties .............       4,293     1.45%             3,761     1.40%
   Non-farm Nonresidential Properties .............     148,489    50.07%           136,692    50.90%
   Other Real Estate
Loans .............................................       2,969     1.00%             3,211     1.20%
Commercial & Industrial ...........................      52,495    17.70%            45,230    16.84%
Consumer ..........................................         461     0.16%               410     0.15%
                                                       --------                    --------

Total .............................................    $296,559    100.0%          $268,532    100.0%
                                                       ========    ======          ========    ======
</TABLE>




                                       16
<PAGE>


<TABLE>
<CAPTION>
Table Seven                        Analysis of Loan Maturities and Repricing Frequency
                                                   as of June 30, 2006
                                                  (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 .......  $233,164     $     -     $     -     $     -       $  -    $233,164

Fixed Rate Loans ..........    16,486      12,671      15,823      14,275        988      60,243
                             --------     -------     -------     -------       ----    --------

Total Loans ...............  $249,650     $12,671     $15,823     $14,275       $988    $293,407
</TABLE>


Excludes loans on non-accrural status of $3.152 million

The allowance for loan losses,  which  represents  management's  estimate of the
losses inherent in the loan portfolio,  is analyzed monthly in accordance with a
board approved plan. This judgmental analysis is based on a model that assigns a
risk rating on each individual loan and considers the loss risks associated with
various risk categories in  relationship to the current and forecasted  economic
environment.  Management  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  increase of
$119 thousand in loan loss provision for the six months ending June 30, 2006, as
compared to the same period in 2005, was primarily due to the application of the
bank's  formula for  calculating  the  allowance  for loan losses  based on loan
grades and the growth the bank experienced.  The loan portfolio during the first
six months of 2006  experienced  a downgrading  pertaining  to some  outstanding
loans in the  portfolio.  Table Eight  provides the results of the  year-to-date
analysis  for six month  ending June 30,  2006 and 2005,  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

                                               2006                   2005
                                               ----                   ----
Balance at Beginning of Year ............   $3,000,000             $2,900,000
Provision Charged to Operations .........      542,000                423,000
Loans Charged-Off .......................    (206,000)              (325,000)
Loan Recoveries .........................       14,000                  2,000
                                            ----------             ----------
Balance at End Of Period ................   $3,350,000             $3,000,000

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  element of the  interest  rate risk  management


                                       17
<PAGE>

process.  At June  30,  2006,  the  cumulative  one-year  gap for the Bank was a
negative, or liability sensitive, $5.5 million. At June 30, 2006, the cumulative
five-year gap for the Bank was a positive, or asset sensitive,  $20.6 million. A
positive gap means that assets would reprice faster than liabilities if interest
rates changed.  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,  2006.

<TABLE>
<CAPTION>
Table  Nine                                               Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
                                                                                Repricing Schedule as of June 30, 2006
                                                                                      (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 ........................................          $   3,225            $       -           $     -          $   3,225
Investment Securities* ................................              9,000               11,492            13,325             33,817
FHLB Stock ............................................              1,326                    -                 -              1,326
Loans** ...............................................            262,321               30,098               988            293,407
                                                                 =========            =========           =======          =========

Total .................................................          $ 275,872            $  41,590           $14,313          $ 331,775
*Amortized Cost
**Excludes $3,152 in loans on non-accrural status

Interest Bearing
Liabilities

NOW Accounts ..........................................          $  31,777            $       -           $     -          $  31,777
Savings & MMIA ........................................             53,278                    -                 -             53,278
Time Deposits:$100 & > ................................             58,930                5,367                 -             64,297
Time Deposits: <$100m .................................            113,747               10,022                 -            123,769
Repurchase Agreements .................................              3,727                    -                 -              3,727
Subordinated Debt (Trust Preferred Sec.) ..............              5,000                    -                 -              5,000
Other Borrowed Funds ..................................             15,000                    -                 -             15,000
                                                                 =========            =========           =======          =========

Total .................................................          $ 281,459            $  15,389           $     -          $ 296,848

Period Gap ............................................          $  (5,587)           $  26,201           $14,313          $  34,927

Cumulative Gap ........................................          $  (5,587)           $  20,614           $34,927

Period Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ......................               98.0%               270.3%             N/A

Cumulative Gap Ratios:
  Interest Sensitive Assets to
  Interest Sensitive Liabilities ......................               98.0%               106.9%             N/A
</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 ...........................              $14,237              $44,693              $ 5,367         $64,297
</TABLE>



                                       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 61% of total assets at March 31, 2006. Asset liquidity is provided from
several  sources,  including  amounts due from banks and federal funds sold, and
funds from maturing  loans.  The Bank is a member of the FHLB of Atlanta and, as
such, has the ability to increase its borrowings from that institution. 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.

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,
2006, the Bank had issued  commitments to extend credit of $49.3 million through
various types of lending  arrangements.  Of these commitments,  62.9 %, or $31.0
million, expire within one year, and 37.1 %, or $18.3 million,  expiring in more
than one year.  Past  experience  indicates  that many of theses  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.

Capital Resources

Tier 1 capital for the Company during the six month period between  December 31,
2005  and  June 30,  2006,  increased  $2.641  resulting  from a $2.504  million
increase in retained  earnings and the exercising of stock options in the amount
of $137 thousand.

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, 2006, the Bank met all
of the requirements to be well capitalized.

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


                                       19
<PAGE>

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

June 30, 2006
              Total Capital
<S>                                              <C>             <C>     <C>               <C>      <C>            <C>
              (To Risk Weighted Assets) ...      $40,524,000     13.52%  $23,983,200       >8.0%    $29,978,900    >10.0%
              Tier I Capital
              (To Risk Weighted Assets) ...      $32,274,000     10.77%  $11,991,600       >4.0%    $17,987,400     >6.0%
              Tier I Capital
              (To Average Assets) .........      $32,274,000      9.19%  $14,047,400       >4.0%    $17,559,200     >5.0%
</TABLE>


<TABLE>
<CAPTION>

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

June 30, 2006
              Total Capital
<S>                                              <C>             <C>       <C>               <C>
              (To Risk Weighted Assets) .....    $41,985,000     14.00%    $23,995,600       >8.0%
              Tier I Capital
              (To Risk Weighted Assets) .....    $33,735,000     11.25%    $11,997,800       >4.0%
              Tier I Capital
              (To Average Assets) ...........    $33,735,000      9.60%    $14,053,600       >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  June  30,  2006,  there  was no  significant  change  from  the  interest
sensitivity  analysis  performed and disclosed in the 2005 Annual Report on Form
10-KSB filed with the Securities and Exchange Commission.



                                       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.


                           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 May 17,2006

     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.

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

          Roger A. F. Habisreutinger      1,262,573       75,662           0
          Chandrakant V. Shanbhag         1,262,573       75,662           0

          Other directors to continue serving after the meeting are:

          Harold E. Fleming, Joel C. Griffin, Herman E. Ratchford
          Barry L. Slider, and David G. White

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












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<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 11, 2006                   ---------------------------------------------
                                   Barry L. Slider, President
                                    and Chief Executive Officer


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
















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<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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