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

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2007
                        Commission File Number 000-22787

                             FOUR OAKS FINCORP, INC.
             (Exact name of registrant as specified in its charter)

               North Carolina                           56-2028446
               --------------                           ----------
      (State or other jurisdiction of          (IRS Employer Identification
        incorporation or organization)                    Number)

             6114 U.S. 301 South
          Four Oaks, North Carolina                       27524
          -------------------------                       -----
  (Address of principal executive offices)              (Zip Code)

   Registrant's telephone number, including area code:     (919) 963-2177
                                                           --------------

           Securities registered under Section 12(b) of the Act: NONE
              Securities registered under Section 12(g) of the Act:

                     Common Stock, par value $1.00 per share
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. YES |_|  NO |X|

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_|  NO |X|

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days:
|X|YES  [ ]NO

Indicate by check mark whether  disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |X|

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 large accelerated filer" in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ]   Accelerated filer |X|   Non-accelerated filer [ ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act): YES [ ]  NO |X|

                                  $108,252,293
                                  ------------
     (Aggregate market value of voting and non-voting common equity held by
  non-affiliates of the registrant based on the price at which the registrant's
       Common Stock, par value $1.00 per share was sold on June 30, 2007)

                                    6,207,191
                                    ---------
         (Number of shares of Common Stock, par value $1.00 per share,
                        outstanding as of March 6, 2008)

Documents Incorporated by Reference                        Where Incorporated
-----------------------------------                        ------------------
(1)  Proxy Statement for the 2007 Annual                   Part III
     Meeting of Shareholders to be held April 28, 2008

                                       1
<PAGE>

Forward-Looking Information

         Information  set forth in this  Annual  Report  on Form 10-K  under the
caption  "Business"  and  "Management's  Discussion  and  Analysis of  Financial
Condition  and  Results  of  Operations"   contains   various  "forward  looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended,
which statements represent our judgment concerning the future and are subject to
business,  economic and other risks and  uncertainties,  both known and unknown,
that could cause our actual operating  results and financial  position to differ
materially.  Such forward  looking  statements  can be  identified by the use of
forward  looking  terminology,  such as "may," "will,"  "expect,"  "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereof or
comparable terminology.

         We  caution  that any  such  forward  looking  statements  are  further
qualified by important  factors that could cause our actual operating results to
differ  materially  from those in the  forward  looking  statements,  including,
without  limitation,  the effects of future  economic  conditions,  governmental
fiscal and monetary policies,  legislative and regulatory changes,  the risks of
changes in interest rates on the level and composition of deposits,  the effects
of competition  from other  financial  institutions,  the failure of assumptions
underlying the  establishment  of the allowance for possible loan losses and the
low trading volume of our common stock and the risks  discussed in Item 1A. Risk
Factors below.

         Any forward looking statements  contained in this Annual Report on Form
10-K are as of the date  hereof and we  undertake  no duty to update them if our
view changes later.  These forward looking  statements should not be relied upon
as representing our view as of any date subsequent to the date hereof.

                                     PART I

Item 1 - Business.

          Four Oaks Bank & Trust Company  (referred to herein as the "bank") was
incorporated  under the laws of the State of North Carolina in 1912. On February
5, 1997,  the bank formed Four Oaks  Fincorp,  Inc.  (referred  to herein as the
"company";  references  herein to "we," "us" and "our"  refer to the company and
its consolidated  subsidiaries,  unless the context otherwise  requires) for the
purpose of serving as a holding company for the bank. Our corporate  offices and
banking  offices  are  located in eastern  North  Carolina  in the  counties  of
Johnston (our corporate  headquarters),  Wake, Sampson,  Lee, Duplin and Harnett
counties.  We have no  significant  assets other than cash, the capital stock of
the bank and its membership interest in Four Oaks Mortgage Services,  L.L.C., as
well as $1,153,000 in securities available for sale.

         In  addition,  we have an  interest in Four Oaks  Statutory  Trust I, a
wholly owned  Delaware  statutory  business  trust (the  "Trust"),  for the sole
purpose of issuing trust  preferred  securities.  The Trust is not  consolidated
with our  financial  statements  of the Company  pursuant to the  provisions  of
Financial   Accounting   Standards   Board  ("FASB")   Interpretation   No.  46,
"Consolidation  of  Variable  Interest  Entities  (revised  December  2003) - an
interpretation  of ARB No.  51" ("FIN  46R").  We formed  the Trust for the sole
purpose of issuing  $12.0  million of trust  preferred  securities  (the  "Trust
Preferred Securities"). The Trust has invested the net proceeds from the sale of
the Trust Preferred  Securities in Junior Subordinated  Deferrable Interest (the
"Debentures")  issued  by us and  recorded  in  borrowings  on the  accompanying
consolidated  balance sheet. The Trust Preferred  Securities pay cumulative cash
distributions quarterly at an annual rate, reset quarterly, equal to three month
LIBOR  plus  1.35%.  The  dividends  paid  to  holders  of the  Trust  Preferred
Securities,  which are recorded as interest  expense,  are deductible for income
tax purposes.

         As of December 31,  2007,  we had assets of $708.3  million,  net loans
outstanding  of $538.6 million and deposits of $537.8  million.  We have enjoyed
considerable  growth  over the  past  five (5)  years as  evidenced  by a 122.5%
increase in assets,  a 137.6%  increase in net loans  outstanding,  and a 114.6%
increase in deposits  since December 31, 2002. We had net income of $5.7 million
and $7.0  million and basic  earnings  per share of $.92 and $1.15 for the years
ended December 31, 2007 and 2006,  respectively.  Net income of $5.0 million and
basic  earnings per share of $0.84 were recorded for the year ended December 31,
2005.

         The bank  continues  to remain a  community-focused  bank  engaging  in
general  commercial  banking  business to the  communities we serve in Johnston,
Harnett,  Wake,  Sampson,  Lee and Duplin counties of North  Carolina.  The bank
provides a full range of banking services, including such services as:

         o     checking accounts;
         o     savings accounts;
         o     individual retirement accounts;

                                       2
<PAGE>

         o     NOW accounts;
         o     money market accounts;
         o     certificates of deposit;
         o     a student checking and savings program;
         o     loans for businesses, agriculture, real estate, personal uses,
               home improvement and automobiles;
         o     mortgage loans;
         o     equity lines of credit;
         o     credit cards;
         o     safe deposit boxes;
         o     electronic funds transfer services, including wire transfers;
               internet banking and bill pay services;
         o     telephone banking;
         o     gift cards;
         o     cashier's checks;
         o     traveler's check cards; and
         o     free notary services to all bank customers.

         The bank also provides financial services,  offering a complete line of
insurance and investment services, including financial strategies, mutual funds,
annuities,  insurance,  stock  brokerage,  IRAs,  discount  brokerage  services,
employee  benefit plans,  401(k)'s and  simplified  employee  pension plans.  In
addition,  the bank provides its customers  access to automated  teller machines
("ATMs) through its own ATMs throughout its communities served as well as access
to worldwide ATMs for cash withdrawals through the services of the Star, Cirrus,
or Visa networks by using ATM or Visa check cards. The Visa check cards may also
be used at  merchant  locations  worldwide  through  the Star,  Cirrus,  or Visa
networks.  Through an arrangement with Jefferson Pilot  Securities  Corporation,
the Bank also  makes  available  a complete  line of  insurance  and  investment
services,  including financial strategies,  mutual funds, annuities,  insurance,
stock brokerage,  IRA's,  discount brokerage  services,  employee benefit plans,
401(K)'s and simplified  employee  pension plans. At present,  the bank does not
provide the services of a trust department.

         We  maintain  a website  at  www.fouroaksbank.com  where  our  periodic
reports on Form 10-Q and 10-K and our current  reports on Form 8-K are available
under "Investor Relations". We are registered as a bank holding company with the
Federal Reserve System. We are a  state-chartered  member of the Federal Reserve
System and the Federal Deposit  Insurance  Corporation  (the "FDIC") insures its
deposits up to applicable  limits.  Our corporate offices are located at 6114 US
301 South,  Four Oaks, North Carolina,  27524. Our common stock is traded on the
OTC Bulletin Board under the symbol "FOFN".

         Our market area is concentrated in the eastern North Carolina  counties
of  Johnston,  Wake,  Sampson,  Lee,  Duplin,  and Harnett.  Johnston  County is
contiguous to Wake,  Wayne,  Wilson,  Harnett,  Sampson and Nash counties.  Wake
County is contiguous to Johnston, Durham, Harnett, Nash, Franklin, Granville and
Chatham  counties.  Sampson  County is  contiguous  to Duplin,  Pender,  Bladen,
Harnett,  Cumberland,  Johnston, and Wayne counties. Lee County is contiguous to
Chatham,  Moore and Harnett  counties.  Duplin  County is  contiguous to Pender,
Sampson, Wayne, Lenoir, Jones and Onslow counties.  Harnett County is contiguous
to Cumberland, Moore, Lee, Chatham, Wake, Johnston and Sampson counties.

         From its headquarters  located in Four Oaks and its fourteen  locations
in Four Oaks, Clayton, Smithfield, Garner, Benson, Fuquay-Varina, Wallace, Holly
Springs,  Harrells,  Sanford, Zebulon, and Dunn, the bank serves a major portion
of Johnston County, and part of Wake, Harnett, Duplin, Sampson and Lee counties.
Johnston County has a diverse economy and is not dependent on any one particular
industry.   The  leading   industries   in  the  area  include   retail   trade,
manufacturing,  pharmaceuticals,  government, services, construction,  wholesale
trade and agriculture.  The population for Johnston County in 2006 was estimated
in excess of 152,000.  As of June 2007,  the bank ranked first in deposit market
share for Johnston County at 28%.

         In Four  Oaks,  the main  office is located at 6144 US 301 South and an
additional branch is located at 111 North Main Street.  The bank also operates a
branch office in Clayton at 102 East Main Street, two in Smithfield at 128 North
Second Street,  and 403 South  Brightleaf  Boulevard,  one in Garner at 200 Glen
Road, one in Benson at 200 East Church Street, one in Fuquay-Varina at 325 North
Judd Parkway  Northeast,  one in Wallace at 406 East Main  Street,  one in Holly
Springs at 101 West Center Street, one in Harrells at 590 Tomahawk Highway,  one
in Sanford at 830 Spring Lane, one in Zebulon at 130 North Arendell Avenue,  and
one in Dunn at 604-A Erwin Road.

         The  majority  of the bank's  customers  are  individuals  and small to
medium-size  businesses  located in Johnston,  Wake,  Sampson,  Lee,  Duplin and
Harnett  counties  and  surrounding  areas.  The  deposits  and  loans  are well
diversified  with no  material  concentration  in a single  industry or group of
related  industries.  There are no seasonal factors that would have any material
adverse  effect on the  bank's  business,  and the bank does not rely on foreign
sources of funds or income.

                                       3
<PAGE>

         In an effort to offer a more  diversified and competitive  product line
to  better  serve our  customers  and  community,  in 2003 we  discontinued  our
provision of secondary  market-type  mortgages  through the bank and,  through a
joint venture with Centex Corporation,  formed Four Oaks Mortgage Company,  L.P.
Since 2003, Four Oaks Mortgage Company,  L.P. has provided secondary market-type
mortgages and has been the vehicle through which all of our mortgage business is
run.  Four Oaks  Mortgage  Company,  L.P.  is owned  49.99% by our  wholly-owned
subsidiary,  Four Oaks  Mortgage  Services,  L.L.C.,  and 50.01% by its  general
partner,  CTX Mortgage  Ventures,  LLC, a  wholly-owned  indirect  subsidiary of
Centex Corporation.

         Amounts spent on research  activities  relating to the  development  or
improvement of services has been immaterial over the past two years. At December
31, 2007, the bank employed 177 full time  equivalent  employees.  Our employees
are  extremely  important to our  continued  success and the bank  considers its
relationship with its employees to be good. Management continually seeks ways to
improve upon their benefits and well being.

         The following table sets forth certain of our financial data and ratios
for the years ended  December 31,  2007,  2006 and 2005 derived from our audited
financial  statements and notes. This information  should be read in conjunction
with and is qualified in its entirety by reference to the more detailed  audited
financial statements and notes thereto included in this report:

<TABLE>
<CAPTION>
                                                                      2007           2006           2005
                                                                  ------------   ------------   ------------
                                                                         (In thousands, except ratios)
<S>                                                                <C>            <C>            <C>
Net income                                                         $    5,652     $    7,017     $    5,003
Average equity capital accounts                                    $   52,246     $   45,541     $   39,613
Ratio of net income to average equity capital accounts                  10.82%         15.41%         12.63%
Average daily total deposits                                       $  505,494     $  435,991     $  355,214
Ratio of net income to average daily total deposits                      1.12           1.61           1.41
Average daily loans (gross)                                        $  494,426     $  426,768     $  351,103
Ratio of average daily loans to average daily total deposits            97.81%         97.88%         98.84%
</TABLE>

Proposed Merger with LongLeaf Community Bank

            On December  10,  2007,  we  announced  that we had  entered  into a
definitive agreement with LongLeaf Community Bank ("LongLeaf") pursuant to which
LongLeaf  will merge with and into the bank.  Under the terms of the  Agreement,
each share of LongLeaf  common stock will be  automatically  converted  into the
right to receive either (i) $16.50 in cash, without interest,  (ii) 1.0 share of
Company  common stock  multiplied  by an exchange  ratio or (iii) 0.60 shares of
Company  common stock  multiplied by the exchange  ratio plus an amount equal to
$6.60 in cash, all on and subject to the terms and  conditions  contained in the
Agreement.  The exchange ratio is equal to $16.50 divided by the volume weighted
average of the daily  closing  sales price of our common  stock as quoted on the
OTC Bulletin Board during the 20 consecutive  trading days ending three business
days prior to the closing  date of the Merger  (the  "Average  Closing  Price").
Pursuant  to the  Agreement,  the  Average  Closing  Price can be no higher than
$19.3397452 per share and no lower than  $14.2945943 per share. In addition,  if
(a) as of the  later  of the  date  of  receipt  of  the  required  approval  of
regulatory  authorities  or the date of approval by LongLeaf  shareholders,  the
average  closing  price  of our  common  stock is less  than 75% of the  Average
Closing  Price as of the date the Agreement was executed and (b) we do not agree
to adjust the exchange ratio as permitted by the  Agreement,  then LongLeaf will
have a right to terminate the Agreement.  Finally, certain allocation procedures
will  be  used  to  cause  the  stock  consideration  to  be  paid  to  LongLeaf
shareholders to be between 50% and 70% of the total merger consideration.

            On January 30, 2008, we filed a  Registration  Statement on Form S-4
with the  Securities  and  Exchange  Commission  (the  "SEC") to  register up to
708,461  shares of our common stock that could be issued in connection  with the
proposed transaction.  LongLeaf mailed the related proxy statement/prospectus to
its  shareholders on or about February 28, 2008,  setting forth matters relating
to  the  transaction  to be  voted  upon  at its  upcoming  special  Meeting  of
Shareholders  to be held on April 10, 2008.  The Form S-4 describes the proposed
transaction in detail and provides, among other things,  highlights and terms of
the proposed merger and pro forma financial  information.  Subject to receipt of
approval by LongLeaf's  shareholders  and certain other closing  conditions,  we
plan to consummate the bank merger in the second quarter of 2008.

                                       4
<PAGE>

         We believe that the proposed merger  presents an important  opportunity
for us to increase  shareholder  value by acquiring a  well-respected  community
bank in  Richmond  and  Moore  counties  in North  Carolina,  both of which  are
desirable  markets for the bank. We believe  these  counties  represent  natural
extensions of the bank's existing market areas, as Moore County is contiguous to
Lee County where the bank is already located,  and Richmond County is contiguous
to Moore County.  The bank's  existing  Sanford  office located in Lee County is
situated just off US 1 as are the two offices of LongLeaf. The bank also expects
to realize profitability  improvements in the LongLeaf operations due to merging
its back office  functions  into those of the bank. We also believe that we will
be able to further leverage  LongLeaf's  existing  customer base, branch network
and  reputation  as a method to  implement  and  accelerate  the  bank's  growth
strategy and objectives. In addition, we believe that customers of LongLeaf will
benefit from the  combination  by having access to a larger  community bank that
offers a full array of products and services at competitive prices.

Competition

         Commercial  banking in North Carolina is extremely  competitive  due in
large part to North  Carolina's  early  adoption of  statewide  branching.  As a
result, many commercial banks have branches located in several communities.  The
bank competes in its market area with some of the largest banking  organizations
in the state and the country and other financial institutions, such as federally
and  state-chartered  savings and loan  institutions.  At June 2007, we operated
branches in Johnston,  Wake, Sampson,  Duplin, and Lee counties, North Carolina.
At that time in Johnston  County,  North  Carolina,  the bank's primary  market,
there were a total of  approximately  $1.3  billion in deposits  and 39 branches
represented  by the top eleven  financial  institutions  in the county  based on
deposit share, all commercial  banks. The bank operated seven of the 39 branches
with deposits of $352.3 million,  placing the bank first in the top eleven based
on deposit share. Many of the bank's competitors have broader geographic markets
and higher  lending  limits  than those of the bank and are also able to provide
more  services  and make  greater use of media  advertising.  Therefore,  in our
market area, the bank has  significant  competition  for deposits and loans from
other  depository  institutions.  Other  financial  institutions  such as credit
unions,  as well as consumer  finance  companies,  mortgage  companies and other
lenders  engaged in the  business of extending  credit with  varying  degrees of
regulatory  restrictions also compete in our market area.  Additionally,  credit
unions have been permitted to expand their membership  criteria and expand their
loan services to include  traditional  bank services such as commercial  lending
creating   a  greater   competitive   disadvantage   to   tax-paying   financial
institutions.

         The enactment of legislation  authorizing interstate banking has caused
great  increases  in the  size and  financial  resources  of some of the  bank's
competitors.  See "Holding Company  Regulation"  below for a description of this
legislation.  In  addition,  as a result  of  interstate  banking,  out-of-state
commercial  banks may acquire North Carolina banks and heighten the  competition
among banks in North Carolina.

         Although the competition in its market areas is expected to continue to
be  significant,  the bank believes that it has certain  competitive  advantages
that  distinguish  it from its  competition.  The bank believes that its primary
competitive  advantages are its strong local identity,  its affiliation with the
community  and its  emphasis  on  providing  specialized  services  to small and
medium-sized  business  enterprises,  as well as professional  and  upper-income
individuals.  The  bank  offers  customers  modern,  high-tech  banking  without
forsaking  community values such as prompt,  personal service and  friendliness.
The bank offers many personalized services and attracts and retains customers by
being  responsive  and sensitive to their  individualized  needs.  The bank also
relies on goodwill and referrals from our  shareholders and the bank's satisfied
customers,  as well as traditional media, to attract new customers. To enhance a
positive image in the  community,  the bank supports and  participates  in local
events  and its  officers  and  directors  serve on  boards  of local  civic and
charitable organizations.

Governmental Regulation

         Holding  companies,  banks and many of their  non-bank  affiliates  are
extensively regulated under both federal and state law. The following is a brief
summary of certain  statutes,  rules and regulations  affecting us and the bank.
This  summary is  qualified  in its  entirety  by  reference  to the  particular
statutory and regulatory provisions referred to below and are not intended to be
an  exhaustive  description  of the statutes or  regulations  applicable  to the
business of the company or bank. Supervision,  regulation and examination of the
company and the bank by bank regulatory  agencies is intended  primarily for the
protection of the bank's depositors rather than the company's shareholders.

                                       5
<PAGE>

Holding Company Regulation

         General.  Four Oaks Fincorp,  Inc. is a holding company registered with
the Board of  Governors  of the Federal  Reserve  System  under the Bank Holding
Company Act of 1956 (the "BHCA").  As such,  we are subject to the  supervision,
examination and reporting  requirements contained in the BHCA and the regulation
of the Federal Reserve.  The bank is also subject to the BHCA. The BHCA requires
that a bank holding  company  obtain the prior  approval of the Federal  Reserve
before (i) acquiring  direct or indirect  ownership or control of more than five
percent of the voting  shares of any bank,  (ii) taking any action that causes a
bank to become a subsidiary of the bank holding company,  (iii) acquiring all or
substantially  all of the assets of any bank or (iv)  merging  or  consolidating
with any other bank holding company.

         The BHCA  generally  prohibits a bank  holding  company,  with  certain
exceptions,  from  engaging in  activities  other than  banking,  or managing or
controlling  banks or other  permissible  subsidiaries,  and from  acquiring  or
retaining  direct or indirect  control of any company  engaged in any activities
other than those  activities  determined  by the  Federal  Reserve to be closely
related to banking, or managing or controlling banks, as to be a proper incident
thereto.  In  determining  whether a  particular  activity is  permissible,  the
Federal  Reserve must consider  whether the  performance of such an activity can
reasonably  be  expected  to produce  benefits  to the  public,  such as greater
convenience,  increased  competition  or  gains  in  efficiency,  that  outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair  competition,  conflicts of interest or unsound  banking  practices.  For
example, banking, operating a thrift institution,  extending credit or servicing
loans,  leasing  real  or  personal  property,  providing  securities  brokerage
services,  providing certain data processing services, acting as agent or broker
in  selling   credit  life  insurance  and  certain  other  types  of  insurance
underwriting  activities  have all been determined by regulations of the Federal
Reserve to be permissible activities.

         Pursuant to delegated  authority,  the Federal Reserve Bank of Richmond
has  authority to approve  certain  activities of holding  companies  within its
district, including us, provided the nature of the activity has been approved by
the Federal Reserve.  Despite prior approval,  the Federal Reserve has the power
to order a holding  company or its  subsidiaries to terminate any activity or to
terminate  its  ownership  or control of any  subsidiary  when it believes  that
continuation of such activity or such ownership or control constitutes a serious
risk to the financial  safety,  soundness or stability of any bank subsidiary of
that bank holding company.

         Financial Holding Companies.  The Gramm-Leach-Bliley  Modernization Act
of 1999 (the "GLB"), which was enacted on November 12, 1999, allows bank holding
companies  that meet  certain new  regulatory  standards  regarding  management,
capital and the Community  Reinvestment Act of 1997 (the "CRA"),  to engage in a
broader range of non-banking activities than previously  permissible,  including
insurance underwriting and making merchant banking investments in commercial and
financial  companies;  allows insurers and other financial services companies to
acquire banks; removes various restrictions that applied to bank holding company
ownership  of  securities  firms  and  mutual  fund  advisory   companies;   and
establishes  the  overall  regulatory   structure  applicable  to  bank  holding
companies that also engage in insurance and securities operations.

         At the present time, we have elected to remain a bank holding  company,
and therefore we remain subject to the same  regulatory  framework as before the
enactment of the GLB.  However,  the financial holding company structure created
by the GLB permits  insurance  companies or securities firms operating under the
financial  holding company structure to acquire us, and, if we elect to become a
financial holding company in the future, we could acquire insurance companies or
securities firms.

         In addition to creating the more  flexible  financial  holding  company
structure,  the GLB introduced several additional  customer privacy  protections
that  will  apply to us and the  bank.  The  GLB's  privacy  provisions  require
financial  institutions  to,  among other  things:  (i)  establish  and annually
disclose  a  privacy  policy,  (ii)  give  consumers  the  right  to opt  out of
disclosures to  nonaffiliated  third  parties,  with certain  exceptions,  (iii)
refuse to disclose  consumer  account  information to third-party  marketers and
(iv) follow regulatory  standards to protect the security and confidentiality of
consumer information.

         Pursuant  to  the  GLB's  rulemaking  provisions,  the  Office  of  the
Comptroller  of the  Currency,  the Board of  Governors  of the Federal  Reserve
System,  the  Federal  Deposit  Insurance  Corporation  and the Office of Thrift
Supervision  adopted  regulations,   establishing   standards  for  safeguarding
customer information.  Such regulations provide financial  institutions guidance
in  establishing  and  implementing   administrative,   technical  and  physical
safeguards  to protect the security,  confidentiality  and integrity of customer
information.

                                       6
<PAGE>

         Mergers  and  Acquisitions.  The  Riegle-Neal  Interstate  Banking  and
Branching  Efficiency Act of 1994 (the "IBBEA") permits interstate  acquisitions
of banks and bank holding companies without  geographic  limitation,  subject to
any state  requirement  that the bank has been organized for a minimum period of
time, not to exceed five (5) years,  and the  requirement  that the bank holding
company,  prior to or following the proposed acquisition,  controls no more than
ten  percent  (10%) of the  total  amount  of  deposits  of  insured  depository
institutions  in the U.S. and no more than thirty percent (30%) of such deposits
in any state (or such lesser or greater amount set by state law).

         In addition,  the IBBEA  permits a bank to merge with a bank in another
state as long as neither  of the states has opted out of the IBBEA  prior to May
31, 1997. In 1995, the state of North Carolina  "opted in" to such  legislation.
In  addition,  a bank may  establish  and operate a de novo branch in a state in
which the bank does not  maintain  a branch if that state  expressly  permits de
novo  interstate  branching.  As a result  of North  Carolina  having  opted-in,
unrestricted interstate de novo branching is permitted in North Carolina.

         Additional  Restrictions  and  Oversight.  Subsidiary  banks  of a bank
holding  company  are  subject to certain  restrictions  imposed by the  Federal
Reserve on any  extensions  of credit to the bank holding  company or any of its
subsidiaries,  investments in the stock or securities thereof and the acceptance
of such stock or  securities as  collateral  for loans to any  borrower.  A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.  An example of a prohibited  tie-in would be
any  arrangement  that would  condition  the  provision or cost of services on a
customer obtaining  additional  services from the bank holding company or any of
its other subsidiaries.

         The  Federal  Reserve may issue cease and desist  orders  against  bank
holding companies and non-bank  subsidiaries to stop actions believed to present
a serious  threat to a  subsidiary  bank.  The Federal  Reserve  also  regulates
certain  debt  obligations,  changes in control of bank  holding  companies  and
capital requirements.

         Under the provisions of the North Carolina law, we are registered  with
and subject to supervision by the North Carolina Commissioner of Banks.

         Capital  Requirements.  The Federal Reserve has established  risk-based
capital  guidelines  for bank  holding  companies  and state member  banks.  The
minimum  standard for the ratio of capital to  risk-weighted  assets  (including
certain off balance  sheet  obligations,  such as standby  letters of credit) is
eight percent (8%). At least half of this capital must consist of common equity,
retained earnings and a limited amount of perpetual preferred stock and minority
interests in the equity  accounts of  consolidated  subsidiaries,  less goodwill
items and  certain  other  items  ("Tier 1  capital").  The  remainder  ("Tier 2
capital") may consist of mandatory  convertible  debt  securities  and a limited
amount of other preferred stock, subordinated debt and loan loss reserves.

         In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding  companies.  These guidelines  provide for a minimum
leverage  ratio of Tier 1 capital to  adjusted  average  quarterly  assets  less
certain  amounts  ("Leverage  Ratio")  equal to three  percent for bank  holding
companies that meet certain  specified  criteria,  including  having the highest
regulatory  rating.  All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent.

         The guidelines  also provide that bank holding  companies  experiencing
significant growth, whether through internal expansion or acquisitions,  will be
expected to maintain  strong capital  ratios well above the minimum  supervisory
levels without  significant  reliance on intangible  assets. The same heightened
requirements  apply  to bank  holding  companies  with  supervisory,  financial,
operational or managerial  weaknesses,  as well as to other banking institutions
if warranted by  particular  circumstances  or the  institution's  risk profile.
Furthermore,  the guidelines  indicate that the Federal Reserve will continue to
consider a "tangible  Tier 1 Leverage  Ratio"  (deducting  all  intangibles)  in
evaluating proposals for expansion or new activity.  The Federal Reserve has not
advised us of any specific  minimum  Leverage  Ratio or tangible Tier 1 Leverage
Ratio applicable to us.

         As of December 31, 2007, we had Tier 1 risk-adjusted,  total regulatory
capital  and  leverage  capital of  approximately  11.70%,  12.87%  and  10.16%,
respectively,  all  in  excess  of the  minimum  requirements  to be  considered
well-capitalized under prompt corrective action provisions.

         Dividends. During 2007, we paid cash dividends of $.29 per share on our
common stock,  a 20.8% increase over 2006.  North Carolina  banking law requires
that dividends be paid out of retained earnings as determined  pursuant to North
Carolina  General Statues Section 53-87. At present,  the company has sufficient
cash from its operations to pay cash dividends on its common stock. In the past,
we have  received  cash  dividends  from our bank and may continue to do so from
time to time in the future as necessary for cash flow purposes. Also, applicable
federal  banking law contains  additional  limitations  and  restrictions on the
payment  of  dividends  by a bank  holding  company.  Accordingly,  shareholders
receive  dividends  from us only to the extent that funds are available from our
operations or the bank. In addition,  the Federal  Reserve  generally  prohibits
bank holding  companies from paying dividends except out of operating  earnings,
and the prospective rate of earnings  retention appears consistent with the bank
holding company's capital needs, asset quality and overall financial condition.

                                       7
<PAGE>

         USA  Patriot  Act of 2001.  Title  III of the USA  Patriot  Act of 2001
contains  the   International   Money   Laundering   Abatement   and   Financial
Anti-Terrorism Act of 2001 (the "IMLAFA").  The anti-money laundering provisions
of  IMLAFA  impose  affirmative  obligations  on  a  broad  range  of  financial
institutions,  including banks, brokers, and dealers.  Among other requirements,
IMLAFA requires all financial  institutions to establish  anti-money  laundering
programs that include, at minimum, internal policies,  procedures, and controls;
specific  designation of an anti-money  laundering  compliance officer;  ongoing
employee  training  programs;  and an  independent  audit  function  to test the
anti-money  laundering  program.  IMLAFA requires  financial  institutions  that
establish,   maintain,  administer,  or  manage  private  banking  accounts  for
non-United  States persons or their  representatives  to establish  appropriate,
specific, and, where necessary, enhanced due diligence policies, procedures, and
controls  designed to detect and report money laundering.  Additionally,  IMLAFA
provides for the Department of Treasury to issue minimum  standards with respect
to customer  identification  at the time new accounts are opened. As of the date
of this  filing,  we believe  that  IMLAFA has not had a material  impact on the
bank's  operations.  The bank has established  policies and procedures to ensure
compliance  with the  IMLAFA,  which are  overseen by an  Anti-Money  Laundering
Officer who was appointed by our Board of Directors.

Bank Regulation

         The  bank is  subject  to  numerous  state  and  federal  statutes  and
regulations  that  affect  its  business,  activities,  and  operations,  and is
supervised  and  examined by the North  Carolina  Commissioner  of Banks and the
Federal  Reserve.  The Federal  Reserve and the North Carolina  Commissioner  of
Banks  regularly  examine  the  operations  of banks over  which  they  exercise
jurisdiction. They have the authority to approve or disapprove the establishment
of branches, mergers,  consolidations,  and other similar corporate actions, and
to prevent the continuance or development of unsafe or unsound banking practices
and  other  violations  of law.  The  Federal  Reserve  and the  North  Carolina
Commissioner  of Banks regulate and monitor all areas of the operations of banks
and their  subsidiaries,  including loans,  mortgages,  issuances of securities,
capital adequacy,  loss reserves,  and compliance with the CRA, as well as other
laws  and  regulations.   Interest  and  certain  other  charges  collected  and
contracted for by banks are also subject to state usury laws and certain federal
laws concerning interest rates.

         The deposit  accounts of the bank are insured by the Deposit  Insurance
Fund (the "DIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to
a maximum of one hundred thousand dollars ($100,000) per insured depositor, with
the exception of retirement  accounts,  which were  increased to $250,000 by the
FDIC  effective  April  1,  2006.  Any  insured  bank  that is not  operated  in
accordance  with  or  does  not  conform  to  FDIC  regulations,  policies,  and
directives may be sanctioned for noncompliance.  Civil and criminal  proceedings
may be instituted against any insured bank or any director,  officer or employee
of such bank for the violation of applicable laws and  regulations,  breaches of
fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the
authority to terminate insurance of accounts pursuant to procedures  established
for that purpose.

         Under the North  Carolina  Business  Corporation  Act, we may not pay a
dividend or distribution,  if after giving it effect we would not be able to pay
our debts as they become due in the usual course of business or our total assets
would be less than our  liabilities.  All dividends paid by the bank are paid to
us,  the sole  shareholder  of the bank.  In  general,  our  ability to pay cash
dividends is  dependent  in part upon the amount of dividends  paid to us by the
bank. The ability of the bank to pay dividends to us is subject to statutory and
regulatory  restrictions  on  the  payment  of  cash  dividends,  including  the
requirement  under the North  Carolina  banking laws that cash dividends be paid
only out of  undivided  profits  and only if the bank has surplus of a specified
level.  The  Federal  Reserve  also  imposes  limits on the  bank's  payment  of
dividends. The amount of future dividends paid to us by the bank will in general
be a function  of the  profitability  of the bank,  which  cannot be  accurately
estimated  or assured.  We expect the bank will  continue to pay us dividends in
the foreseeable  future from time to time as needed to pay cash dividends to our
shareholders.

         Like us,  the bank is  required  by  federal  regulations  to  maintain
certain minimum capital levels.  The levels required of the bank are the same as
those required of us. At December 31, 2007,  the bank had Tier 1  risk-adjusted,
total regulatory  capital and leverage capital of approximately  10.71%,  11.88%
and 8.85%, respectively,  in excess of the minimum requirements to be considered
well-capitalized under prompt corrective action provisions.

                                       8
<PAGE>

         The bank is  subject  to  insurance  assessments  imposed  by the FDIC,
including a risk-based assessment schedule providing for annual assessment rates
ranging  from 5 to 43  cents  per $100 in  assessable  deposits,  applicable  to
institutions  insured by the DIF.  The FDIC may change the  assessment  schedule
quarterly. The actual assessment to be paid by each insured institution is based
on the institution's  assessment risk  classification,  which focuses on whether
the institution is considered "well  capitalized,"  "adequately  capitalized" or
"under  capitalized,"  as such  terms  are  defined  in the  applicable  federal
regulations.  Within each of these three risk classifications,  each institution
will be assigned to one of three subgroups based on supervisory risk factors. In
particular,  regulators  will  assess  supervisory  risk  based on  whether  the
institution is financially sound with only a few minor weaknesses  (Subgroup A),
whether it has weaknesses which, if not corrected,  could result in an increased
risk  of  loss  to the  DIF  (Subgroup  B) or  whether  such  weaknesses  pose a
substantial probability of loss to the DIF unless effective corrective action is
taken  (Subgroup  C). The FDIC also is  authorized to impose one or more special
assessments  in an amount  deemed  necessary  to  enable  repayment  of  amounts
borrowed by the FDIC from the United States Treasury  Department and,  beginning
in 1997, all banks are required to pay additional  annual  assessments as set by
the Financing  Corporation,  which was established by the  Competitive  Equality
Banking  Act of 1987.  In 2007,  we  received  a one-time  assessment  credit of
approximately $197,000,  which has been applied to payments due during the year.
FDIC deposit insurance expense was $57,000,  $52,000,  and $46,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.

         The  Federal  Deposit  Insurance  Corporation  Improvement  Act of 1991
("FDICIA")  provides for,  among other  things,  (i) publicly  available  annual
financial  condition and management reports for certain financial  institutions,
including audits by independent  accountants,  (ii) the establishment of uniform
accounting  standards by federal banking agencies,  (iii) the establishment of a
"prompt  corrective  action" system of regulatory  supervision and intervention,
based on capitalization levels, with greater scrutiny and restrictions placed on
depository  institutions with lower levels of capital,  (iv) additional  grounds
for the  appointment  of a  conservator  or  receiver  and (v)  restrictions  or
prohibitions  on accepting  brokered  deposits,  except for  institutions  which
significantly  exceed  minimum  capital  requirements.  FDICIA also provides for
increased  funding  of the  FDIC  insurance  funds  and  the  implementation  of
risk-based premiums.

         A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital  requirements.  Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital  adequacy of the depository  institutions  that
they supervise.  Under these regulations, a depository institution is classified
in one of the following  capital  categories:  "well  capitalized,"  "adequately
capitalized,"  "under   capitalized,"   "significantly   undercapitalized,"   or
"critically undercapitalized." An institution may be deemed by the regulators to
be in a  capitalization  category  that is lower than is indicated by its actual
capital  position  if,  among  other  things,   it  receives  an  unsatisfactory
examination  rating  with  respect to asset  quality,  management,  earnings  or
liquidity.  FDICIA  provides the federal  banking  agencies  with  significantly
expanded powers to take enforcement  action against  institutions  which fail to
comply with capital or other standards.  Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.

         Banks are also  subject  to the CRA,  which  requires  the  appropriate
federal bank regulatory agency, in connection with its examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate-income neighborhoods.  Each institution is
assigned one of the  following  four ratings of its record in meeting  community
credit needs: "outstanding,"  "satisfactory," "needs to improve" or "substantial
noncompliance."  The regulatory agency's assessment of the bank's record is made
available to the public.  Further, such assessment is required of any bank which
has  applied to (i)  charter a national  bank,  (ii)  obtain  deposit  insurance
coverage for a newly chartered institution,  (iii) establish a new branch office
that will accept  deposits,  (iv) relocate an office or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally  regulated
financial  institution.  In the  case of a bank  holding  company  applying  for
approval to acquire a bank or other bank holding  company,  the Federal  Reserve
will assess the record of each  subsidiary  bank of the  applicant  bank holding
company, and such records may be the basis for denying the application.

         In addition,  the GLB's "CRA Sunshine  Requirements" call for financial
institutions to disclose publicly certain written agreements made in fulfillment
of the CRA.  Banks  that are  parties  to such  agreements  also must  report to
federal  regulators  the  amount  and  use  of any  funds  expended  under  such
agreements on an annual basis,  along with such other  information as regulators
may require.  This annual reporting  requirement is effective for any agreements
made after May 12, 2000.

                                       9
<PAGE>

Monetary Policy and Economic Controls

         Both the company  and the bank are  directly  affected by  governmental
policies and regulatory  measures affecting the banking industry in general.  Of
primary  importance is the Federal Reserve Board,  whose actions directly affect
the money supply which, in turn,  affects banks' lending abilities by increasing
or decreasing the cost and  availability of funds to banks.  The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb  inflationary  pressures in the economy by open market operations in United
States  government  securities,  changes  in the  discount  rate on member  bank
borrowings,   changes  in  reserve  requirements  against  bank  deposits,   and
limitations on interest rates that banks may pay on time and savings deposits.

         Deregulation  of interest rates paid by banks on deposits and the types
of  deposits  that may be  offered  by banks  have  eliminated  minimum  balance
requirements  and rate ceilings on various types of time deposit  accounts.  The
effect of these specific  actions and, in general,  the  deregulation of deposit
interest rates has generally  increased  banks' cost of funds and made them more
sensitive  to  fluctuations  in  money  market  rates.  In view of the  changing
conditions in the national  economy and money markets,  as well as the effect of
actions by monetary  and fiscal  authorities,  no  prediction  can be made as to
possible future changes in interest rates, deposit levels, or loan demand on our
business and earnings or those of the bank.  As a result,  banks,  including the
bank, face a significant challenge to maintain acceptable net interest margins.

Our Executive Officers

         The following table sets forth certain  information with respect to our
executive officers:

                                          Positions and offices with Four Oaks
                                            Fincorp, Inc. and Four Oaks Bank &
                             Year first   Trust Company and business experience
Name                   Age     employed         during past five (5) years
--------------------------------------------------------------------------------
Ayden R. Lee, Jr.       59       1980     Chief Executive Officer, President and
                                          Chairman of the Board of Directors of
                                          Four Oaks Fincorp, Inc. and Four Oaks
                                          Bank & Trust Company. Previously
                                          Director of Four Oaks Fincorp, Inc.
                                          and Four Oaks Bank & Trust Company.

Clifton L. Painter      58       1986     Senior Executive Vice President, Chief
                                          Operating Officer of Four Oaks
                                          Fincorp, Inc. and Four Oaks Bank &
                                          Trust Company.

Nancy S. Wise           52       1991     Executive Vice President, Chief
                                          Financial Officer of Four Oaks
                                          Fincorp, Inc. and Four Oaks Bank &
                                          Trust Company. Previously, Senior Vice
                                          President, Chief Financial Officer of
                                          Four Oaks Fincorp, Inc. and Four Oaks
                                          Bank & Trust Company.

W. Leon Hiatt, III      40       1994     Executive Vice President of Four Oaks
                                          Fincorp, Inc. and Four Oaks Bank &
                                          Trust Company, Chief Administrative
                                          Officer of Four Oaks Bank & Trust
                                          Company. Previously, Senior Vice
                                          President Four Oaks Fincorp, Inc. and
                                          Four Oaks Bank & Trust Company, Loan
                                          Administrator of Four Oaks Bank &
                                          Trust Company.

Jeff D. Pope            51       1991     Executive Vice President of Four Oaks
                                          Fincorp, Inc. and Four Oaks Bank &
                                          Trust Company, Branch Administrator of
                                          Four Oaks Bank & Trust Company.
                                          Previously, Senior Vice President,
                                          Loan Officer and Regional Branch
                                          Administrator of Four Oaks Bank and
                                          Trust Company.

                                       10
<PAGE>

Item 1A.  Risk Factors

Our Results Are Impacted by the Economic  Conditions of Our Principal  Operating
Regions

         The majority of our customers are  individuals and small to medium-size
businesses located in North Carolina's Johnston, Wake, Duplin, Sampson, Harnett,
and  Lee  counties  and  surrounding  areas.  As a  result  of  this  geographic
concentration,  our results may  correlate to the economic  conditions  in these
areas.  Declines in these markets' economic  conditions may adversely affect the
quality of our loan portfolio and the demand for our products and services,  and
accordingly, our results of operations.

We Are Exposed to Risks in Connection with the Loans We Make

         A significant  source of risk for us arises from the  possibility  that
loan losses will be sustained because borrowers,  guarantors and related parties
fail to perform in accordance with the terms of their loans. Our policy dictates
that we maintain an allowance  for loan losses.  The amount of the  allowance is
based on management's evaluation of our loan portfolio,  the financial condition
of the  borrowers,  current  economic  conditions,  past and expected  loan loss
experience,  and other factors management deems  appropriate.  Such policies and
procedures,  however,  may not prevent  unexpected  losses that could  adversely
affect our results of operations.

We Compete with Larger Companies for Business

         Commercial  banking in North Carolina is extremely  competitive  due in
large part to North Carolina's early adoption of statewide  branching.  The bank
competes in the North  Carolina  market  area with some of the  largest  banking
organizations  in the state and the  country and other  financial  institutions,
such as federally and  state-chartered  savings and loan institutions and credit
unions,  as well as consumer  finance  companies,  mortgage  companies and other
lenders engaged in the business of extending  credit.  Many of these competitors
have broader geographic markets,  higher lending limits, more services, and more
media advertising. We may not be able to compete effectively in our markets, and
our results of operations  could be adversely  affected by the nature or pace of
change in competition.

We Are Exposed to Certain Market Risks

         Like most  financial  institutions,  our most  significant  market risk
exposure is the risk of economic loss resulting  from adverse  changes in market
prices and interest  rates.  Our market risk stems  primarily from interest rate
risk inherent in our lending and  deposit-taking  activities.  Our policy allows
that we may maintain  derivative  financial  instruments,  such as interest rate
swap agreements, to manage such risk.

         To manage the risk of  potentially  decreasing  interest  rates for our
variable rate loan portfolio, from time to time we may use an interest rate swap
agreement  whereby we contract to receive  fixed rate  payments and in turn,  we
agree to make variable interest payments for a defined time period. In addition,
we use fixed rate time deposits, such as certificates of deposit, for use in our
lending and investment  activities.  If the interest rates decline,  we face the
risk of being  committed to pay a fixed rated that is higher than the fair value
rate of such  deposits.  To manage this risk, we use interest rate swaps whereby
we contract to make a series of floating rate payments in exchange for receiving
a series of fixed rate payments.

         Because the value of  derivative  contracts  is tied to an  independent
instrument,  index or  reference  rate,  the  contracts  are written in abstract
amounts  that  only  provide  the  basis  for   calculating   payments   between
counterparties,   i.e.,  notional  amounts.  Credit  risk  arises  when  amounts
receivable  from  the  counterparty   exceed  amounts   payable,   or  when  the
counterparty  fails to pay. The  counterparties to these contracts are primarily
large  commercial  banks and  investment  banks.  We control our risk of loss on
derivative  contracts by  subjecting  each  contracting  counterparty  to credit
reviews and approvals similar to those used in making loans and other extensions
of credit, and we continuously monitor these agreements. Other risks include the
effect on fixed rate positions during periods of changing interest rates,  e.g.,
when interest rates fall, the notional  amounts  decrease more rapidly,  whereas
when interest rates rise, the notional amounts decrease more slowly.

Technological Advances

         The banking  industry  undergoes  frequent  technological  changes with
introductions  of new  technology-driven  products and services.  In addition to
improving  customer  services,   the  effective  use  of  technology   increases
efficiency  and  enables  financial  institutions  to reduce  costs.  Our future
success  will  depend,  in part,  on our  ability  to  address  the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations.  Many of our competitors,  however,  have substantially  greater
resources to invest in technological improvements.

                                       11
<PAGE>

Compliance  with  Changing  Laws,   Regulations  and  Standards  May  Result  in
Additional Risks and Expenses

         We are subject to changing laws,  regulations and standards,  including
the BHCA,  the GLB, the IBBEA,  the USA Patriot Act of 2001,  the FDIC, the CRA,
the North Carolina  Business  Corporation  Act, the  Sarbanes-Oxley  Act of 2002
("Sarbanes-Oxley"), and new SEC regulations to name a few.

         Sarbanes-Oxley  and new SEC  regulations,  in particular,  are creating
uncertainty  for  companies  such as ours  because  they are  subject to varying
interpretations  in many cases. As a result,  their  application in practice may
evolve over time as new guidance is provided by regulatory and governing bodies,
which could result in continuing  uncertainty  regarding  compliance matters and
higher costs  necessitated  by ongoing  revisions to disclosure  and  governance
practices.   We  are  committed  to  maintaining  high  standards  of  corporate
governance  and public  disclosure.  As a result,  our  efforts  to comply  with
evolving  laws,  regulations  and standards  have resulted in, and are likely to
continue to result in, increased expenses and a diversion of management time and
attention.   Specifically,   our   efforts  to  comply   with   Section  404  of
Sarbanes-Oxley  and the  related  regulations  regarding  management's  required
assessment  of our internal  control over  financial  reporting and our external
auditors'  audit of that  assessment  has required the commitment of significant
financial  and  managerial  resources.  We expect  these  efforts to require the
continued commitment of significant resources. Further, the members of our board
of  directors,  members  of the  audit or  compensation  committees,  our  chief
executive  officer,  our  chief  financial  officer  and  certain  other  of our
executive  officers  could  face an  increased  risk of  personal  liability  in
connection with the performance of their duties. In addition, it may become more
difficult and more expensive to obtain director and officer liability insurance.
As a result,  our ability to attract and retain executive officers and qualified
board and committee members could be more difficult.

Government  Regulations  May  Prevent  or Impair Our  Ability to Pay  Dividends,
Engage in Acquisitions or Operate in Other Ways

         Current and future legislation and the policies  established by federal
and state regulatory  authorities will affect our operations.  We are subject to
supervision and a periodic examination by the Federal Reserve Bank and the North
Carolina State Banking Commission.  Banking regulations,  designed primarily for
the  protection of  depositors,  may limit our growth and the return to you, our
investors, by restricting certain of our activities, such as:

         o     payment of dividends to our shareholders;
         o     possible mergers with or acquisitions of or by other
               institutions;
         o     our desired investments;
         o     loans and interest rates on loans;
         o     payment of interest, interest rates on deposits;
         o     the possible expansion of branch offices; and/or
         o     our ability to make other financial services available.

         We also are subject to  capitalization  guidelines set forth in federal
regulations,  and could be subject to enforcement  actions to the extent that we
are found by regulatory examiners to be undercapitalized. We cannot predict what
changes,  if any,  will be made to existing  federal and state  legislation  and
regulations or the effect that such changes may have on our future  business and
earnings  prospects.   The  cost  of  compliance  with  regulatory  requirements
including  those imposed by the SEC may adversely  affect our ability to operate
profitably.

Our  Proposed   Transaction   with  LongLeaf   Community   Bank  is  Subject  to
Uncertainties.

Our  proposed   transaction  with  LongLeaf  is  subject  to  customary  closing
conditions,  including shareholder approval by LongLeaf shareholders.  If any of
the conditions to closing are not satisfied or waived, the proposed  transaction
would not be  completed.  In  addition,  the merger  agreement  relating  to the
proposed  transaction  can be terminated  prior to completion of the transaction
under certain  circumstances,  including where LongLeaf  receives an acquisition
proposal  from a third party that its board  believes is more  favorable  to its
shareholders than the proposed  transaction (after following specific procedures
described in our merger  agreement with  LongLeaf).  If the merger  agreement is
terminated,  the proposed  transaction  would not be completed,  and, in certain
circumstances,  LongLeaf  could  be  required  to  pay us a  termination  fee of
$350,000.  If the merger is not  completed,  the value of our common stock could
decline. We are currently targeting to close the proposed transaction,  assuming
the satisfaction or waiver of all conditions, in the second quarter of 2008. The
closing of the proposed  transaction  could be delayed beyond the second quarter
of 2008 due to many  factors,  including  factors  beyond the  control of either
party.

                                       12
<PAGE>

We May Not Be Able To  Successfully  Integrate  Bank  Mergers and  Acquisitions,
Including the Merger of LongLeaf into the Bank.

         Our proposed merger of the bank with LongLeaf  involves the combination
of two banks that previously have operated independently. Difficulties may arise
in the  integration  of the business and operations of any banks that we acquire
and, as a result,  we may not be able to achieve the cost savings and  synergies
that we expect will result from such  transactions.  Achieving  cost  savings is
dependent on consolidating certain operational and functional areas, eliminating
duplicative  positions and terminating  certain agreements for outside services.
Additional  operational  savings  are  dependent  upon  the  integration  of the
acquired  or merged  entity's  businesses  with  ours,  the  conversion  of core
operating systems, data systems and products and the standardization of business
practices. Complications or difficulties in the conversion of the core operating
systems,  data systems and products may result in the loss of customers,  damage
to our reputation within the financial services industry,  operational problems,
one-time costs currently not anticipated or reduced cost savings  resulting from
such mergers or  acquisitions.  Annual cost savings in each such transaction may
be materially  less than  anticipated  if the merger or  acquisition  is delayed
unexpectedly,   the   integration  of  operations  is  delayed  beyond  what  is
anticipated or the conversion to a single data system is not  accomplished  on a
timely basis.

         Difficulty  in  integrating  an  acquired  company  may cause us not to
realize expected  revenue  increases,  cost savings,  increases in geographic or
product  presence  and/or other  projected  benefits from the  acquisition.  The
integration could result in higher than expected deposit attrition,  loss of key
employees,  disruption  of our  businesses  or the  businesses  of the  acquired
company,  or otherwise  adversely  affect our ability to maintain  relationships
with  customers  and  employees  or  achieve  the  anticipated  benefits  of the
acquisition.

We Depend Heavily on our Key Management Personnel

         Our success depends in part on our ability to retain key executives and
to  attract  and  retain  additional  qualified  management  personnel  who have
experience  both in  sophisticated  banking  matters and in operating a small to
mid-size bank.  Competition for such personnel is strong in the banking industry
and we may not be  successful  in  attracting  or  retaining  the  personnel  we
require. We expect to compete  effectively in this area by offering  competitive
financial packages that include incentive-based compensation.

We Have a High Concentration of Loans Secured by Real Estate

         A  significant  portion  of our loan  portfolio  is  dependent  on real
estate. In addition to the financial  strength and cash flow  characteristics of
the borrower in each case, often loans are secured with real estate  collateral.
At December  31,  2007,  approximately  88.5% of our loans have real estate as a
primary or  secondary  component  of  collateral.  The real  estate in each case
provides  an  alternate  source  of  repayment  in the event of  default  by the
borrower and may deteriorate in value during the time the credit is extended. An
adverse change in the economy  affecting  values of real estate  generally or in
our  primary  markets  specifically  could  significantly  impair  the  value of
collateral and our ability to sell the collateral upon foreclosure. Furthermore,
it is likely that, in a decreasing  real estate market,  we would be required to
increase  our  allowance  for loan losses.  If we are required to liquidate  the
collateral  securing a loan to satisfy the debt during a period of reduced  real
estate values or to increase our allowance  for loan losses,  our  profitability
and financial condition could be adversely impacted.

Our Allowance for Probable Loan Losses May Be Insufficient

         We maintain an allowance for probable  loan losses,  which is a reserve
established  through a provision  for probable  loan losses  charged to expense.
This allowance  represents  management's  best estimate of probable  losses that
have been incurred within the existing portfolio of loans. The allowance, in the
judgment of  management,  is necessary to reserve for estimated  loan losses and
risks  inherent  in the loan  portfolio.  The  level of the  allowance  reflects
management's continuing evaluation of industry  concentrations;  specific credit
risks; loan loss experience;  current loan portfolio quality;  present economic,
political and regulatory  conditions  and  unidentified  losses  inherent in the
current  loan  portfolio.  The  determination  of the  appropriate  level of the
allowance  for  probable  loan  losses  inherently  involves  a high  degree  of
subjectivity  and  requires us to make  significant  estimates  and  assumptions
regarding  current  credit  risks and future  trends,  all of which may  undergo
material  changes.  Changes in  economic  conditions  affecting  borrowers,  new
information regarding existing loans, identification of additional problem loans
and other factors,  both within and outside our control, may require an increase
in the allowance for probable loan losses. In addition, bank regulatory agencies
periodically review our allowance for loan losses and may require an increase in
the  provision  for  probable  loan losses or the  recognition  of further  loan
charge-offs, based on judgments different than those of management. In addition,
if  charge-offs in future periods exceed the allowance for probable loan losses;
we will need  additional  provisions to increase the allowance for probable loan
losses. Any increases in the allowance for probable loan losses will result in a
decrease in net income and, possibly,  capital,  and may have a material adverse
effect  on our  financial  condition  and  results  of  operations.  See Item 7,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations for further  discussion  related to our process for  determining  the
appropriate level of the allowance for probable loan losses.

                                       13
<PAGE>

We  Are  Subject  To  Environmental   Liability  Risk  Associated  With  Lending
Activities

         A  significant  portion  of our  loan  portfolio  is  secured  by  real
property.  During the ordinary course of business,  we may foreclose on and take
title to properties  securing  certain loans.  In doing so, there is a risk that
hazardous or toxic substances could be found on these  properties.  If hazardous
or toxic  substances are found, we may be liable for remediation  costs, as well
as for personal injury and property damage. Environmental laws may require us to
incur  substantial  expenses and may materially  reduce the affected  property's
value or limit our ability to use or sell the  affected  property.  In addition,
future laws or more  stringent  interpretations  or  enforcement  policies  with
respect to existing laws may increase our exposure to  environmental  liability.
Although we have  policies and  procedures  to perform an  environmental  review
before initiating any foreclosure action on nonresidential real property,  these
reviews may not be sufficient to detect all potential environmental hazards. The
remediation  costs  and  any  other  financial  liabilities  associated  with an
environmental  hazard  could have a  material  adverse  effect on our  financial
condition and results of operations.

Our Controls and Procedures May Fail or Be Circumvented

         Management   regularly  reviews  and  updates  our  internal  controls,
disclosure  controls  and  procedures,  and  corporate  governance  policies and
procedures. Any system of controls, however well designed and operated, is based
in part on certain  assumptions and can provide only  reasonable,  not absolute,
assurances   that  the  objectives  of  the  system  are  met.  Any  failure  or
circumvention  of  our  controls  and  procedures  or  failure  to  comply  with
regulations  related to controls and  procedures  could have a material  adverse
effect on our business, results of operations and financial condition.

The Holders of Our Subordinated  Debentures Have Rights That Are Senior to Those
of Our Shareholders

         As  described  below,  we have  issued  $12.0  million of  subordinated
debentures  in  connection  with a trust  preferred  securities  issuance by our
subsidiary,  the Trust. We  unconditionally  guarantee payments of the principal
and interest on the trust preferred securities.  Our subordinated debentures are
senior to our shares of common stock. As a result,  we must make payments on the
subordinated  debentures (and the related trust preferred securities) before any
dividends  can be paid on our  common  stock  and,  in the event of  bankruptcy,
dissolution  or  liquidation,  the holders of the  debentures  must be satisfied
before any distributions can be made to the holders of common stock.

Our Information Systems May Experience an Interruption or Breach in Security

         We rely heavily on  communications  and information  systems to conduct
our business.  Any failure,  interruption or breach in security of these systems
could result in failures or disruptions in our customer relationship management,
general  ledger,  deposit,  loan and other  systems.  While we have policies and
procedures designed to prevent or limit the effect of the failure,  interruption
or security breach of our information systems, there can be no assurance that we
can prevent any such failures, interruptions or security breaches or, if they do
occur, that they will be adequately  addressed.  The occurrence of any failures,
interruptions or security  breaches of our information  systems could damage our
reputation,  result in a loss of  customer  business,  subject us to  additional
regulatory  scrutiny,  or expose us to civil  litigation and possible  financial
liability,  any of which could have a material  adverse  effect on our financial
condition and results of operations.

An Investment in Our Common Stock Is Not an Insured Deposit

         Our common stock is not a bank deposit and,  therefore,  is not insured
against  loss by the FDIC,  any  other  deposit  insurance  fund or by any other
public or private entity. Investment in our common stock is inherently risky for
the reasons  described  in this "Risk  Factors"  section and  elsewhere  in this
report and is subject to the same market  forces that affect the price of common
stock in any company. As a result, if you acquire our common stock, you may lose
some or all of your investment.

                                       14
<PAGE>

Consumers May Decide Not To Use Banks to Complete Their Financial Transactions

         Technology and other changes are allowing parties to complete financial
transactions that historically have involved banks through alternative  methods.
For example,  consumers can now maintain funds that historically would have been
held as bank deposits in brokerage accounts or mutual funds.  Consumers can also
complete  transactions such as paying bills and/or  transferring  funds directly
without  the  assistance  of  banks.   The  process  of  eliminating   banks  as
intermediaries  could  result in the loss of fee income,  as well as the loss of
customer deposits and the related income generated from those deposits. The loss
of these revenue  streams and the lower cost deposits as a source of funds could
have a  material  adverse  effect on our  financial  condition  and  results  of
operations.

Item 1B - Unresolved Staff Comments.

         Not applicable.

Item 2 - Properties.

         The bank owns its main  office,  which is located at 6144 US 301 South,
Four Oaks, North Carolina. The main office, which was constructed by the bank in
1985, is a 12,000 square foot facility on 1.64 acres of land.  The bank leases a
limited-service  facility in downtown Four Oaks located at 111 North Main Street
from M.S.  Canaday,  who is a former director of the company as well as a former
director of the bank.  Under the terms of the lease,  which the bank believes to
be  arms-length,  the bank  paid  $995 per  month in rent in 2007.  The lease is
month-to-month  and we review its terms on an annual basis. The bank also leases
a branch  office  located  at 101  West  Center  Street,  Holly  Springs,  North
Carolina. Under the terms of the lease, the bank will pay $2,500 per month for a
period of five years ending  April 1, 2008,  with a 3% increase per year for the
next 5 years until March 31, 2013.

         The bank's Harrells office located at 590 Tomahawk  Highway,  Harrells,
North  Carolina  is under a lease with terms  specifying  the bank will pay $600
each month for a period of four years ending December 31, 2009. In addition, the
bank has  entered  into a ten-year  lease on its Sanford  office  located at 830
Spring Lane Sanford, North Carolina. Under the terms of the lease, the bank will
pay $7,170 each month with an annual rate  increase not to exceed 2.5% over a 10
year period.  On September  17, 2007,  the bank entered into a two year lease on
its Dunn office located at 604-A Erwin Road,  Dunn,  North  Carolina.  Under the
terms of the lease, the bank will pay $1,500 each month for the period beginning
September 17, 2007 and ending August 31, 2009. The bank owns a 5,000 square foot
facility  renovated  in 1992 on 1.15 acres of land located at 5987 US 301 South,
Four Oaks, North Carolina which houses its training center. The bank also owns a
15,000  square foot  facility  built in 2000 located at 6114 US 301 South,  Four
Oaks, North Carolina,  which houses its administrative offices, data operations,
loan operations and wide area network  central link. In addition,  the bank owns
the following:

                                       15
<PAGE>

Location                           Year Built    Present Function    Square Feet
--------                           ----------    ----------------    -----------

102 East Main Street
Clayton, North Carolina                  1986    Branch Office             4,900

200 East Church Street
Benson, North Carolina                   1987    Branch Office             2,300

128 North Second Street
Smithfield, North Carolina               1991    Branch Office             5,500

403 South Brightleaf Boulevard
Smithfield, North Carolina               1995    Limited-Service             860
                                                 Facility

200 Glen Road
Garner, North Carolina                   1996    Branch Office             3,500

325 North Judd Parkway Northeast
Fuquay-Varina, North Carolina            2002    Branch Office             8,900

406 East Main Street
Wallace, North Carolina                  2006    Branch Office             9,300

805 N. Arendell Avenue
Zebulon, North Carolina                  2007    Branch Office             6,100


Management  believes  each of the  properties  referenced  above  is  adequately
covered  by  insurance.  In  addition  to the above  locations,  we have one ATM
located  inside  Blackmon's  Country store in Four Oaks and 15 ATMs in Food Lion
grocery  stores in the cities and towns of Clayton,  Benson,  Sanford,  Wallace,
Fuquay-Varina,  Holly Springs,  Garner, Zebulon and Wendell, North Carolina. The
net book value for our properties,  including land, buildings, and furniture and
equipment  was $12.6  million  at  December  31,  2007.  Additional  information
disclosed in Note D "Bank Premises and Equipment" to our consolidated  financial
statements presented under Item 8 of Part II of this Form 10-K.

Item 3 - Legal Proceedings.

         We are not involved in any material  legal  proceedings  at the present
time.

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

         None.



                                     PART II

Item 5 - Market for Registrant's Common Equity,  Related Stockholder Matters and
Issuer Purchases of Equity Securities.

         Our common  stock  trades on the OTC  Bulletin  Board  under the symbol
"FOFN."  The  range of high and low bid  prices  of our  common  stock  for each
quarter  during  the two most  recent  fiscal  years,  as  published  by the OTC
Bulletin  Board,  adjusted  for stock  splits,  is as  follows  (prices  reflect
inter-dealer  prices,  without retail mark-up,  mark-down or commissions and may
not necessarily represent actual transactions):

                                       16
<PAGE>

                                        Fiscal Year Ended December 31,
                                        ------------------------------
                                        2006                      2007
                               ----------------------    ----------------------
                                  High         Low          High         Low
                               ----------  ----------    ----------  ----------
         First quarter          $  18.00    $  16.00      $  24.77    $  23.64
         Second quarter            23.25       17.64         23.64       20.00
         Third quarter             21.82       18.00         20.00       18.82
         Fourth quarter            24.55       21.45         19.09       15.50


         As of March 6, 2008, the approximate number of holders of record of our
common stock was 1,700. We have no other class of equity securities.  The bank's
ability to declare a dividend to us and the  company's  ability to pay dividends
are subject to the restrictions of the North Carolina Business  Corporation Act.
There  also are state  banking  laws that  require a surplus  of at least 50% of
paid-in  capital stock be maintained in order for the bank to declare a dividend
to the company.  Subject to the legal  availability  of funds to pay  dividends,
cash dividends paid by us in 2007 and 2006, after giving effect to the 10% stock
dividend in 2007 and a 5-for-4  stock split during 2006 were $0.29 and $0.24 per
share, respectively.

         We did not sell any securities in 2007 that were not  registered  under
the Securities Act of 1933 as amended. During 2007, we repurchased 75,807 shares
of our equity  securities  registered  pursuant to Section 12 of the  Securities
Exchange Act of 1934, as amended.  The following table provides information with
respect to  purchases  made by or on behalf of the  Company  or any  "affiliated
purchaser"  (as  defined in Rule  10b-18(a)(3)  under the  Exchange  Act) of the
Company's common stock during the three months ended December 31, 2007:


<TABLE>
<CAPTION>
                                                             Total Number of Shares     Maximum Number of
                         Total Number                        Purchased as Part of a    Shares That May Yet
                           of Shares    Average Price Paid     Publicly Announced       Be Purchased Under
                         Purchased (1)       Per Share             Program (2)           the Program (2)
                        -----------------------------------------------------------------------------------
<S>                                 <C>              <C>                        <C>                <C>
October 1, 2007 to
October 31, 2007                    -                -                          -                  390,969
                        -----------------------------------------------------------------------------------
November 1, 2007 to
November 30, 2007                   -                -                          -                  390,969
                        -----------------------------------------------------------------------------------
December 1, 2007 to
December 31, 2007               1,100            15.95                     40,000                  350,969
                        -----------------------------------------------------------------------------------
Total                           1,100            15.95                     40,000                  350,969
                        -----------------------------------------------------------------------------------
</TABLE>


(1)      This represents purchases of stock by the  company  on  behalf  of  the
         Employee Stock Ownership Plan.

(2)      The company is  authorized  to  repurchase  shares of its common  stock
         through a program  first  approved by its board of  directors in  2001.
         The program  currently  approved by  the  company's  board of directors
         extends through December 31, 2008 and allows the company to  repurchase
         up to an aggregate of 500,000 shares,  with the limit  aggregated  from
         2001 through December 31, 2008. The company  repurchased 40,000  shares
         of stock under the program  during the three months ended  December 31,
         2007. As of December 31, 2007, of the 500,000 authorized  shares of its
         common stock  designated for repurchase an aggregate of 149,031  shares
         have already been repurchased and 350,969  shares  remained  authorized
         for repurchase under the program.

Item 6 - Selected Financial Data

         The  following  table  sets  forth  certain   historical   consolidated
financial  data  for the  periods  indicated.  The  selected  historical  annual
consolidated  statement of  operations  and balance sheet data as of each of the
fiscal  years ended  December  31, 2007 and 2006 and are derived  from,  and are
qualified in their entirety by, our audited  consolidated  financial  statements
included elsewhere in this report. The selected  historical annual  consolidated
statement of operations  data for each of the years ended  December 31, 2004 and
2003 and balance  sheet date as of each of the years ended  December  31,  2005,
2004 and 2003 are derived from audited  consolidated  financial  statements  not
included  herein.  Historical  results  are not  necessarily  indicative  of the
results to be  expected  in the  future.  You  should  read the  following  data
together with "Item 1. Business," "Item 7. Management's  Discussion and Analysis
of Financial Condition and Results of Operations," and our audited  consolidated
financial  statements  and the related  notes  appearing  in "Item 8.  Financial
Statements."  (dollars in thousands,  except per share data).

                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                                  As of and for the Year Ended December 31,
                                                    --------------------------------------------------------------------
                                                        2007          2006          2005          2004          2003
                                                    ------------  ------------  ------------  ------------  ------------
<S>                                                 <C>           <C>           <C>           <C>           <C>
Operating Data:
  Total interest income                             $    47,513   $    40,556   $    29,404   $    21,748   $    18,943
  Total interest expense                                 23,699        17,817         9,983         5,811         5,922
                                                    ------------  ------------  ------------  ------------  ------------
    Net interest income                                  23,814        22,739        19,421        15,937        13,021
  Provision for loan losses                               1,362           873         1,403         1,596         1,373
                                                    ------------  ------------  ------------  ------------  ------------
    Net interest income after provision                  22,452        21,866        18,018        14,341        11,648
  Noninterest income                                      4,071         4,337         3,077         3,849         3,470
  Noninterest expense                                    17,684        15,559        13,354        11,507        10,588
                                                    ------------  ------------  ------------  ------------  ------------
    Income before income taxes                            8,839        10,644         7,741         6,683         4,530
  Provision for income taxes                              3,187         3,627         2,738         2,308         1,612
                                                    ------------  ------------  ------------  ------------  ------------
    Net income                                      $     5,652   $     7,017   $     5,003   $     4,375   $     2,918
                                                    ============  ============  ============  ============  ============

Per Share Data: (Note A)
  Earnings per share - basic                        $      0.92   $      1.15   $      0.84   $      0.75   $      0.51
  Earnings per share - diluted                             0.91          1.14          0.83          0.75          0.50
  Cash dividends declared                                  0.29          0.24          0.22          0.19          0.16
  Market price
    High                                                  24.77         28.00         25.00         20.00         16.64
    Low                                                   15.50         17.40         17.60         13.44         11.26
    Close                                                 15.75         26.75         22.61         17.60         13.44
  Book value                                               8.86          8.04          6.91          6.31          5.72

  Weighted average shares outstanding
    Basic                                             6,170,140     6,080,778     5,972,073     5,839,186     5,768,245
    Diluted                                           6,192,559     6,137,222     6,016,319     5,872,418     5,788,820

Selected Year-End Balance Sheet Data:
  Total assets                                      $   708,303   $   608,137   $   522,872   $   398,500   $   341,721
  Loans                                                 545,270       461,763       397,094       312,815       272,623
  Allowance for loan losses                               6,653         5,566         4,965         4,055         3,430
  Deposits                                              537,763       466,868       398,341       315,307       272,918
  Short-term borrowings                                  97,000        73,400        74,140        43,160        33,160
  Subordinated Debentures                                12,372        12,372             -             -             -
  Shareholders' equity                                   54,630        49,323        41,612        37,295        32,880

Selected Average Balances:
  Total assets                                      $   655,157   $   560,689   $   449,462   $   376,422   $   324,222
  Loans                                                 494,426       426,768       351,103       298,783       249,240
  Total interest-earning assets                         619,340       528,056       419,307       349,596       300,672
  Deposits                                              505,494       435,991       355,214       295,524       255,038
  Total interest-bearing liabilities                    521,957       435,131       340,798       282,743       244,024
  Shareholders' Equity                                   52,246        45,541        39,613        35,135        32,341

Selected Performance Ratios:
  Return on average assets                                 0.86%         1.25%         1.11%         1.16%         0.90%
  Return on average equity                                10.82%        15.41%        12.63%        12.45%         9.02%
  Net interest spread                                      3.13%         3.59%         4.08%         4.16%         3.87%
  Net interest margin (yield)                              3.84%         4.31%         4.63%         4.56%         4.33%
  Net Income to average daily deposits                     1.12%         1.61%         1.41%         1.48%         1.14%
  Noninterest income to total revenue                      7.89%         9.66%         9.47%        15.04%        15.48%
  Noninterest income to average assets                     0.62%         0.77%         0.68%         1.02%         1.07%
  Noninterest expense to average assets                    2.70%         2.77%         2.97%         3.06%         3.27%
  Efficiency ratio                                        63.49%        57.43%        58.51%        58.58%        66.15%
  Dividend payout ratio                                   31.66%        20.80%        26.26%        25.36%        31.63%
</TABLE>

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                        2007          2006          2005          2004          2003
                                                    ------------  ------------  ------------  ------------  ------------
<S>                                                        <C>           <C>           <C>           <C>           <C>
Asset Quality Ratios:
  Nonperforming loans to period-end loans                  0.23%         0.18%         0.25%         0.30%         0.39%
  Allowance for loan losses to period-end loans            1.22%         1.21%         1.25%         1.30%         1.26%
  Allowance for loan losses to nonperforming loans       530.54%       663.41%       497.99%       429.56%       323.89%
  Nonperforming assets to total assets                     0.42%         0.20%         0.25%         0.39%         0.52%
  Net loan charge-offs to average loans                    0.06%         0.06%         0.14%         0.32%         0.32%

Capital Ratios:
  Total risk-based capital - Bank                         10.71%        11.63%        10.40%        11.80%        12.30%
  Tier 1 risk-based capital - Bank                        11.88%        12.79%         9.19%        10.60%        11.10%
  Leverage ratio - Bank                                    8.85%         9.31%         7.66%         8.60%         9.00%
  Equity to assets ratio                                   7.71%         8.11%         7.96%         9.36%         9.62%
  Equity to assets ratio (averages)                        7.97%         8.12%         8.81%         9.33%         9.97%
  Average interest earning assets to average total
   assets                                                 94.53%        94.18%        93.29%        92.87%        92.74%
  Average loans to average total deposits                 97.81%        97.88%        98.84%       101.10%        97.73%
  Average interest bearing liabilities to average
   interest earning assets                                84.28%        82.40%        81.28%        80.88%        81.16%

Other Data:
  Number of banking offices                                  14            13            12            10            10
  Number of full time equivalent employees                  177           156           135           131           126
</TABLE>

Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.

         The following  discussion and analysis  provides  information about the
major components of our results of operations and financial condition, liquidity
and  capital  resources  and  should  be read in  conjunction  with our  audited
consolidated  financial statements and notes thereto which are contained in this
report.  Additional  discussion  and  analysis  related  to fiscal  year 2007 is
contained in our Quarterly  Reports on Form 10-Q for the fiscal  quarters  ended
March 31, 2007, June 30, 2007 and September 30, 2007, respectively.

Overview

         As a  community-focused  commercial bank, our primary business consists
of providing a full range of banking  services to our customers with an emphasis
on quality personal service.  Our core products consist of loans secured by real
estate and commercial and consumer loans as well as various deposit  products to
meet our  customers'  needs.  Our primary source of income is generated from net
interest  income,  the difference  between interest income received on our loans
and securities and interest expense paid on deposits and borrowings.  Our income
is also affected by our ability to price our products competitively and maximize
the interest rate spread  between the interest yield on loans and securities and
the interest  rate paid on deposits and  borrowings.  Our products also generate
other income through  product related fees and  commissions.  We incur operating
expenses consisting primarily of salaries and benefits,  occupancy and equipment
and other professional and miscellaneous expenses.

         Our assets have  increased  from $341.7 million at December 31, 2003 to
$708.3  million at December 31, 2007,  primarily  due to increased  loan demand,
while our total  deposits have  increased  from $272.9 million to $537.8 million
over that same  period.  In addition,  for 71  consecutive  years,  we have paid
dividends (prior to 1997 when we reorganized into a holding company,  it was our
wholly owned subsidiary,  Four Oaks Bank & Trust Company, which paid dividends).
For the past five  years,  dividends  have  averaged  26.4% of our  average  net
income.  Return on average  equity  and  return on average  assets for 2007 were
10.82%  and .86%,  respectively,  decreasing  from  returns of 15.41% and 1.25%,
respectively, for 2006.

         We set interest  rates on deposits and loans at competitive  rates.  We
have  maintained  spreads  of 3.13% and  3.59% in 2007 and  2006,  respectively,
between  interest  earned on average loans and  investments and interest paid on
average interest-bearing deposits and borrowings. Our gross loans have increased
from $272.6 million at December 31, 2003 to $545.3 million at December 31, 2007;
while our average net annual charge-offs over the same period were approximately
$563,000.  The sustained growth provided by operations  resulted in increases in
total assets of 16.5%, 16.3%, and 31.2%, for 2007, 2006 and 2005, respectively.

         Our gross  loans grew  18.1% and 16.3% in 2007 and 2006,  respectively.
Our total  investments  (including  interest-earning  deposits  and FHLB  stock)
increased 12.7% and 16.9% in 2007 and 2006, respectively, due to the decision to
build the  portfolio  as yields have  continued to improve  throughout  2006 and
2007. We closely monitor  changes in the financial  markets in order to maximize
the yield on our  assets.  The  growth in loans for 2007 and 2006 was  funded by
deposit  growth of 15.2% and 17.2%,  respectively.  Earnings  decreased in 2007,
ending the year with net income of $5.7 million, a decrease of 19.5% over 2006's
net income of $7.0 million, as a result of a challenging economic environment.

                                       19
<PAGE>

         During  2007 and  2006,  Four  Oaks  Mortgage  Company,  L.P.  provided
secondary  market-type  mortgages which contributed $112,000 and $135,000 to our
revenue for the years 2007 and 2006,  respectively.  Four Oaks Mortgage Company,
L.P.  is owned  49.99%  by our  wholly  owned  subsidiary,  Four  Oaks  Mortgage
Services, L.L.C., and 50.01% by its general partner, CTX Mortgage Ventures, LLC,
a wholly owned indirect subsidiary of Centex Corporation.

         In December  2004,  we added the Retail Real Estate  Lending  division,
which works with individuals, developers and contractors involved in real estate
acquisition and development.

         Management  historically has attempted to monitor and control increases
in  overhead  expenses  while  being  committed  to  developing  the  skills and
enhancing  the  professionalism  of our  employees.  Employee  turnover has been
minimal historically, while the number of our full-time equivalent employees has
increased from 126 at December 31, 2003 to 177 at December 31, 2007.

         As  described  in more  detail in the  Business  section of this Annual
Report on Form 10-K, on December 10, 2008, we announced that we had entered into
a definitive  agreement with LongLeaf pursuant to which LongLeaf will merge with
and into the bank. Subject to receipt of approval by LongLeaf's shareholders and
certain other closing  conditions,  we plan to consummate the bank merger in the
second  quarter  of 2008.  While the  proposed  merger  will  likely  dilute our
earnings  per share  for the  period in which it is  completed,  subject  to the
amount and timing of projected  cost savings that the proposed  merger  realizes
and to the amount of merger-related expenses charged against our earnings, it is
expected  that the  proposed  merger will be accretive to its earnings in future
periods.

Results of Operations

Comparison of Financial Condition at December 31, 2007 and 2006

         During 2007, our total assets  increased by $100.2  million,  or 16.5%,
from $608.1 million at December 31, 2006 to $708.3 million at December 31, 2007.
This  increase in our total  assets  resulted  primarily  from growth in our net
loans,  which  increased  from  $456.2  million at  December  31, 2006 to $538.6
million at  December  31,  2007,  an increase of $82.4  million,  or 18.1%.  The
sustained  growth in our loan  portfolio  continues  to reflect a trend  towards
growth in commercial real estate lending  primarily in real estate  construction
as a result of a continued shift in our markets from an agricultural  focus to a
suburban focus. Loans secured by real estate at December 31, 2007 of which $58.0
million was  related to  construction  and land  development  loans,  grew $78.4
million  over  2006.  In  addition  to loan  growth,  our  securities  portfolio
increased  $12.9  million to $114.3  million at  December  31,  2007 from $101.4
million at December 31, 2006.  Our loan growth and  increases in our  securities
portfolio  were primarily  funded by deposit growth of $70.9 million,  or 15.2%,
during 2007 to $537.8  million at December 31, 2007 compared with $466.9 million
at December 31,  2006.  Our local  market  customers  continue to be our primary
source for deposit growth,  funding deposit growth  predominantly in savings and
time deposits.  Deposits from our local market customers  provided $65.6 million
of the December 31, 2007 increase in deposits  over December 31, 2006,  and with
the  remaining  $5.3 million  increase  coming from  deposits  outside our local
customer  base.  We believe the growth in deposits  was  encouraged  by targeted
deposit  campaigns and branch calling efforts within our competitive  market, in
spite of the national  prime  decrease from 8.25% at January 1, 2007 to 7.25% at
December 31, 2007.

         Shareholders'  equity increased by $5.3 million as of December 31, 2007
as compared to December 31, 2006. This increase  resulted from our net income of
$5.7 million, dividend reinvestment plan proceeds of $1.3 million, proceeds from
the  exercise of stock  options of $362,000  and employee  stock  purchase  plan
proceeds of $141,000,  net of dividends paid of $1.8 million,  stock  repurchase
expenses of $1.5 million and other  comprehensive  gain of $855,000 comprised of
unrealized  gains on securities  available for sale of $613,000,  net of tax and
unrealized gains on cash flow hedging activities of $242,000 net of tax.

                                       20
<PAGE>

Comparison of Operating Results for the Years Ended December 31, 2007 and 2006

Net Income

         During 2007,  we earned net income of $5.7  million,  or $.92 basic net
income  per  share,  which was a 19.5%  decrease  over  2006 net  income of $7.0
million, or $1.15 basic net income per share. Increased competition for deposits
in our local markets caused interest  expense to increase,  causing a decline in
our net interest  margin.  The  resulting  $1.1  million,  or 4.7%,  increase in
interest  income failed to absorb a 13.7% increase in  non-interest  expense for
2007 over  2006.  A full year of  opening  and  operating  two new  full-service
offices during 2007  contributed to increased  salaries and benefits,  occupancy
and equipment and other operating  costs,  along with costs  associated with the
completion  of the new  building  for Zebulon and the  upfitting of the new Dunn
location.  In addition to the new  offices,  rising  costs in employee  salaries
contributed to increased personnel expense in 2007.  Compliance costs related to
the Sarbanes-Oxley Act of 2002 increased costs for outside professional services
for 2007.

Net Interest Income

         Like most financial institutions, the primary component of earnings for
the bank is net interest income.  Net interest income is the difference  between
interest income,  principally from loan and investment securities,  and interest
expense,  principally  on  customer  deposits  and  borrowings.  Changes  in net
interest  income  result from  changes in volume,  spread and  margin.  For this
purpose,  volume refers to the average dollar level of  interest-earning  assets
and  interest-bearing  liabilities,  spread refers to the difference between the
average   yield   on   interest-earning   assets   and  the   average   cost  of
interest-bearing  liabilities,  and margin refers to net interest income divided
by  average  interest-earning  assets.  Margin  is  influenced  by the level and
relative mix of interest-earning  assets and  interest-bearing  liabilities,  as
well as by levels of non-interest-bearing liabilities and capital.

         Net interest income increased by $1.1 million to $23.8 million in 2007,
with a net yield of 3.84%  compared to $22.7 million and a net yield of 4.31% in
2006.  However,  the yield for 2007 decreased  overall 47 basis points from 2006
due to the  increasing  costs of deposits  and  borrowings.  The increase in net
interest income  primarily was generated by an increased  volume of $5.4 million
in average net  interest-earning  assets,  which  produced  $1.1  million in net
interest income. The additional interest income over interest expense was driven
by steady loan growth,  acquisition of higher yielding investments as well as an
increase of $2.1 million in average  non-interest-bearing  demand deposits.  The
rates earned on a substantial  portion of our loans  reprice to correspond  with
each prime rate increase.  Most of our  interest-bearing  liabilities,  however,
have fixed  interest  rates  until  maturity  and as a result do not  reprice as
quickly or in the same  increments  as our loan  portfolio.  The national  prime
decreased  100 basis points during 2007 to 7.25% at December 31, 2007 from 8.25%
at  January  1,  2007.  Prime rate  decreased  three  times in late 2007,  which
accounts for the decrease in net interest margin for 2007.

         On average, our interest-earning  assets grew $91.3 million during 2007
over 2006. A substantial portion of the increase in interest-earning  assets was
achieved through increased loan demand. Average loans increased by $67.7 million
during 2007 over 2006 to $494.4 million,  generating  additional interest income
of $5.5 million. An increase in volume of interest-bearing  liabilities of $85.8
million in 2007 resulted in additional  interest expense of $3.7 million,  while
increased  competition  for deposits in our local markets  resulted in increased
interest  expense of $2.2  million.  The  increase in  interest  expense in 2007
primarily  resulted from a $27.0 million  increase in more expensive  other time
deposits  at an  average  rate paid on these  deposits  of  5.02%,  which was an
increase of 77 basis points over 2006.  However, an increase of $36.7 million in
less  expensive  NOW and money market  deposits at an average rate paid of 3.59%
and an  increase  of $2.1  million in  interest  free  demand  deposits  in 2007
partially offset the increased cost of other time deposits.  Interest expense on
subordinated debt associated with our Trust Preferred  Securities increased from
$626,000  in 2006 to  $850,000  in 2007.  The  average  outstanding  balance  of
subordinated  debt increased from $9.4 million in 2006 to $12.4 million in 2007,
as we completed a $12 million  offering of Trust  Preferred  Securities  in late
March 2006. The Trust  Preferred  Securities pay cumulative  cash  distributions
quarterly at an annual rate,  reset  quarterly,  equal to three month LIBOR plus
1.35%.

Provision for Loan Losses and Asset Quality

         Our provision for loan losses was $1.4 million during 2007 and $873,000
million during 2006. Net  charge-offs in 2007 increased to $275,000  compared to
$272,000 in 2006. As a percent of average loans, net charge-offs were 0.06%, the
lowest level in the past five years and unchanged  from 2006. The lower level of
net-charge-offs and nonperforming assets is attributable to continued efforts to
improve asset quality, including improved underwriting.

                                       21
<PAGE>

         The  provision  for loan losses is charged to bring the  allowance  for
loan losses to the level deemed  appropriate by management  after  adjusting for
recoveries  of amounts  previously  charged off.  Loans are charged  against the
allowance for loan losses when management believes that the  uncollectibility of
a loan balance is  confirmed.  The  allowance for loan losses is maintained at a
level deemed  adequate to absorb  probable losses inherent in the loan portfolio
and results from  management's  consideration  of such factors as the  financial
condition of borrowers,  past and expected  loss  experience,  current  economic
conditions,   and  other  factors   management  feels  deserve   recognition  in
establishing an appropriate  reserve.  Although  management attempts to maintain
the allowance at a level deemed adequate,  future additions to the allowance may
be necessary based upon changes in market  conditions or the status of the loans
included  in the  loan  portfolio.  In  addition,  various  regulatory  agencies
periodically review our allowance for loan losses. These agencies may require us
to make adjustments  based upon their judgments about  information  available to
them at the time of their  examination.  See  "Allowance  for  Loan  Losses  and
Summary of Loan Loss  Experience"  below.  We  evaluate  our loan  portfolio  in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 114,
Accounting  by Creditors  for  Impairment of a Loan, as amended by SFAS No. 118,
Accounting  by  Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures.  Under these  standards,  a loan is considered  impaired,  based on
current  information  and events,  if it is  probable  that we will be unable to
collect the  scheduled  payments of principal and interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for  impairment  based  on the  present  value of  expected  future  cash  flows
discounted at the historical  effective  interest rate or the loan's  observable
market price, while all  collateral-dependent  loans are measured for impairment
based on the fair value of the  collateral.  If the recorded  investment  in the
loan exceeds the measure of fair value, a valuation  allowance is established as
a component of the  allowance  for loan losses.  This  evaluation  is inherently
subjective  as it  requires  material  estimates  that  may  be  susceptible  to
significant change.

         Our non-performing  assets,  which consist of loans past due 90 days or
more, real estate  acquired in the settlement of loans,  and loans in nonaccrual
status,  increased  to $3.0  million at December  31, 2007 from $1.3  million at
December 31, 2006.  This  increase was  primarily  due to  properties  valued at
approximately  $2.6 million  being added to other real estate owned during 2007,
and to a lesser  degree,  the  contraction  of the housing market and subsequent
slowdown of real estate construction.  Our allowance for loan losses,  expressed
as a  percentage  of gross  loans,  was 1.22% and 1.21% at December 31, 2007 and
2006, respectively. At December 31, 2007, the allowance for loan losses amounted
to $6.7 million, which management believes is adequate to absorb losses inherent
in our loan portfolio.

Non-interest Income

         Non-interest  income  before  gains and losses on sales of  securities,
hedging  activity  and loans  decreased  $744,000,  or 16.1%,  from $4.6 million
during  2006 to $3.9  million  in 2007.  Our  non-interest  income is  comprised
primarily  of  service   charges  on  deposit   accounts,   financial   services
commissions,  merchant fees,  changes in the value of bank-owned  life insurance
and  various  other  sources of  miscellaneous  operating  income.  Net gains of
$512,000 on sales of investment  securities  and interest rate hedging  activity
were  recognized in 2007. The primary  component of the decrease in non-interest
income is a loss on the  surrender of the  previous  bank-owned  life  insurance
policy and the subsequent  purchase of a new policy,  resulting in a net loss of
$205,000  for the year ended  December  31,  2007,  as compared to a net gain of
$549,000 in 2006.

Non-interest Expense

         Our non-interest  expense increased from $15.5 million in 2006 to $17.7
million in 2007, an increase of $2.2 million.  Although our non-interest expense
has continued to increase,  our non-interest expense as a percent of our average
assets has declined over the last five years, down to 2.70% for 2007, our lowest
level in the last five years.  Approximately  70.3% of the $2.2 million increase
in non-interest expense over 2006 was due to increases in salaries and benefits.
Salaries increased 17.9% while employee benefits increased 14.4%,  primarily due
a 13.5%  increase in the number of employees  in 2007 over 2006.  In addition to
normal  salary  increases  and increased  costs for employee  benefits  overall,
personnel  costs grew due to additional  staffing needs  throughout the bank. In
total, our number of full time equivalent  employees grew from 156 employees for
the year 2006 to 177 employees for the year 2007. The increased  personnel costs
reflect  the costs of  additional  personnel  for the new Dunn  loan  production
office as well as  increased  staffing  for the  administration  and  operations
departments.  In addition to personnel costs,  additional costs during 2007 were
incurred for occupancy expense.  For 2007,  occupancy expense increased $118,000
over 2006. Additional testing and documentation required for compliance with the
Sarbanes-Oxley  Act of 2002  continued  to  increase  our fees paid for  outside
professional services in 2007, contributing to an increase of $80,000 over 2006.
The primary increases in other non-interest  expense for 2007 over 2006 included
advertising expense, up $28,000,  printing and office supplies, up $21,000, auto
expense, up $17,000, meals,  entertainment and travel, up $30,000, donations and
charities expense, up $58,000, ATM expense, up $77,000, postage, up $32,000, and
expenses  relating  to the  collection  of  non-performing  loans  and  sale  of
repossessed assets, up $34,000. There were no other significant increases in the
remaining other non-interest expense categories.

                                       22
<PAGE>

Comparison of Operating Results for the Years Ended December 31, 2006 and 2005

Net Income

         During 2006, we earned net income of $7.0  million,  or $1.15 basic net
income  per  share,  which was a 40.3%  increase  over  2005 net  income of $5.0
million,  or $0.84 basic net income per share. We believe  strategic  pricing of
both our loans and deposits  improved  our net  interest  margin by managing our
overall  cost of funds and  allowing  us to attract the higher  balance,  higher
quality loans in our markets. The resulting $3.3 million, or 17.1%,  increase in
net interest income  absorbed a 16.5% increase in non-interest  expense for 2006
over 2005. A full year of opening and  operating  two new  full-service  offices
during 2006  contributed  to increased  salaries  and  benefits,  occupancy  and
equipment  and other  operating  costs,  along  with costs  associated  with the
completion  of the new building for Wallace and the upfitting of the new Sanford
location.  In addition to the new  offices,  rising  costs in employee  benefits
contributed  to  increased  personnel  expense.   Compliance  costs  related  to
Sarbanes-Oxley increased costs for outside professional services.

Net Interest Income

         Net interest income increased by $3.3 million to $22.7 million in 2006,
with a net yield of 4.31%  compared to $19.4 million and a net yield of 4.63% in
2005. However, the 2006 yield decreased an overall 32 basis points from 2005 due
to the increasing costs of deposits and borrowings. The increase in net interest
income  primarily  was  generated  by an  increased  volume of $14.4  million in
average net interest-earning assets, which produced $3.3 million in net interest
income.  The  additional  interest  income over  interest  expense was driven by
strong loan demand in a rising rate environment,  acquisition of higher yielding
investments   as   well   as  an   increase   of   $7.6   million   in   average
non-interest-bearing  demand deposits. The rates earned on a substantial portion
of our loans reprice to correspond  with each prime rate  increase.  Most of our
interest-bearing liabilities,  however, have fixed interest rates until maturity
and as a result do not reprice as quickly or in the same  increments as our loan
portfolio. The national prime increased 100 basis points during 2006 to 8.25% at
December  31,  2006 from 7.25% at  January  1,  2006.  Since the last prime rate
increase was June 29, 2006, our loan repricing leveled off in the latter part of
2006, while our deposits  continued to reprice upwards as they reached maturity,
which accounts for the decrease in net interest margin for 2006.

            On average,  interest-earning assets grew $108.7 million during 2006
over 2005. A substantial portion of the increase in interest-earning  assets was
achieved  through  increased loan demand.  Average loans increased $75.7 million
during 2006 over 2005 to $426.8 million,  generating  additional interest income
of $3.6 million.  Rising interest rates generated  additional interest income of
$2.8  million  on  the  bank's  loan   portfolio.   An  increase  in  volume  of
interest-bearing  liabilities of $94.3 million  resulted in additional  interest
expense of $3.6 million while  repricing due to rising  interest rates increased
interest  expense by $4.2 million.  The increase in interest  expense  primarily
resulted from a $33.2 million  increase in higher costing jumbo time deposits at
an average rate paid on these  deposits of 4.42% an increase of 113 basis points
over 2005.  However, an increase of $24.5 million in lower costing NOW and money
market deposits at an average rate paid of 2.89% and an increase of $7.6 million
in interest free demand  deposits  partially  offset the  increased  cost of the
jumbo time deposits.  Interest expense on subordinated  debt associated with our
offering  of the  Trust  Preferred  Securities  increased  from  zero in 2005 to
$626,000 in 2006. The average outstanding balance of subordinated debt increased
from  zero in 2005 to $9.4  million  in  2006,  as we  completed  a $12  million
offering of Trust  Preferred  Securities in late March 2006. The Trust Preferred
Securities pay cumulative cash distributions  quarterly at an annual rate, reset
quarterly, equal to three month LIBOR plus 1.35%.

Provision for Loan Losses and Asset Quality

         Our provision for loan losses was $873,000 during 2006 and $1.4 million
during 2005. Net  charge-offs in 2006 declined to $272,000  compared to $493,000
in 2005. As a percent of average loans,  net charge-offs  were 0.06%, the lowest
level  in  the  past  five  years.  The  lower  level  of  net-charge-offs   and
nonperforming  assets is  attributable  to  continued  efforts to improve  asset
quality, including improved underwriting.

                                       23
<PAGE>

         The  provision  for loan losses is charged to bring the  allowance  for
loan losses to the level deemed  appropriate by management  after  adjusting for
recoveries  of amounts  previously  charged off.  Loans are charged  against the
allowance for loan losses when management believes that the  uncollectibility of
a loan balance is  confirmed.  The  allowance for loan losses is maintained at a
level deemed  adequate to absorb  probable losses inherent in the loan portfolio
and results from  management's  consideration  of such factors as the  financial
condition of borrowers,  past and expected  loss  experience,  current  economic
conditions,   and  other  factors   management  feels  deserve   recognition  in
establishing an appropriate  reserve.  Although  management attempts to maintain
the allowance at a level deemed adequate,  future additions to the allowance may
be necessary based upon changes in market  conditions or the status of the loans
included  in the  loan  portfolio.  In  addition,  various  regulatory  agencies
periodically review our allowance for loan losses. These agencies may require us
to make adjustments  based upon their judgments about  information  available to
them at the time of their  examination.  See  "Allowance  for  Loan  Losses  and
Summary of Loan Loss  Experience"  below.  We  evaluate  our loan  portfolio  in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 114,
Accounting  by Creditors  for  Impairment of a Loan, as amended by SFAS No. 118,
Accounting  by  Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures.  Under these  standards,  a loan is considered  impaired,  based on
current  information  and events,  if it is  probable  that we will be unable to
collect the  scheduled  payments of principal and interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for  impairment  based  on the  present  value of  expected  future  cash  flows
discounted at the historical  effective  interest rate or the loan's  observable
market price, while all  collateral-dependent  loans are measured for impairment
based on the fair value of the  collateral.  If the recorded  investment  in the
loan exceeds the measure of fair value, a valuation  allowance is established as
a component of the  allowance  for loan losses.  This  evaluation  is inherently
subjective  as it  requires  material  estimates  that  may  be  susceptible  to
significant change.

         Our non-performing  assets,  which consist of loans past due 90 days or
more, real estate  acquired in the settlement of loans,  and loans in nonaccrual
status, remained unchanged at $1.3 million at December 31, 2005 and December 31,
2006.  Our allowance for loan losses,  expressed as a percentage of gross loans,
was 1.21% and 1.25% at December 31, 2006 and 2005, respectively. At December 31,
2006, the allowance for loan losses amounted to $5.6 million,  which  management
believes is adequate to absorb losses inherent in our loan portfolio.

Non-interest Income

         Non-interest  income  before  gains and losses on sales of  securities,
hedging  activity  and loans  increased  $756,000,  or 19.9%,  from $3.8 million
during  2005 to $4.6  million  in 2006.  Our  non-interest  income is  comprised
primarily  of  service   charges  on  deposit   accounts,   financial   services
commissions,  merchant fees,  bank-owned life insurance income and various other
sources of miscellaneous operating income. Fees charged on deposit accounts, our
largest component of non-interest  income,  increased $178,000 for 2006 compared
to 2005,  primarily  due to an  increase in  overdraft  charges.  Merchant  fees
increased  $13,000 from $389,000 during 2005 to $402,000 in 2006,  primarily due
to increased customer use of debit cards. During the same period,  other service
charges,   commissions  and  fees  increased  $316,000,  of  which  $29,000  was
attributable  to increased  profits from our  investment  in Four Oaks  Mortgage
Company,  L.P.,  $117,000 was  attributable  to increased  commissions  from our
financial  services  department,  $235,000  was  attributable  to the  return on
investment in the Triangle  Mezzanine Fund and $19,000 from the equity  earnings
in The  Four  Oaks  Statutory  Trust.  Income  from  bank-owned  life  insurance
increased $249,000.  Net gains of $400,000 on sales of investment securities and
interest rate hedging  activity were  recognized in 2006. Our net gains on sales
of loans  increased  to $103,000  in 2006 from  $61,000  recorded  in 2005.  The
increase  in loan  sales  was  driven  by strong  loan  demand in a rising  rate
environment.

                                       24
<PAGE>

Non-interest Expense

         Our non-interest  expense increased from $13.4 million in 2005 to $15.5
million in 2006, an increase of $2.1 million.  Although our non-interest expense
has continued to increase,  our non-interest expense as a percent of our average
assets has declined over the last five years, down to 2.76% for 2006, our lowest
level in the last five years.  Approximately  60.7% of the $2.1 million increase
in non-interest expense over 2005 was due to increases in salaries and benefits.
Salaries increased 18.7% while employee benefits increased 13.0%,  primarily due
a 15.6%  increase in the number of employees  in 2006 over 2005.  In addition to
normal  salary  increases  and increased  costs for employee  benefits  overall,
personnel  costs grew due to additional  staffing needs  throughout the bank. In
total, our number of full time equivalent  employees grew from 135 employees for
the year 2005 to 156 employees for the year 2006. The increased  personnel costs
reflect the costs of a full year of staffing  for our new Zebulon  office  which
opened in January 2006, and the increased  staffing in Sanford when we converted
that office from a loan production office to a full-service  branch. In addition
to personnel costs,  additional costs during 2006 were incurred in occupancy and
equipment due to the additional staff, operating new offices, as well as general
upgrades in technology  throughout the bank.  For 2006,  occupancy and equipment
expense increased  $132,000 and $125,000,  respectively,  over 2005.  Additional
testing and documentation required for compliance with the Sarbanes-Oxley Act of
2002  continued to increase our fees paid for outside  professional  services in
2006,  contributing  to an increase of $218,000 in  professional  and consulting
fees over 2005.  The primary  increases in other  non-interest  expense for 2006
over 2005  included  advertising  expense,  up  $111,000,  printing  and  office
supplies,  up $42,000,  telephone expense, up $15,000, auto expense, up $18,000,
directors  fees,  up  $26,000,  meals,  entertainment  and  travel,  up $24,000,
donations  and  charities  expense up,  $21,000,  ATM expense,  up $20,000,  and
servicing expense, up $16,000.  There were no other significant increases in the
remaining other non-interest expense categories.





                    (The remainder of this page left blank.)



                                       25
<PAGE>

Liquidity and Capital Resources

         Our liquidity  position is primarily  dependent upon the bank's need to
respond to loan demand,  the  short-term  demand for funds caused by withdrawals
from  deposit  accounts  (other than time  deposits)  and the  liquidity  of its
assets.  The bank's primary  liquidity sources include cash and amounts due from
other banks, U.S Government Agency and other short-term  investment  securities.
In addition,  the bank has the ability to borrow funds from the Federal  Reserve
Bank and the Federal  Home Loan Bank of Atlanta  ("FHLB"),  to purchase  federal
funds from other  financial  institutions,  to obtain  wholesale  deposits,  and
repurchase  agreements.  At December 31, 2007,  the bank had available  lines of
credit  totaling  $54.7  million with the FHLB and $22.7 million lines of credit
from various  financial  institutions to purchase  federal funds. As of December
31,  2007,  we  have  no  outstanding  commitments  for  facility  construction.
Management  believes  that  our  liquidity  sources  are  adequate  to meet  our
operating  needs  and the  operating  needs of the  bank  for the next  eighteen
months.  Total shareholders'  equity was $54.6 million, or 7.71% of total assets
at December 31, 2007, and $49.3 million or 8.11% of total assets at December 31,
2006.

Off-Balance Sheet Arrangements

         As part of its normal course of business to meet the financing needs of
its  customers,  the  bank is at  times a party to  financial  instruments  with
off-balance  sheet credit risk. Such instruments  include  commitments to extend
credit  and  standby  letters  of  credit.  At  December  31,  2007,  the bank's
outstanding  commitments  to extend  credit  consisted of  undisbursed  lines of
credit,  other commitments to extend,  undisbursed portion of construction loans
and stand-by  letters of credit of $144.1 million.  Additional  detail regarding
the bank's  off-balance  sheet risk exposure is presented in Note J and K to the
accompanying consolidated financial statements.

Interest Rate Sensitivity Analysis

          As a part of our interest rate risk management policy, we periodically
perform  an  interest  rate  sensitivity  analysis.  Interest  rate  sensitivity
analysis is a common,  though  imperfect,  measure of interest rate risk,  which
measures   the  relative   dollar   amounts  of   interest-earning   assets  and
interest-bearing  liabilities that reprice within a specific time period, either
through  maturity or rate adjustment.  Any resulting  interest rate "gap" is the
difference  between the amounts of such assets and liabilities  that are subject
to  repricing.  A  positive  gap for a given  period  means  that the  amount of
interest-earning  assets  maturing  or  otherwise  repricing  within that period
exceeds  the  amount  of  interest-bearing  liabilities  maturing  or  otherwise
repricing  within the same period.  Accordingly,  in a declining  interest  rate
environment,  an  institution  with a positive gap would  generally be expected,
absent the effects of other  factors,  to  experience a decrease in the yield on
its assets greater than the decrease in the cost of its liabilities, and its net
interest  income should be  negatively  affected.  Conversely,  the yield on its
assets for an  institution  with a positive  gap would  generally be expected to
increase  more  quickly  than  the  cost of  funds  in a  rising  interest  rate
environment,  and such  institution's  net interest  income  generally  would be
expected to be positively affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a negative gap.

         The table below sets forth the amounts of our  interest-earning  assets
and  interest-bearing  liabilities  outstanding as of December 31, 2007 that are
projected to reprice or mature in each of the future time periods shown.  Except
as stated  below,  the amounts of assets and  liabilities  shown that reprice or
mature  within a  particular  period  were  determined  in  accordance  with the
contractual terms of the assets or liabilities.  Loans with adjustable rates are
shown as being  due at the end of the next  upcoming  adjustment  period.  Money
market deposit accounts and negotiable order of withdrawal or other  transaction
accounts  are  assumed  to be  subject  to  immediate  repricing  and  depositor
availability  and have been  placed in the  shortest  period.  In making the gap
computations, none of the traditional assumptions regarding prepayment rates and
deposit  decay  rates  have  been  used  for  any  interest-earning   assets  or
interest-bearing  liabilities. In addition, the table does not reflect scheduled
principal  payments that will be received  throughout  the lives of the loans or
investments.  The  interest  rate  sensitivity  of our  assets  and  liabilities
illustrated  in the  following  table  would  vary  substantially  if  different
assumptions  were used or if actual  experience  differs from that  indicated by
such assumptions. (dollars in thousands).

                                       26
<PAGE>
<TABLE>
<CAPTION>
<S>                                                <C>             <C>             <C>             <C>             <C>
                                                                 Interest Rate Sensitivity as of December 31, 2007
                                                   ----------------------------------------------------------------------------
                                                      3 Months    Over 3 Months    Total Within      Over 12
                                                      or Less      to 12 Months      12 Months        Months          Total
                                                   ------------    ------------    ------------    ------------    ------------
Interest-earning assets:
   Loans                                           $   269,976     $    51,052     $   321,028     $   224,242     $   545,270
   Securities available for sale                             -             590             590         113,711         114,301
   Other earning assets                                  3,881               -           3,881           5,010           8,891
                                                   ------------    ------------    ------------    ------------    ------------
       Total interest-earning assets               $   273,857     $    51,642     $   325,499     $   342,963     $   668,462
                                                   ============    ============    ============    ============    ============

   Percent of total interest-earning assets              40.97%           7.73%          48.69%          51.31%         100.00%
   Cumulative percent of total interest-
    earning assets                                       40.97%          48.69%          48.69%         100.00%         100.00%

Interest-bearing liabilities
   Fixed maturity deposits                         $    84,481     $   176,709     $   261,190     $    47,545     $   308,735
   All other deposits                                  154,341               -         154,341               -         154,341
   Borrowings                                           10,000          10,000          20,000          77,000          97,000
                                                   ------------    ------------    ------------    ------------    ------------
       Total interest-bearing liabilities          $   248,822     $   186,709     $   435,531     $   124,545     $   560,076
                                                   ============    ============    ============    ============    ============

   Percent of total interest-bearing liabilities         44.43%          33.34%          77.76%          22.24%         100.00%
   Cumulative percent of total interest-
    bearing liabilities                                  44.43%          77.76%          77.76%         100.00%         100.00%

Interest sensitivity gap                           $    25,035     $  (135,067)    $  (110,032)    $   218,418     $   108,386
Cumulative interest sensitivity gap                     25,035        (110,032)       (110,032)        108,386         108,386
Cumulative interest sensitivity gap as a
 percent of total interest-earning assets                 3.75%         -16.46%         -16.46%          16.21%          16.21%
Cumulative ratio of interest-sensitive assets
 to interest-sensitive liabilities                      110.06%          74.74%          74.74%         119.35%         119.35%

Contractual Obligations and Commitments

         In  the  normal  course  of  business  there  are  various  outstanding
contractual  obligations that require future cash outflows.  The following table
shows  our  expected   contractual   obligations  and  future   operating  lease
commitments as of December 31, 2007 (in thousands):

                                                                              Payments Due by Period
                                                   ----------------------------------------------------------------------------
                                                                    Less than 1                                     More than
                                                       Total           year          1-3 years       3-5 years       5 years
                                                   ------------    ------------    ------------    ------------    ------------
Borrowings                                         $    97,000     $    20,000     $    10,000     $         -     $    67,000
Subordinated debentures                                 12,372               -               -               -     $    12,372
Operating leases                                         1,106             144             265             256             441
Deposits                                               308,736         261,462          43,723           3,551               -
                                                   ------------    ------------    ------------    ------------    ------------
Total                                              $   419,214     $   281,606     $    53,988      $    3,807     $    79,813
                                                   ============    ============    ============    ============    ============
</TABLE>

                                       27
<PAGE>

         The  following  table  shows our  undisbursed  lines of  credit,  other
commitments to extend,  undisbursed  portion of construction  loans and stand-by
letters of credit as of December 31, 2007 (in thousands):

<TABLE>
<CAPTION>
<S>                                                <C>             <C>             <C>             <C>             <C>
                                                                    Amount of Commitment Expiration Per Period
                                                   ----------------------------------------------------------------------------
                                                                    Less than 1                                     More than
                                                       Total           year          1-3 years       3-5 years       5 years
                                                   ------------    ------------    ------------    ------------    ------------
Undisbursed lines of credit                        $    33,757     $     3,509     $     9,644     $     1,149     $    19,455
Other commitments to extend                             30,860          22,872           7,302             686               -
Undisbursed portion of construction loans               76,894          65,097          10,479           1,134             183
Stand-by letters of credit                               2,611           2,399              72             140               -
                                                   ------------    ------------    ------------    ------------    ------------
   Total                                           $   144,122     $    93,877     $    27,497     $     3,109     $    19,638
                                                   ============    ============    ============    ============    ============
</TABLE>

Inflation

         The effect of inflation on financial institutions differs somewhat from
the effect it has on other  businesses.  The performances of banks,  with assets
and  liabilities  that are  primarily  monetary in nature,  are affected more by
changes in interest rates than by inflation.  Interest rates generally  increase
as the rate of inflation increases, but the magnitude of the change in rates may
not  be  the  same.  During  periods  of  high  inflation,  there  are  normally
corresponding  increases in the money supply, and banks will normally experience
above average growth in assets,  loans and deposits.  Also, general increases in
the price of goods and services  will  generally  result in increased  operating
expenses.

Income Taxes

         Income taxes,  as a percentage of income before income taxes,  for 2007
and 2006 were 36.06% and 34.08%,  respectively.  The  increase was the result of
management's  redirection of funds between loans and different  types of taxable
and tax exempt  interest-bearing  assets in response to economic  conditions and
the bank's liquidity requirements.

                                       28
<PAGE>

Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential

         The following  schedule  presents average balance sheet information for
the years 2007,  2006 and 2005,  along with related  interest earned and average
yields for  interest-earning  assets and the interest paid and average rates for
interest-bearing liabilities. Nonaccrual notes are included in loan amounts.

<TABLE>
<CAPTION>
<S>                                  <C>         <C>          <C>   <C>         <C>          <C>   <C>         <C>          <C>
                                                      Average Daily Balances, Interest Income/Expense, Average Yield/Rate

                                                                    For the Years Ended December 31,
                                     --------------------------------------------------------------------------------------------
                                                    2007                           2006                           2005
                                     ------------------------------ ------------------------------ ------------------------------
                                       Average              Average   Average              Average   Average              Average
                                       Balance    Interest    Rate    Balance    Interest    Rate    Balance    Interest    Rate
                                     ----------  ----------  ------ ----------  ----------  ------ ----------  ----------  ------
                                                                         (dollars in thousands)
Interest-earning assets:
  Loans                              $  494,426  $   40,967   8.29% $  426,768  $   35,457   8.31% $  351,103  $   26,612   7.58%
  Investment securities - taxable       111,837       5,873   5.25%     89,195       4,503   5.05%     57,242       2,389   4.17%
  Investment securities - tax exempt      4,846         178   3.68%      4,123         152   3.69%      3,175         118   3.72%
  Other interest-earning assets           8,231         495   6.01%      7,970         444   5.57%      7,787         285   3.66%
                                     ----------  ----------  ------ ----------  ----------  ------ ----------  ----------  ------

     Total interest-earning assets      619,340      47,513   7.67%    528,056      40,556   7.68%    419,307      29,404   7.01%
                                                 ----------  ------             ----------  ------             ----------  ------

Other assets                             35,817                         32,633                         30,155
                                     ----------                     ----------                     ----------

     Total assets                    $  655,157                     $  560,689                     $  449,462
                                     ==========                     ==========                     ==========

Interest-bearing liabilities:
  Deposits:
  NOW and money market deposits      $  107,520  $    3,860   3.59% $   71,981  $    2,079   2.89% $   57,928  $      808   1.39%
  Savings deposits                       30,068         800   2.66%     37,304       1,079   2.89%     26,858         599   2.23%
  Time deposits, $100,000 and over      166,744       8,164   4.90%    157,497       6,961   4.42%    124,248       4,066   3.27%
  Other time deposits                   125,875       6,317   5.02%     96,058       4,083   4.25%     80,610       2,350   2.92%
  Borrowed funds                         79,378       3,708   4.67%     63,885       2,989   4.68%     51,154       2,160   4.22%
  Subordinated debentures                12,372         850   6.87%      9,389         626   6.67%          -           -   0.00%
                                     ----------  ----------  ------ ----------  ----------  ------ ----------  ----------  ------

     Total interest-bearing
      liabilities                       521,958      23,699   4.54%    436,114      17,817   4.09%    340,798       9,983   2.93%
                                                 ----------  ------             ----------  ------             ----------  ------

  Noninterest-bearing deposits           75,286                         73,151                         65,570
  Other liabilities                       5,668                          5,883                          3,481
  Stockholders' equity                   52,246                         45,541                         39,613
                                     ----------                     ----------                     ----------

     Total liabilities and
      stockholders' equity           $  655,157                     $  560,689                     $  449,462
                                     ==========                     ==========                     ==========

     Net interest income and interest
      rate spread                                $   23,814   3.13%             $   22,739   3.59%             $   19,421   4.08%
                                                 ==========  ======             ==========  ======             ==========  ======

     Net yield on average interest-
      earning assets                                          3.84%                          4.31%                          4.63%
                                                             ======                         ======                         ======

     Ratio of average interest-
      earning assets to average
      interest-bearing liabilities      118.66%                        121.08%                        123.04%
                                     ==========                     ==========                     ==========
</TABLE>

                                       29
<PAGE>

         The  following  table shows  changes in interest  income and expense by
category and  rate/volume  variances  for the years ended  December 31, 2007 and
2006.  The  changes  due to rate and volume  were  allocated  on their  absolute
values:

<TABLE>
<CAPTION>
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>
                                                         Year Ended                          Year Ended
                                                 December 31, 2007 vs. 2006          December 31, 2006 vs. 2005
                                             ----------------------------------  ----------------------------------
                                                 Increase (Decrease) Due to            Increase (Decrease) Due to
                                             ----------------------------------  ----------------------------------
                                               Volume       Rate        Total      Volume       Rate        Total
                                             ----------  ----------  ----------  ----------  ----------  ----------
                                                                         (In thousands)
Interest income:
   Loans                                     $   5,614   $    (103)  $   5,511   $   6,011   $   2,834   $   8,845
   Investment securities - taxable               1,166         204       1,370       1,473         641       2,114
   Investment securities - tax exempt               26           -          26          35          (1)         34
   Other interest-earning assets                    17          34          51          10         149         159
                                             ----------  ----------  ----------  ----------  ----------  ----------
       Total interest income                     6,823         135       6,958       7,529       3,623      11,152
                                             ----------  ----------  ----------  ----------  ----------  ----------


Interest expense:
   Deposits
       NOW and money market deposits             1,151         630       1,781         301         970       1,271
       Savings deposits                           (202)        (77)       (279)        268         212         480
       Time deposits over $100,000                 431         772       1,203       1,279       1,615       2,894
       Other time deposits                       1,383         851       2,234         552       1,182       1,735
   Borrowed funds                                  725          (6)        719         567         262         829
   Subordinated Debentures                         202          22         224         626           -         626
                                             ----------  ----------  ----------  ----------  ----------  ----------
       Total interest expense                    3,690       2,192       5,882       3,593       4,241       7,835
                                             ----------  ----------  ----------  ----------  ----------  ----------

Net interest income increase (decrease)      $   3,133   $  (2,057)  $   1,076   $   3,936   $    (618)  $   3,317
                                             ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>

Market Risk

         Like most  financial  institutions,  our most  significant  market risk
exposure is the risk of economic loss resulting  from adverse  changes in market
price and  interest  rates.  This risk of loss can be  reflected  in  diminished
current  market values and/or  reduced  potential net interest  income in future
periods.  Our market risk arises  primarily  from interest rate risk inherent in
our lending and deposit-taking activities. The structure of our loan and deposit
portfolios  is such that a significant  decline in interest  rates may adversely
impact net market values and net interest  income.  We do not maintain a trading
account nor are we subject to currency  exchange  risk or commodity  price risk.
Interest rate risk is monitored as part of the bank's asset/liability management
function.  The  following  table  presents  information  about  the  contractual
maturities,  average  interest  rates and estimated fair values of our financial
instruments we considered  market risk sensitive as of December 31, 2007.  Loans
include  nonaccrual  loans but not the  allowance  for loan losses.  (dollars in
thousands).

                                       30
<PAGE>

<TABLE>
<CAPTION>
<S>                      <C>        <C>        <C>        <C>        <C>        <C>        <C>            <C>        <C>
                                                                               Beyond Five              Average      Estimated
                           2008       2009       2010       2011       2012       Years      Total   Interest Rate   Fair Value
                           ----       ----       ----       ----       ----    ----------  --------  -------------  ------------
Financial Assets
   Loans:
     Fixed rate          $ 66,072   $ 55,974   $ 57,708   $ 46,845   $ 53,950   $  9,837   $290,386       7.38%      $289,967
     Variable Rate        254,884          -          -          -          -          -    254,884       7.99%       254,517
   Securities available
    for sale                  587        276     12,103      3,524      4,346     92,727    113,561       5.24%       114,301
   Other earning assets     3,881          -          -          -          -          -      3,881       5.51%         3,881

                         --------   --------   --------   --------   --------   --------   --------       -----      --------
   Total                 $325,424   $ 56,250   $ 69,811   $ 50,368   $ 58,296   $102,563   $662,712       7.24%      $662,666
                         ========   ========   ========   ========   ========   ========   ========                  ========

Financial Liabilities
   Money market, NOW and
    savings deposits     $154,341          -          -          -          -          -   $154,341       2.05%      $156,641
   Time deposits          261,468     16,605     27,111      1,459      2,092          -    308,735       5.03%       301,102
   Borrowings              20,000          -     10,000          -          -     67,000     97,000       4.67%        99,095
   Subordinated
    debentures                  -          -          -     12,372          -          -     12,372       6.87%        12,381
                         --------   --------   --------   --------   --------   --------   --------       -----      --------
   Total                 $435,809   $ 16,605   $ 37,111   $ 13,831   $  2,092   $ 67,000   $572,448       4.20%      $569,219
                         ========   ========   ========   ========   ========   ========   ========                  ========
</TABLE>

Derivative Financial Instruments

          A derivative  is a financial  instrument  that derives its cash flows,
and therefore  its value,  by reference to an  underlying  instrument,  index or
reference  rate.  These  instruments  primarily  consist of interest rate swaps,
caps,  floors,  financial  forward and futures  contracts and options written or
purchased.  Derivative  contracts are written in amounts referred to as notional
amounts.  Notional  amounts  only  provide  the basis for  calculating  payments
between  counterparties  and do not  represent  amounts to be exchanged  between
parties and are not a measure of financial risk. Credit risk arises when amounts
receivable from a counterparty  exceed amounts  payable.  We control our risk of
loss on derivative contracts by subjecting  counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.

          We have used  interest  rate swaps in the  management of interest rate
risk.  Interest  rate swaps are  contractual  agreements  between two parties to
exchange a series of cash flows representing  interest  payments.  A swap allows
both parties to alter the  repricing  characteristics  of assets or  liabilities
without affecting the underlying principal positions. Through the use of a swap,
assets and  liabilities may be transformed  from fixed to floating  rates,  from
floating rates to fixed rates, or from one type of floating rate to another.  At
December  31,  2007,  swap  derivatives  with a total  notional  value  of $33.3
million, with remaining terms ranging up to three years, were outstanding.

          Although  off-balance  sheet derivative  financial  instruments do not
expose us to credit risk equal to the notional amount,  such agreements generate
credit  risk to the  extent  of the  fair  value  gain in an  off-balance  sheet
derivative  financial  instrument  if the  counterparty  fails  to  perform.  We
minimize such risk by evaluating the  creditworthiness of the counterparties and
consistently   monitoring  these   agreements.   The   counterparties  to  these
arrangements are primarily large commercial  banks and investment  banks.  Where
appropriate, master netting agreements are arranged or collateral is obtained in
the form of rights to securities.  At December 31, 2007, our interest rate swaps
reflected a net unrealized loss of $16,000.

         Other risks associated with interest-sensitive  derivatives include the
effect on fixed rate  positions  during  periods  of  changing  interest  rates.
Indexed  amortizing  swaps'  notional  amounts and  maturities  change  based on
certain  interest rate indices.  Generally,  as rates fall the notional  amounts
decline  more  rapidly,  and as rates  increase  notional  amounts  decline more
slowly. As of December 31, 2007, we had no indexed amortizing swaps outstanding.
Under unusual circumstances, financial derivatives also increase liquidity risk,
which  could  result  from an  environment  of  rising  interest  rates in which
derivatives  produce  negative  cash flows while being offset by increased  cash
flows from variable rate loans. We consider such risk to be insignificant due to
the relatively small derivative positions we hold.

                                       31
<PAGE>

         A discussion of derivatives is presented in Note J to our  consolidated
financial  statements,  which are presented under Item 8 of Part II in this Form
10-K.

Quarterly Financial Information

         The following table sets forth, for the periods  indicated,  certain of
our consolidated  quarterly financial  information.  This information is derived
from our  unaudited  financial  statements,  which  include,  in the  opinion of
management, all normal recurring adjustments that management considers necessary
for a fair presentation of the results for such periods. This information should
be read in conjunction with our consolidated financial statements included under
Item 8 of Part  II in this  Form  10-K.  The  results  for any  quarter  are not
necessarily indicative of results for any future period.  (dollars in thousands,
except per share data).

<TABLE>
<CAPTION>
<S>                                             <C>        <C>       <C>       <C>        <C>        <C>       <C>        <C>
                                                    Year Ended December 31, 2007                Year Ended December 31, 2006
                                              ------------------------------------------ -------------------------------------------
                                                 Fourth     Third     Second     First     Fourth     Third     Second      First
                                                Quarter    Quarter   Quarter    Quarter    Quarter   Quarter    Quarter    Quarter
                                              ----------- --------- --------- ---------- ---------- --------- ---------- -----------
Operating Data:
 Total interest income                          $  12,480  $ 12,310  $ 11,594  $  11,128  $  11,097  $ 10,547  $   9,673  $    9,239
 Total interest expense                             6,203     6,134     5,891      5,471      5,283     4,762      4,176       3,596
                                              ----------- --------- --------- ---------- ---------- --------- ---------- -----------
  Net interest income                               6,277     6,176     5,703      5,657      5,814     5,785      5,497       5,643
 Provision for loan losses                            587       280       232        262        187       332        168         186
                                              ----------- --------- --------- ---------- ---------- --------- ---------- -----------
  Net interest income after
     provision                                      5,690     5,896     5,471      5,395      5,627     5,453      5,329       5,457
 Noninterest income                                 1,037     1,218       750      1,067        835     1,656        861         923
 Noninterest expense                                4,510     4,306     4,607      4,262      4,313     3,889      3,786       3,509
                                              ----------- --------- --------- ---------- ---------- --------- ---------- -----------
  Income before income taxes                        2,218     2,808     1,614      2,200      2,149     3,220      2,404       2,871
 Provision for income taxes                           876       996       565        750        653     1,074        869       1,031
                                              ----------- --------- --------- ---------- ---------- --------- ---------- -----------
  Net income                                    $   1,341  $  1,812  $  1,050  $   1,450  $   1,496  $  2,146  $   1,535  $    1,840
                                              =========== ========= ========= ========== ========== ========= ========== ===========

Per Share Data:
  Net income:
 Basic                                          $    0.22  $   0.27  $   0.17  $    0.24  $    0.25  $   0.35  $    0.25  $     0.30
 Diluted                                             0.22      0.27      0.17       0.24       0.24      0.35       0.25        0.30

  Cash dividends declared                            0.08      0.08      0.07       0.06       0.07      0.06       0.06        0.06

  Common stock price:
 High                                           $   19.09  $  20.00  $  23.64  $   24.77  $   24.55  $  21.82  $   23.25  $    18.00
 Low                                                15.50     18.82     20.00      23.64      21.45     18.00      17.64       16.00

</TABLE>


                                       32
<PAGE>

Investment Portfolio

         The valuations of investment  securities at December 31, 2007, 2006 and
2005, respectively, were as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                            <C>              <C>           <C>          <C>        <C>        <C>
                                                                         Available for Sale
                                              --------------------------------------------------------------------------
                                                           2007                        2006                 2005
                                              -----------------------------  ----------------------  -------------------
                                               Amortized cost   Estimated     Amortized    Estimated Amortized Estimated
                                                                 fair value       cost       fair       cost     fair
                                                                                             value               value
                                              --------------- -------------- ------------- --------- --------- ---------
U.S. Government and agency
   securities                                  $      92,651    $    93,208   $    85,730  $ 85,247   $69,108    $68,431
State and municipal securities                         6,136          6,148         4,623     4,609     3,963      3,910
Mortgage-backed securities                            12,985         13,087         9,882     9,860     7,003      6,904
Other                                                  1,789          1,858         1,441     1,677       685        964
                                              --------------  -------------  ------------  --------  --------  ---------
Total securities                               $     113,561    $   114,301   $   101,676  $101,393   $80,759    $80,209
                                              ==============  =============  ============  ========  ========  =========

Pledged securities                                              $    98,540                $ 69,239              $65,159
                                                              =============                ========            =========


         The following  table sets forth the carrying value of our available for
sale investment portfolio at December 31, 2007 (in thousands):

                                                                 Carrying Value
                                         ------------------------------------------------------------------
                                            1 year     After 1 year      After 5     After 10      Total
                                                      through 5 years     years         years
                                                                        through 10
                                                                           years
                                         ------------ ----------------- ------------ ------------ ---------
U.S. Government and agency
 securities                                        -    $      17,100   $   69,115   $    6,994   $ 93,208
State and municipal securities                     -            1,527        1,413        3,208      6,148
Mortgage-backed securities                $      590            1,682            -       10,815     13,087
Other                                              -                -            -        1,858      1,858
                                         ------------ ----------------  -----------  -----------  ---------
Total                                     $      590    $      20,309   $   70,528   $   22,874   $114,301
                                         ============ ================  ===========  ===========  =========


         The following  table sets forth the weighted  average yield by maturity
of our available for sale  investment  portfolio at December 31, 2007  amortized
cost:

                                                              Weighted Average Yields
                                          -----------------------------------------------------------------
                                            1 year     After 1 year      After 5     After 10      Total
                                                      through 5 years     years         years
                                                                        through 10
                                                                           years
                                          ----------- ----------------  -----------  -----------  ---------
U.S. Government and agency
 securities                                        -             4.59%        5.59%        5.62%      5.41%
State and municipal securities                     -             4.12%        4.14%        4.27%      4.20%
Mortgage-backed securities                      4.27%            4.29%           -         5.20%      5.04%
Other                                              -                -            -         4.63%      4.63%
                                          ----------- ----------------  -----------  -----------  ---------
Total weighted average yields                   4.27%            4.53%        5.56%        5.01%      5.24%
                                          =========== ================  ===========  ===========  =========
</TABLE>

                                       33
<PAGE>

Loan Portfolio

<TABLE>
<CAPTION>
<S>                                                      <C>           <C>           <C>        <C>        <C>
                                                             2007          2006        2005       2004        2003
                                                         ------------ ------------- ---------- ---------- ------------

Loans secured by real estate:
 Construction and land development                       $   252,449   $   194,460   $142,592   $ 90,742   $   66,242
 Secured by farmland                                          12,700        12,326     11,650     15,203       13,384
 Secured by 1-4 family residential properties:
  Revolving open-end loans & lines of credit                  24,579        22,868     23,581     23,295       18,879
  All other                                                   76,776        68,196     66,140     58,158       55,113
 Secured by multifamily residential properties                 5,123         3,913      4,085      5,088        3,634
 Secured by nonfarm nonresidential properties                110,769       102,217     84,189     72,611       63,372
Loans to finance agricultural production and
 other loans to farmers                                        3,119         2,724      3,729      4,020        5,084
Commercial and industrial loans                               45,653        37,622     34,166     26,005       27,872

Loans to individuals for household, family and
 other personal expenditures
  Credit cards and related plans                               4,331         4,778      3,933      3,807        3,574
  Other                                                        8,235        11,840     22,438     13,400       14,458
Obligations of states and political subdivisions in
 the U.S.:
 Tax exempt obligations                                          744           199        113        225          332
All other loans                                                1,030           897        787        628          836
Lease financing receivables                                        5             5          9         12           13
Deferred cost (unearned income) on loans                        (243)         (283)      (318)      (379)        (170)
                                                         ------------ ------------- ---------- ---------- ------------
 Total loans                                                 545,270       461,763    397,094    312,815      272,623
Allowance for loan losses                                     (6,653)       (5,566)    (4,965)    (4,055)      (3,430)
                                                         ------------ ------------- ---------- ---------- ------------
  Net loans                                              $   538,617   $   456,197   $392,129   $308,760   $  269,193
                                                         ============ ============= ========== ========== ============
Commitments and contingencies:
Commitments to make loans                                    141,511       140,539     97,183     89,377       68,731

Standby letters of credit                                      2,611         4,711      4,796      1,726        1,003
</TABLE>


                                       34
<PAGE>


Certain Loan Maturities

         The maturities and carrying amounts of certain loans as of December 31,
2007 are summarized as follows (in thousands):

                                      Commerical    Real Estate
                                      Financial    Construction
                                         and         and Land
                                     Agricultural   Development     Total
                                    -------------  ------------  -----------

Due within one year                 $     44,695   $   165,523   $  210,218

Due after one year to five years:
 Fixed rate                               89,350        65,392      154,743
 Variable rate                            24,130        17,520       41,650

Due after five years:
 Fixed rate                                5,299         1,481        6,780
 Variable rate                             4,426             -        4,426
                                    -------------  ------------  -----------

Total                               $    167,900   $   249,916   $  417,816
                                    ============   ============  ===========

Risk Elements

         Past due and  nonaccrual  loans,  as extracted from the Call Reports of
December 31, 2007, 2006, 2005, 2004 and 2003 were as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                  <C>        <C>        <C>        <C>       <C>
                                      2007       2006       2005       2004      2003
                                    --------- ---------- ---------- ---------- ---------
Nonaccrual loans:
   Real estate loans                 $  1,038   $    859   $    535   $    614  $    739
   Installment loans                       40         58        114         80        96
   Commercial and all other loans         176         50        348        250       224
                                    --------- ---------- ---------- ---------- ---------

      Total                          $  1,254   $    967   $    997   $    944  $  1,059
                                    ========= ========== ========== ====================

Agricultural loans included above    $    164   $      -   $    252   $    197  $    110
                                    ========= ========== ========== ========== =========

Past due 90 days or more and still
 accruing:
   Real estate loans                 $     30   $     33   $     64   $    188  $    597
   Installment loans                        -          -          -          1         5
   Credit cards and related plans          22          -         10         11        18
   Commercial and all other loans           -          -          -         26        15
                                    --------- ---------- ---------- ---------- ---------

      Total                          $     52   $     33   $     74   $    226  $    635
                                    ========= ========== ========== ========== =========

Agricultural loans included above    $      -   $      -   $      -   $     26  $      -
                                    ========= ========== ========== ========== =========
</TABLE>


Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  The gross  interest  income that would have been recorded for loans
accounted  for on a  nonaccrual  basis at December  31,  2007 was  approximately
$88,000. This amount represents interest income that would have been recorded if
the loans had been current in accordance  with their original terms and had been
outstanding  throughout  the  period or since  origination,  if held for part of
period.


                                       35
<PAGE>

         Foreclosed  assets  (included  in  other  assets)  were  $1.7  million,
$327,000,  $247,000,  $404,000,  and $75,000,  at December 31, 2007, 2006, 2005,
2004,  and 2003,  respectively.  The amount of interest  recognized  on impaired
loans during the portion of 2007 that they were impaired was not material.

Allowance for Loan Losses and Summary of Loan Loss Experience

         As a matter of policy, the bank maintains an allowance for loan losses.
The  allowance  for loan  losses is created  by direct  charges to income and by
recoveries of amounts previously charged off. The allowance is reduced as losses
on loans are charged against the allowance when realized.

         We  evaluate  our loan  portfolio  in  accordance  with  SFAS No.  114,
Accounting  by Creditors  for  Impairment of a Loan, as amended by SFAS No. 118,
Accounting  by  Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosure.  Under these  standards,  a loan is  considered  impaired,  based on
current  information  and  events,  if it is probable  that the company  will be
unable to collect the  scheduled  payments of principal  and  interest  when due
according to the contractual terms of the loan agreement. Uncollateralized loans
are measured for impairment  based on the present value of expected  future cash
flows  discounted  at the  historical  effective  interest  rate  or the  loan's
observable market price, while all  collateral-dependent  loans are measured for
impairment based on the fair value of the collateral. If the recorded investment
in the loan  exceeds  the  measure  of fair  value,  a  valuation  allowance  is
established as a component of the allowance for loan losses.  This evaluation is
inherently  subjective as it requires material estimates that may be susceptible
to significant change.

         The loan  portfolio  and the adequacy of the allowance are evaluated by
management at least quarterly.  In addition, our Loan Committee reviews our loan
portfolio and credit quality quarterly.  The amount of the allowance is based on
management's  evaluation of the loan portfolio  including trends in composition,
growth  and  terms,  historical  and  expected  loan loss  experience,  economic
conditions  and conditions  that may affect the  borrowers'  ability to pay, and
other factors management deems appropriate.  In addition,  regulatory  examiners
may require the bank to recognize changes to the allowance for loan losses based
on their  judgments  about  information  available  to them at the time of their
examination.  The bank's  management  believes its  allowance for loan losses is
adequate under existing  economic  conditions to absorb loan losses  inherent in
its loan portfolio.  Although management attempts to maintain the allowance at a
level deemed adequate,  future additions to the allowance may be necessary based
upon  changes in market  conditions  or the status of the loans  included in the
loan portfolio.

         The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loans are
charged against the allowance for loan losses when management  believes that the
uncollectibility  of a loan balance is  confirmed.  In addition to the review of
loans  considered  impaired as discussed above, the allowance for loan losses is
also  based upon such  factors as changes in the trends in volumes  and terms of
loans,  levels and trends of  charge-offs  and  recoveries,  national  and local
economic  trends and conditions  that may affect the borrowers'  ability to pay,
effects of changes  in risk  selection  and  underwriting  standards  as well as
overall  portfolio  quality.   If  conditions  change   substantially  from  the
assumptions used to evaluate the allowance for loan losses,  it is possible that
management's assessment of the allowance may change.


                                       36
<PAGE>

         The following table  summarizes the bank's loan loss experience for the
years ending December 31, 2007, 2006, 2005, 2004 and 2003 (in thousands,  except
ratios):

<TABLE>
<CAPTION>
<S>                                     <C>           <C>         <C>          <C>          <C>
                                    2007         2006         2005         2004        2003
                                ------------ ------------ ------------ ------------ ------------

Balance at beginning of period    $   5,566    $   4,965    $   4,055    $   3,430    $   2,860

Charge-offs:
   Commercial and other                 104          135          245          417          311
   Real estate                          144           87          158          395          342
   Installment loans to
    individuals                         217          178          198          237          396
   Credit cards and related
    plans                                39           58           95          297           88
                                ------------ ------------ ------------ ------------ ------------
                                        504          458          696        1,346        1,137
                                ------------ ------------ ------------ ------------ ------------
Recoveries:
   Commercial and other                  26           49           49          206           31
   Real estate                           71           32           19           27          134
   Installment loans                     88           65           69           56          159
   Credit cards and related
    plans                                44           40           66           86           10
                                ------------ ------------ ------------ ------------ ------------
                                        229          186          203          375          334
                                ------------ ------------ ------------ ------------ ------------

Net charge-offs                         275          272          493          971          803
                                ------------ ------------ ------------ ------------ ------------

Additions charged to operations       1,362          873        1,403        1,596        1,373
                                ------------ ------------ ------------ ------------ ------------

Balance at end of year            $   6,653    $   5,566    $   4,965    $   4,055    $   3,430
                                ============ ============ ============ ============ ============

Ratio of net charge-offs during
 the
   year to average gross loans
   outstanding during the year         0.06%        0.06%        0.14%        0.32%        0.32%


         The following table  summarizes the bank's  allocation of allowance for
loan losses at December  31,  2007,  2006,  2005,  2004 and 2003 (in  thousands,
except ratios):

                                                                At December 31,
                                    -----------------------------------------------------------------------
                                              2007                       2006                  2005
                                    ------------------------- ------------------------ --------------------
                                       Amount     % of Total     Amount    % of Total    Amount  % of Total
                                                   Loans (1)                 Loans (1)            Loans (1)
                                    -----------------------------------------------------------------------
Real estate loans                     $    5,883          88%   $    4,866        87%   $  4,150        84%
Commercial and industrial loans              595           9%          486         9%        474        10%
Installment loans                            153           2%          200         4%        330         7%
Unallocated                                   22           0%           14         0%         11         0%
                                    ------------ ------------ ------------ ----------- --------- ----------

 Total                                $    6,653         100%   $    5,566       100%   $  4,965       100%
                                    ============ ============ ============ =========== ========= ==========
</TABLE>

                                       37
<PAGE>

                                             At December 31,
                              ----------------------------------------------
                                      2004                     2003
                              --------------------     ---------------------
                                        % of Total     Amount     % of Total
                               Amount    Loans (1)                 Loans (1)
                              --------------------     ---------------------
Real estate loans             $   3,432        85%     $    2,773        81%
Commercial and industrial
 loans                              389        10%            415        12%
Installment loans                   223         6%            227         7%
Unallocated                          11         0%             15         0%
                              --------- ----------     ---------- ----------

  Total                       $   4,055       100%     $    3,430       100%
                              ========= ==========     ========== ==========

------------------------------------------
(1)      Represents  total  of all  outstanding  loans  in  each  category  as a
         percentage of total loans outstanding.


Deposits

         Time  certificates  in  amounts  of  $100,000  or more  outstanding  at
December 31, 2007 by maturity were as follows (in thousands):

Three months or less                          $   42,167
Over three months through six months              51,296
Over six months through twelve months             39,506
Over twelve months through three years            37,671
Over three years                                   1,873
                                             -----------

Total                                         $  172,513
                                             ===========

Borrowings

         The bank borrows funds principally from the FHLB. Information regarding
such borrowings is as follows (in thousands, except rates):

                                            2007        2006        2005
                                         ----------- ----------- ------------

Balance outstanding at December 31        $  97,000   $  70,000   $   63,000
Weighted average rate at December 31           4.44%       4.65%        4.44%
Maximum borrowings during the year        $  97,000   $  70,000   $   63,000
Average amounts outstanding during year   $  78,405   $  62,103   $   48,945
Weighted average rate during year              4.73%       4.65%        4.23%

         There were no short-term advances outstanding from the FHLB at December
31, 2007 and 2006. For 2007 and 2006, average  outstanding  short-term  balances
were $973,000 and $1,221,000, respectively.

         In addition,  the bank may purchase  federal  funds  through  unsecured
federal  funds lines of credit with various  banks  aggregating  $32.7  million.
These lines are intended for short-term borrowings and are payable on demand and
bear  interest  based  upon the daily  federal  funds  rate.  For 2007 and 2006,
average   federal   funds   purchased   were  $3.6  million  and  $1.8  million,
respectively.  At December 31, 2007 the bank had $10.0  million of federal funds
borrowings  outstanding under these lines. At December 31, 2006, there were $3.4
million federal funds borrowings outstanding.

         The bank completed a $12 million offering of Trust Preferred Securities
on March 30, 2006. Net proceeds from the sale of the Trust Preferred  Securities
were invested in Junior  Subordinated  Deferrable  Interest Debentures issued by
the Company.


                                       38
<PAGE>


Critical Accounting Estimates and Policies

         We prepare our  consolidated  financial  statements in conformity  with
accounting  principles  generally accepted in the United States of America.  The
preparation  of these  financial  statements  requires us to make  estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amount  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

         Critical  accounting  estimates  and  policies are those we believe are
both most important to the portrayal of our financial condition and results, and
require our most difficult,  subjective or complex judgments,  often as a result
of the need to make  estimates  about the effect of matters that are  inherently
uncertain.  Judgments  and  uncertainties  affecting  the  application  of those
policies  may  result in  materially  different  amounts  being  reported  under
different  conditions  or  using  different  assumptions.  We  believe  that the
allowance  for  loan  losses  represents  a  particularly  sensitive  accounting
estimate. The amount of the allowance is based on management's evaluation of the
collectibility  of the  loan  portfolio,  including  the  maturity  of the  loan
portfolio, credit concentration,  trends in historical loss experience, specific
impaired loans and general economic  conditions.  See Note A to the consolidated
financial statements for a comprehensive discussion of our accounting policy for
the allowance for loan losses.

New Accounting Standards

         The  Emerging  Issues Task Force  ("EITF")  reached a consensus  at its
September 2006 meeting regarding EITF 06-4, Accounting for Deferred Compensation
and  Postretirement  Benefit Aspects of Endorsement  Split-Dollar Life Insurance
Arrangements.  The  scope  of  EITF  06-4 is  limited  to the  recognition  of a
liability  and related  compensation  costs for  endorsement  split-dollar  life
insurance  policies  that  provide a benefit  to an  employee  that  extends  to
postretirement periods.  Therefore,  this EITF would not apply to a split-dollar
life insurance arrangement that provides a specified benefit to an employee that
is limited to the employee's  active service period with an employer.  This EITF
06-4 is  effective  for fiscal years  beginning  after  December 15, 2007,  with
earlier  application  permitted.  We do not expect  EITF 06-4 to have a material
impact on its  financial  position,  results  of  operations  or cash flows upon
adoption.

         In  September  2006,  the FASB  issued  SFAS No.  No.  157,  Fair Value
Measurements,  which defines fair value,  establishes  guidelines  for measuring
fair value and expands disclosures  regarding fair value measurements.  SFAS No.
157 does not  require  any new fair value  measurements  but  rather  eliminates
inconsistencies  in guidance found in various prior  accounting  pronouncements.
SFAS No. 157 is effective for fiscal years  beginning  after  November 15, 2007.
However,  on December 14, 2007,  the FASB issued  proposed  FASB Staff  Position
("FSP") SFAS 157-b ("FSP  157-b"),  which would delay the effective date of SFAS
NO. 157 for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial  statements on a
recurring basis (at least  annually).  FSP 157-b partially  defers the effective
date of SFAS No. 157 to fiscal years  beginning  after  November  15, 2008,  and
interim  periods  within  those  fiscal  years for items within the scope of FSP
157-b.  We will adopt SFAS No.  157 during  2008,  except as it applies to those
non-financial  assets and  non-financial  liabilities  as noted in proposed  FSP
157-b.  The partial  adoption of SFAS No. 157 is not expected to have a material
impact on our financial position, results of operations or cash flows.

         In July 2006,  the FASB  issued  Financial  Interpretation  ("FIN") 48,
Accounting   for   Uncertainty  in  Income  Taxes  ("FIN  48").  FIN  48  is  an
interpretation  of SFAS No. 109,  Accounting  for Income Taxes.  FIN 48 provides
interpretive guidance for the financial statement recognition and measurement of
a tax position taken, or expected to be taken, in a tax return.  FIN 48 requires
the  affirmative  evaluation  that it is more  likely  than  not,  based  on the
technical  merits of a tax position,  that an enterprise is entitled to economic
benefits resulting from positions taken in income tax returns. If a tax position
does not meet the  "more-likely-than-not"  recognition threshold, the benefit of
that  position  is not  recognized  in the  financial  statements.  FIN 48  also
requires   companies  to  disclose   additional   quantitative  and  qualitative
information in their financial statements about uncertain tax positions.  FIN 48
was effective for fiscal year beginning  January 1, 2007. The adoption of FIN 48
did not have a material impact on our financial position,  results of operations
or cash flows.

         In February  2007,  the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial  Liabilities,  Including an Amendment of FASB
Statement  No.  115.  SFAS No. 159 permits  entities  to choose to measure  many
financial  instruments  and  certain  other  items  at fair  value  that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose  different  measurement  attributes  for  similar  types  of  assets  and
liabilities.  SFAS No. 159 is  effective  for  financial  statements  issued for
fiscal years beginning after November 15, 2007. We do not expect SFAS No. 159 to

                                       39
<PAGE>

have a material impact on its financial position,  results of operations or cash
flows upon adoption.

         In November 2007, the SEC issued SAB No. 109,  Written Loan Commitments
Recorded  at Fair  Value  Through  Earnings.  SAB No.  109  supersedes  guidance
provided  by  SAB  No.  105,  Loan  Commitments   Accounted  for  as  Derivative
Instruments,  and provides guidance on written loan commitments accounted for at
fair value through earnings.  Specifically,  SAB No. 109 addresses the inclusion
of expected net future cash flows related to the associated  servicing of a loan
in the measurement of all written loan  commitments  accounted for at fair value
through  earnings.  In addition,  SAB No. 109 retains the SEC's  position on the
exclusion of internally-developed intangible assets as part of the fair value of
a derivative loan commitment  originally  established in SAB No.105. SAB No. 109
is effective  for fiscal years ending after  December 15, 2007.  Our adoption of
SAB No. 109 did not have a material impact on our financial position, results of
operations or cash flows.

         From  time to  time  the  FASB  issues  exposure  drafts  for  proposed
statements of financial accounting  standards.  Such exposure drafts are subject
to comment from the public,  to  revisions by the FASB and to final  issuance by
the FASB as statements of financial accounting  standards.  Management considers
the effect of the proposed statements on our consolidated  financial  statements
and monitors the status of changes to and proposed  effective  dates of exposure
drafts.


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

         This  information  is included  under Item 7 of this  report  under the
captions  "Interest Rate Sensitivity  Analysis,"  "Market Risk," and "Derivative
Financial Instruments."

Item 8 - Financial Statements and Supplementary Data.

                                       40
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders
Four Oaks Fincorp, Inc.
Four Oaks, North Carolina


We have  audited  the  accompanying  consolidated  balance  sheets  of Four Oaks
Fincorp,  Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related
consolidated  statements  of  operations,  comprehensive  income,  shareholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   2007.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Four Oaks Fincorp,
Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2007 in  conformity  with  accounting  principles  generally
accepted in the United States of America.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States), the effectiveness Four Oaks Fincorp,
Inc.'s internal control over financial  reporting as of December 31, 2007, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 12, 2008 expressed an unqualified  opinion on the  effectiveness  of
the Company's internal control over financial reporting.

/s/ Dixon Hughes PLLC
Raleigh, North Carolina
March 12, 2008

                                       41
<PAGE>


Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
December 31, 2007 and 2006
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                                          <C>                    <C>
                                                                             2007                   2006
                                                                     ---------------------  ----------------------
                                                                     (Amounts in thousands, except share data)
ASSETS

Cash and due from banks                                                          $ 14,394                $ 13,960
Interest-earning deposits                                                           3,881                   3,751
Investment securities available for sale, at fair value                           114,301                 101,393

Loans                                                                             545,270                 461,763
Allowance for loan losses                                                          (6,653)                 (5,566)
                                                                     ---------------------  ----------------------
              Net loans                                                           538,617                 456,197

Accrued interest receivable                                                         3,564                   3,614
Bank premises and equipment, net                                                   12,627                  11,630
FHLB stock                                                                          5,010                   4,194
Investment in life insurance                                                       10,041                   8,424
Other assets                                                                        5,868                   4,974
                                                                     ---------------------  ----------------------

              Total assets                                                      $ 708,303               $ 608,137
                                                                     =====================  ======================

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
     Noninterest-bearing demand                                                  $ 74,687                $ 72,087
     Money market and NOW accounts                                                126,300                  89,615
     Savings                                                                       28,041                  31,424
     Time deposits, $100,000 and over                                             172,513                 164,497
     Other time deposits                                                          136,222                 109,245
                                                                     ---------------------  ----------------------
              Total deposits                                                      537,763                 466,868

Borrowings                                                                         97,000                  73,400
Subordinated debentures                                                            12,372                  12,372
Accrued interest payable                                                            4,055                   3,258
Other liabilities                                                                   2,483                   2,916
                                                                     ---------------------  ----------------------

              Total liabilities                                                   653,673                 558,814
                                                                     ---------------------  ----------------------

Commitments and Contingencies (Notes C, J, K, N and S)

Shareholders' equity:
     Common stock; $1.00 par value, 10,000,000 shares
        authorized; 6,165,197 and 5,577,862 shares issued and
        outstanding at December 31, 2007 and 2006,
        respectively                                                                6,165                   5,578
     Additional paid-in capital                                                    21,545                  10,016
     Retained earnings                                                             26,477                  34,141
     Accumulated other comprehensive income (loss)                                    443                    (412)
                                                                     ---------------------  ----------------------
              Total shareholders' equity                                           54,630                  49,323
                                                                     ---------------------  ----------------------

              Total liabilities and shareholders' equity                        $ 708,303               $ 608,137
                                                                     =====================  ======================

</TABLE>

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

                                       42

<PAGE>


Four Oaks Fincorp, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                                     <C>             <C>                <C>

                                                                     2007              2006              2005
                                                                ----------------  ----------------  ----------------
                                                                   (Amounts in thousands, except per share data)
Interest and dividend income:
     Loans, including fees                                             $ 40,967          $ 35,457          $ 26,612
     Investment securities:
         Taxable                                                          5,873             4,503             2,389
         Tax-exempt                                                         178               152               118
     Dividends                                                              390               287               155
     Interest-earning deposits                                              105               157               130
                                                                ----------------  ----------------  ----------------
         Total interest and dividend income                              47,513            40,556            29,404
                                                                ----------------  ----------------  ----------------

Interest expense:
     Deposits                                                            19,142            14,202             7,823
     Borrowings                                                           4,557             3,615             2,160
                                                                ----------------  ----------------  ----------------
         Total interest expense                                          23,699            17,817             9,983
                                                                ----------------  ----------------  ----------------

         Net interest income                                             23,814            22,739            19,421

Provision for loan losses                                                 1,362               873             1,403
                                                                ----------------  ----------------  ----------------
Net interest income after provision for loan losses                      22,452            21,866            18,018
                                                                ----------------  ----------------  ----------------

Non-interest income:
     Service charges on deposit accounts                                  2,098             2,053             1,875
     Other service charges, commissions and fees                          1,544             1,613             1,235
     Losses on sale of investment securities                                (36)             (121)             (386)
     Gains (losses) on hedges, net                                          165              (262)             (397)
     Gains on sale of loans                                                  69               103                61
     Merchant fees                                                          436               402               389
     Income (loss) from investment in life insurance                       (205)              549               300
                                                                ----------------  ----------------  ----------------
         Total non-interest income                                        4,071             4,337             3,077
                                                                ----------------  ----------------  ----------------

Non-interest expenses:
     Salaries                                                             8,444             7,163             6,033
     Employee benefits                                                    1,690             1,477             1,306
     Occupancy expenses                                                     799               681               549
     Equipment expenses                                                   1,409             1,438             1,313
     Professional and consulting fees                                     1,263             1,183               965
     Other taxes and licenses                                               275               271               248
     Merchant processing expenses                                           370               355               341
     Other operating expenses                                             3,434             2,991             2,599
                                                                ----------------  ----------------  ----------------
         Total non-interest expenses                                     17,684            15,559            13,354
                                                                ----------------  ----------------  ----------------

Income before income taxes                                                8,839            10,644             7,741
Provision for income taxes                                                3,187             3,627             2,738
                                                                ----------------  ----------------  ----------------

         Net income                                                     $ 5,652           $ 7,017           $ 5,003
                                                                ================  ================  ================

Basic net income per common share                                        $ 0.92            $ 1.15            $ 0.84
                                                                ================  ================  ================

Diluted net income per common share                                      $ 0.91            $ 1.14            $ 0.83
                                                                ================  ================  ================


</TABLE>

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


                                       43
<PAGE>

Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                             <C>                   <C>                   <C>

                                                              2007                 2006                 2005
                                                        -----------------    -----------------    -----------------
                                                                        (Amounts in thousands)

Net income                                                       $ 5,652              $ 7,017              $ 5,003
                                                        -----------------    -----------------    -----------------

Other comprehensive income (loss):
     Securities available for sale:
         Unrealized holding gains (losses) on
            available for sale securities                            987                  145               (1,326)
                Tax effect                                          (395)                 (57)                 529

         Reclassification of  losses recognized
            in net income                                             36                  121                  386
                Tax effect                                           (14)                 (48)                (154)
                                                        -----------------    -----------------    -----------------
         Net of tax amount                                           613                  161                 (565)
                                                        -----------------    -----------------    -----------------

     Cash flow hedging activities:
         Unrealized holding gains (losses) on
            cash flow hedging activities                             402                  314                 (290)
                Tax effect                                          (160)                (127)                 117
                                                        -----------------    -----------------    -----------------
         Net of tax amount                                           242                  187                 (173)
                                                        -----------------    -----------------    -----------------

         Total other comprehensive income (loss)                     855                  348                 (738)
                                                        -----------------    -----------------    -----------------

Comprehensive income                                             $ 6,507              $ 7,365              $ 4,265
                                                        =================    =================    =================


</TABLE>


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


                                       44
<PAGE>


Four Oaks Fincorp, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                     <C>             <C>          <C>          <C>      <C>            <C>
                                                                                             Accumulated
                                                                   Additional                   other        Total
                                        Common stock                paid-in     Retained    comprehensive shareholders
                                           Shares       Amount      capital     earnings    income (loss)    equity
                                        ------------  ----------   ----------  -----------  ------------- ------------
                                                           (Amounts in thousands, except share data)

BALANCE, DECEMBER 31, 2004                3,438,107     $ 3,438      $ 8,788     $ 25,091          $ (22)    $ 37,295
     Net income                                   -           -            -        5,003              -        5,003
     Other comprehensive loss                     -           -            -            -           (738)        (738)
     Effect of 5-for-4 stock split          872,060         872         (872)           -              -            -
     Issuance of common stock                69,091          69        1,161            -              -        1,230
         Current income tax benefit               -           -          101            -              -          101
     Cash dividends of $.22 per share             -           -            -       (1,279)             -       (1,279)
                                        ------------  ----------   ----------  -----------  ------------- ------------

BALANCE, DECEMBER 31, 2005                4,379,258     $ 4,379      $ 9,178     $ 28,815         $ (760)    $ 41,612
     Net income                                   -           -            -        7,017              -        7,017
     Other comprehensive income                   -           -            -            -            348          348
     Effect of 5-for-4 stock split        1,109,543       1,110       (1,110)           -              -            -
     Issuance of common stock                98,896          98        1,511            -              -        1,609
         Current income tax benefit               -           -          293            -              -          293
     Stock based compensation                     -           -          144            -              -          144
     Purchases and retirement of
         common stock                        (9,835)         (9)           -         (243)             -         (252)
     Cash dividends of $.24 per share             -           -            -       (1,448)             -       (1,448)
                                        ------------  ----------   ----------  -----------  -------------  -----------

BALANCE, DECEMBER 31, 2006                5,577,862     $ 5,578     $ 10,016     $ 34,141         $ (412)    $ 49,323
     Net income                                   -           -            -        5,652              -        5,652
     Other comprehensive income                   -           -            -            -            855          855
     Effect of 10% stock dividend           562,345         562        9,532      (10,094)             -            -
     Issuance of common stock               100,797         100        1,565            -              -        1,665
         Current income tax benefit               -           -          203            -              -          203
     Stock based compensation                     -           -          229            -              -          229
     Purchases and retirement of
         common stock                       (75,807)        (76)           -       (1,437)             -       (1,513)
     Cash dividends of $.29 per share             -           -            -       (1,784)             -       (1,784)
                                        ------------  ----------   ----------  -----------  -------------  -----------

BALANCE, DECEMBER 31, 2007                6,165,197     $ 6,165     $ 21,545     $ 26,477          $ 443     $ 54,630
                                        ============  ==========   ==========  ===========  =============  ===========


</TABLE>


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

                                       45
<PAGE>


Four Oaks Fincorp, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S>                                                                              <C>           <C>            <C>

                                                                                2007          2006          2005
                                                                             ------------  ------------  ------------
                                                                                   (Amounts in thousands)
Cash flows from operating activities:
     Net income                                                                  $ 5,652       $ 7,017       $ 5,003
     Adjustments to reconcile net income to net cash
         provided by operations:
            Provision for loan losses                                              1,362           873         1,403
            Provision for depreciation and amortization                            1,009         1,022         1,038
            Deferred income tax benefit                                             (523)         (319)         (672)
            Net amortization of bond premiums and discounts                           32           (28)           18
            Stock based compensation                                                 229           144             -
            Gain on sale of loans                                                    (69)         (103)          (61)
            (Gain) loss on sale of investment securities                              36           121           386
            (Gain) loss on sale of foreclosed assets                                  20            (2)            -
            Loss on disposition of premises and equipment                             77            73             -
            (Income) loss from investment in life insurance                          205          (549)         (300)
            (Gain) loss on hedges                                                   (165)          262           397
            Changes in assets and liabilities:
                Other assets                                                         407        (1,365)           50
                Interest receivable                                                   50          (664)         (740)
                Other liabilities                                                    134        (3,556)        4,003
                Interest payable                                                     797         1,003         1,054
                                                                             ------------  ------------  ------------
                    Net cash provided by operating activities                      9,253         3,929        11,579
                                                                             ------------  ------------  ------------

Cash flows from investing activities:
     Proceeds from sales and calls of investment
         securities available for sale                                            78,027        36,759        36,783
     Proceeds from maturities of investment
         securities available for sale                                             2,000           275             -
     Purchase of investment securities available for sale                        (91,980)      (58,045)      (65,994)
     Purchase of FHLB stock                                                       (1,320)       (1,825)       (1,034)
     Redemption of FHLB stock                                                        504         1,286             -
     Net increase in loans                                                       (86,283)      (65,107)      (85,142)
     Purchases of bank premises and equipment                                     (2,070)       (3,028)         (558)
     Purchases of bank-owned life insurance                                       (1,822)            -        (1,521)
     Proceeds from sale of foreclosed assets                                       1,299           193           589
     Expenditures on foreclosed assets                                              (110)           (1)           (1)
                                                                             ------------  ------------  ------------
                    Net cash used by investing activities                       (101,755)      (89,493)     (116,878)
                                                                             ------------  ------------  ------------

Cash flows from financing activities:
     Net proceeds from borrowings                                                 23,600          (740)       30,980
     Net increase in deposit accounts                                             70,895        68,526        83,034
     Proceeds from subordinated debentures                                             -        12,372             -
     Proceeds from issuance of common stock                                        1,665         1,609         1,230
     Excess tax benefits from stock options                                          203           293             -
     Purchases and retirement of common stock                                     (1,513)         (252)            -
     Cash dividends paid                                                          (1,784)       (1,448)       (1,279)
                                                                             ------------  ------------  ------------
                    Net cash provided by financing activities                     93,066        80,360       113,965
                                                                             ------------  ------------  ------------

         Net increase (decrease) in cash and cash equivalents                        564        (5,204)        8,666
Cash and cash equivalents at beginning of year                                    17,711        22,915        14,249
                                                                             ------------  ------------  ------------
Cash and cash equivalents at end of year                                        $ 18,275      $ 17,711      $ 22,915
                                                                             ============  ============  ============

</TABLE>


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


                                       46
<PAGE>


Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated  financial  statements include the accounts and transactions of
Four Oaks Fincorp,  Inc. (the  "Company"),  a bank holding company  incorporated
under  the  laws  of  the  State  of  North  Carolina,   and  its  wholly  owned
subsidiaries,  Four Oaks Bank & Trust  Company,  Inc. (the "Bank") and Four Oaks
Mortgage  Services,  LLC, the Company's  mortgage  origination  subsidiary.  All
significant intercompany  transactions have been eliminated.  In March 2006, the
Company  formed Four Oaks Statutory  Trust I, a wholly owned Delaware  statutory
business  trust (the "Trust"),  for the sole purpose of issuing Trust  Preferred
Securities  (as  defined  in Note G  below).  The Trust is not  included  in the
consolidated  financial  statements of the Company, in accordance with Financial
Accounting  Standards Board ("FASB")  Interpretation  No. 46,  "Consolidation of
Variable  Interest  Entities  (revised December 2003) - an interpretation of ARB
No. 51" ("FIN 46R").

Nature of Operations

The Company was  incorporated  under the laws of the State of North  Carolina on
February  5, 1997.  The  Company's  primary  function is to serve as the holding
company  for its  wholly  owned  subsidiaries,  the bank and Four Oaks  Mortgage
Services,  LLC. The bank operates  fourteen offices in eastern and central North
Carolina,  and its primary  source of revenue is derived from loans to customers
and from its securities  portfolio.  The loan  portfolio is comprised  mainly of
real  estate,   commercial  and  consumer  loans.   These  loans  are  primarily
collateralized by residential and commercial  properties,  commercial equipment,
and personal property.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Preparing  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 the reported amounts of
assets and liabilities  and the disclosure of contingent  assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  Material estimates that are particularly  susceptible to significant
change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of  presentation in the  consolidated  statements of cash flows,
cash and cash  equivalents are defined as those amounts  included in the balance
sheet captions cash and due from banks and interest-earning deposits.

Federal regulations require  institutions to set aside specified amounts of cash
as reserves against transactions and time deposits. As of December 31, 2007, the
daily average gross reserve requirement was $3.1 million.


Investment Securities

Investment securities are classified into three categories:

(1) Held to Maturity - Debt  securities that the Company has the positive intent
and the  ability to hold to maturity  are  classified  as held to  maturity  and
reported at amortized cost;

(2) Trading - Debt and equity  securities  that are bought and held  principally
for the  purpose  of  selling  them in the near term are  classified  as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings;  and


                                       47

<PAGE>

NOTE A - ORGANIZATION  AND SUMMARY OF  SIGNIFICANT  ACCOUNTING POLICIES
(Continued)

(3) Available  for Sale - Debt and equity  securities  not  classified as either
securities  held to maturity or trading  securities  are reported at fair value,
with  unrealized  gains and losses  excluded from earnings and reported,  net of
income  taxes,  as  other   comprehensive   income,  a  separate   component  of
shareholders' equity.

The Company has  historically  classified  all securities as available for sale.
Gains  and  losses  on  sales  of   securities,   computed   based  on  specific
identification of adjusted cost of each security,  are included in income at the
time of the sale.  Premiums and  discounts are  amortized  into interest  income
using a  method  that  approximates  the  interest  method  over the  period  to
maturity.

Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal,  reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding.

Loan origination  fees are deferred,  as well as certain direct loan origination
costs.  Such costs and fees are  recognized  as an  adjustment to yield over the
contractual lives of the related loans utilizing the interest method.

The Company  evaluates  its loan  portfolio  in  accordance  with  Statement  of
Financial  Accounting  Standards  ("SFAS") No. 114,  Accounting by Creditors for
Impairment  of a Loan,  as amended by SFAS No. 118,  Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Under these standards,
a loan is considered impaired, based on current information and events, if it is
probable  that the Company will be unable to collect the  scheduled  payments of
principal and interest when due according to the  contractual  terms of the loan
agreement.  Uncollateralized  loans are  measured  for  impairment  based on the
present  value of  expected  future  cash  flows  discounted  at the  historical
effective  interest  rate or the  loan's  observable  market  price,  while  all
collateral-dependent  loans are measured for impairment  based on the fair value
of the collateral. If the recorded investment in the loan exceeds the measure of
fair value, a valuation allowance is established as a component of the allowance
for loan losses.

The  allowance  for loan losses is  established  as losses are estimated to have
occurred  through a provision  for loan losses  charged to  earnings.  Loans are
charged against the allowance for loan losses when management  believes that the
uncollectibility  of a loan balance is  confirmed.  In addition to the review of
loans  considered  impaired as discussed above, the allowance for loan losses is
also  based upon such  factors as changes in the trends in volumes  and terms of
loans,  levels and trends of  charge-offs  and  recoveries,  national  and local
economic  trends and conditions  that may affect the borrowers'  ability to pay,
effects of changes  in risk  selection  and  underwriting  standards  as well as
overall  portfolio  quality.   If  conditions  change   substantially  from  the
assumptions used to evaluate the allowance for loan losses,  it is possible that
management's  assessment of the allowance  may change.  In addition,  regulatory
examiners  may require the bank to recognize  changes to the  allowance for loan
losses based on their judgments about information  available to them at the time
of their examination.

Income Recognition on Impaired and Nonaccrual Loans

Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  If a loan or a portion of a loan is  classified  as  doubtful or is
partially  charged-off,  the loan is generally  classified as nonaccrual.  Loans
that are on a current  payment  status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.

Loans may be returned to accrual status when all principal and interest  amounts
contractually  due (including  arrearages)  are reasonably  assured of repayment
within an acceptable period of time and there is a sustained period of repayment
performance  (generally a minimum of six months) by the borrower,  in accordance
with the contractual terms.

                                       48
<PAGE>


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

While a loan is classified as nonaccrual  and the future  collectibility  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally  applied as a reduction to the  principal  outstanding,  except in the
case of loans  with  scheduled  amortizations  where the  payment  is  generally
applied  to the  oldest  payment  due.  When the  future  collectibility  of the
recorded loan balance is expected,  interest  income may be recognized on a cash
basis.  In the case  where a  nonaccrual  loan had been  partially  charged-off,
recognition of interest on a cash basis is limited to that which would have been
recognized  on the  recorded  loan  balance at the  contractual  interest  rate.
Receipts in excess of that amount are recorded as  recoveries  to the  allowance
for loan losses until prior charge-offs have been fully recovered.

Foreclosed Assets

Assets  acquired as a result of foreclosure are valued at fair value at the date
of foreclosure  establishing a new cost basis. After foreclosure,  valuations of
the property are periodically performed by management and the assets are carried
at the lower of cost or fair value minus  estimated  costs to sell.  Losses from
the acquisition of property in full or partial  satisfaction of debt are treated
as credit losses. Routine holding costs, subsequent declines in value, and gains
or losses on disposition are included in other income and expense.

Bank Premises and Equipment

Land is carried at cost.  Buildings,  furniture and equipment are stated at cost
less accumulated depreciation.  Depreciation is computed using the straight-line
method based on the estimated useful lives of assets.  Useful lives range from 5
to 10 years for furniture and equipment and 40 years for buildings. Expenditures
for repairs and maintenance are charged to expense as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated  future tax
consequences  attributable  to  differences  between the tax bases of assets and
liabilities  and  their  carrying  amounts  for  financial  reporting  purposes.
Deferred  tax assets are also  recognized  for  operating  loss  carry-forwards.
Deferred  tax assets and  liabilities  are measured  using  enacted tax rates in
effect  for the year in which  the  temporary  differences  are  expected  to be
recovered or settled.  Deferred tax assets are reduced by a valuation  allowance
if it is more likely than not that the tax benefits will not be realized.

Stock in Federal Home Loan Bank of Atlanta

As a requirement  for  membership,  the Company  invests in stock of the FHLB of
Atlanta. This investment is carried at cost. Due to the redemptive provisions of
the FHLB,  the  Company  estimated  that fair  value  equals  cost and that this
investment was not impaired as of December 31, 2007.

Comprehensive Income

Comprehensive  income is  defined  as the  change in equity  during a period for
non-owner  transactions  and is divided into net income and other  comprehensive
income.  Other  comprehensive  income includes  revenues,  expenses,  gains, and
losses that are excluded  from  earnings  under  current  accounting  standards.
Components  of  other  comprehensive  income  for  the  Company  consist  of the
unrealized gains and losses,  net of taxes, in the Company's  available for sale
securities  portfolio  and  unrealized  gains and losses,  net of taxes,  in the
Company's cash flow hedge instruments.

                                       49
<PAGE>


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Accumulated other comprehensive income at December 31, 2007 and 2006 consists of
the following:

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

Unrealized holding gains (losses) - investment securities
 available for sale                                       $  740         $ (283)
    Deferred income taxes                                   (297)           113
                                                          -------        -------
        Net unrealized holding gains (losses) - investment
          securities available for sale                      443           (170)
                                                          -------        -------

Unrealized holding losses - cash flow hedge instruments        -           (402)
    Deferred income taxes                                      -            160
                                                          -------        -------
        Net unrealized holding losses - cash flow hedge
           instruments                                         -           (242)
                                                          -------        -------

    Total accumulated other comprehensive income (loss)   $  443         $ (412)
                                                          =======        =======


Stock Compensation Plans

Effective  January 1, 2006,  the Company  adopted SFAS No. 123  (revised  2004),
Share-Based Payment ("SFAS No. 123R"),  which was issued by the FASB in December
2004.   SFAS  No.  123R  revises  SFAS  No.  123   Accounting  for  Stock  Based
Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.  SFAS
No.  123R  requires  recognition  of the cost of employee  services  received in
exchange for an award of equity instruments in the financial statements over the
period the  employee is required  to perform  the  services in exchange  for the
award (usually the vesting period).  SFAS No. 123R also requires  measurement of
the cost of employee  services  received  in exchange  for an award based on the
grant-date  fair  value of the award.  SFAS No.  123R also  amends  SFAS No. 95,
Statement  of Cash Flows,  to require  that  excess tax  benefits be reported as
financing  cash  inflows,  rather  than as a reduction  of taxes paid,  which is
included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective  application as
permitted under SFAS No. 123R.  Accordingly,  prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards  granted  after the date of adoption and for the unvested
portion of  previously  granted  awards that remain  outstanding  at the date of
adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic
value method as  prescribed by APB No. 25 and thus  recognized  no  compensation
expense for options  granted with exercise prices equal to the fair market value
of the Company's common stock on the date of grant.

The following table  illustrates the effect on net income and earnings per share
if the Company had applied  the fair value  recognition  provisions  of SFAS No.
123R to options  granted  under the  Company's  stock  option plans for the year
ended December 31, 2005. For purposes of this pro forma disclosure, the value of
the  options  is  estimated  using the  Black-Scholes  option-pricing  model and
amortized to expense over the options' vesting periods.


                                       50
<PAGE>


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

                                                   For the Year Ended
                                                    December 31, 2005
                                                  (Dollars in thousands)
                                                  ----------------------
Net income:
   As reported                                            $  5,003
      Deduct: Total stock-based employee
       compensation expense determined under
       fair value method for all awards, net
       of related tax effects                                  (88)
                                                          --------

   Pro forma                                              $  4,915
                                                          ========

Basic earnings per share:
   As reported                                            $    .84
   Pro forma                                              $    .82

Diluted earnings per share:
   As reported                                            $    .83
   Pro forma                                              $    .82


Net Income Per Common Share and Common Shares Outstanding

Basic  earnings per share  represents  income  available to common  shareholders
divided by the weighted average number of common shares  outstanding  during the
period.  Diluted earnings per share reflect  additional common shares that would
have been outstanding if dilutive  potential  common shares had been issued,  as
well as any  adjustment  to income that would result from the assumed  issuance.
All references to net income per share, weighted average shares outstanding, and
dividends per share have been  retroactively  adjusted for a 10% stock  dividend
issued on October 3, 2007 and five for four stock splits distributed in the form
of 25% stock  dividend on November 10, 2006,  November 25, 2005, and October 29,


                                       51
<PAGE>

2004. Potential common shares that may be issued by the Company relate solely to
outstanding stock options.

Basic and diluted net income per common share have been computed  based upon net
income as presented in the  accompanying  consolidated  statements of operations
divided by the weighted  average number of common shares  outstanding or assumed
to be outstanding as summarized below:

<TABLE>
<CAPTION>
<S>                                                            <C>               <C>                 <C>
                                                                 2007              2006              2005
                                                             --------------    --------------    --------------
Weighted average number of common shares used in
      computing basic net income per share                       6,170,140         6,080,778         5,972,073

Effect of dilutive stock options                                    22,419            56,444            44,246
                                                             --------------    --------------    --------------

Weighted average number of commons shares and
     dilutive potential common shares used in
      computing diluted net income per share                     6,192,559         6,137,222         6,016,319
                                                             ==============    ==============    ==============
</TABLE>


There were no antidilutive  shares  outstanding for the years ended December 31,
2007, 2006 and 2005.


                                       52
<PAGE>


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Derivative Instruments

The Company  utilizes  interest  rate swaps in the  management  of interest rate
risk.  Interest  rate swaps are  contractual  agreements  between two parties to
exchange a series of cash flows representing  interest  payments.  A swap allows
both parties to alter the  repricing  characteristics  of assets or  liabilities
without affecting the underlying principal positions. Through the use of a swap,
assets and  liabilities may be transformed  from fixed to floating  rates,  from
floating  rates to fixed  rates,  or from one type of floating  rate to another.
Swap terms generally range from one year to ten years depending on the need.

The net  interest  payable  or  receivable  on  interest  rate  swaps  that  are
designated as hedges is accrued and  recognized as an adjustment to the interest
income or expense of the related asset or liability. Gains and losses from early
terminations of derivatives are deferred and amortized as yield adjustments over
the  shorter of the  remaining  term of the  hedged  asset or  liability  or the
remaining term of the derivative  instrument.  Upon disposition or settlement of
the asset or liability being hedged, deferral accounting is discontinued and any
gains or losses are recognized in income. Unrealized holding gains and losses on
derivatives  designated  as cash flow  hedges are  reported,  net of  applicable
income tax effect, in accumulated other comprehensive income.

Derivative financial  instruments that fail to qualify as a hedge are carried at
fair value with gains and losses recognized in current earnings.

New Accounting Standards

The Emerging  Issues Task Force  ("EITF")  reached a consensus at its  September
2006 meeting  regarding  EITF 06-4,  Accounting  for Deferred  Compensation  and
Postretirement  Benefit  Aspects  of  Endorsement  Split-Dollar  Life  Insurance
Arrangements.  The  scope  of  EITF  06-4 is  limited  to the  recognition  of a
liability  and related  compensation  costs for  endorsement  split-dollar  life
insurance  policies  that  provide a benefit  to an  employee  that  extends  to
postretirement periods.  Therefore,  this EITF would not apply to a split-dollar
life insurance arrangement that provides a specified benefit to an employee that
is limited to the employee's  active service period with an employer.  This EITF
06-4 is  effective  for fiscal years  beginning  after  December 15, 2007,  with
earlier application  permitted.  The Company does not expect EITF 06-4 to have a
material impact on its financial  position,  results of operations or cash flows
upon adoption.

In September  2006,  the FASB issued SFAS No. No. 157, Fair Value  Measurements,
which defines fair value,  establishes  guidelines  for measuring fair value and
expands  disclosures  regarding fair value  measurements.  SFAS No. 157 does not
require any new fair value measurements but rather eliminates inconsistencies in
guidance  found in  various  prior  accounting  pronouncements.  SFAS No. 157 is
effective  for fiscal years  beginning  after  November 15,  2007.  However,  on
December 14, 2007,  the FASB issued  proposed FASB Staff  Position  ("FSP") SFAS
157-b ("FSP  157-b"),  which would delay the effective  date of SFAS No. 157 for
all non-financial  assets and non-financial  liabilities,  except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). FSP 157-b partially defers the effective date of SFAS
No. 157 to fiscal years  beginning  after November 15, 2008, and interim periods
within those  fiscal years for items within the scope of FSP 157-b.  The Company
will adopt SFAS No. 157 during 2008, except as it applies to those non-financial
assets and non-financial liabilities as noted in proposed FSP 157-b. The partial
adoption  of SFAS No.  157 is not  expected  to have a  material  impact  on the
Company's financial position, results of operations or cash flows.


                                       53
<PAGE>


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

The Company  adopted the  provisions  of Financial  Accounting  Standards  Board
("FASB")  Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes - an  Interpretation  of FASB  Statement  No. 109,  on April 1, 2007.  The
Company  has  analyzed  filing  positions  in  all  of  the  federal  and  state
jurisdictions  where it is required to file income tax  returns,  as well as all
open tax years in these  jurisdictions.  The periods  subject to examination for
the Company's federal return are the fiscal 2006 and 2007 tax years. The company
did not have any  unrecognized  tax  benefits  and  there  was no  effect on our
financial condition or results of operations as a result of implementing FIN 48.
It is the Company  policy to  recognize  interest and  penalties  accrued on any
unrecognized  tax benefits as a component of income tax expense.  As of the date
of  adoption  of FIN 48,  the  Company  did not have  any  accrued  interest  or
penalties  associated with any unrecognized  tax benefits,  nor was any interest
expense recognized during the quarter.

In  February  2007,  the FASB issued  SFAS No.  159,  The Fair Value  Option for
Financial  Assets and  Financial  Liabilities,  Including  an  Amendment of FASB
Statement  No.  115.  SFAS No. 159 permits  entities  to choose to measure  many
financial  instruments  and  certain  other  items  at fair  value  that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose  different  measurement  attributes  for  similar  types  of  assets  and
liabilities.  SFAS No. 159 is  effective  for  financial  statements  issued for
fiscal years beginning after November 15, 2007. The Company does not expect SFAS
No.  159 to  have a  material  impact  on its  financial  position,  results  of
operations or cash flows upon adoption.

In November 2007, the SEC issued SAB No. 109, Written Loan Commitments  Recorded
at Fair Value Through Earnings.  SAB No. 109 supersedes guidance provided by SAB
No. 105, Loan Commitments Accounted for as Derivative Instruments,  and provides
guidance  on  written  loan  commitments  accounted  for at fair  value  through
earnings.  Specifically,  SAB No. 109  addresses  the  inclusion of expected net
future  cash  flows  related  to  the  associated  servicing  of a  loan  in the
measurement of all written loan commitments  accounted for at fair value through
earnings.  In addition,  SAB No. 109 retains the SEC's position on the exclusion
of  internally-developed  intangible  assets  as part  of the  fair  value  of a
derivative loan commitment originally  established in SAB No.105. SAB No. 109 is
effective for fiscal years ending after December 15, 2007. The Company  adoption
of SAB No. 109 did not have a material impact on its financial position, results
of operations or cash flows.

From time to time the FASB issues  exposure  drafts for proposed  statements  of
financial accounting standards. Such exposure drafts are subject to comment from
the  public,  to  revisions  by the FASB and to  final  issuance  by the FASB as
statements of financial accounting standards. Management considers the effect of
the proposed statements on the consolidated  financial statements of the Company
and monitors the status of changes to and proposed  effective  dates of exposure
drafts.

Reclassifications

Certain items included in the 2006 and 2005  consolidated  financial  statements
have  been   reclassified   to   conform   to  the  2007   presentation.   These
reclassifications  have no effect  on the net  income  or  shareholders'  equity
previously reported.

                                       54
<PAGE>


NOTE B - INVESTMENT SECURITIES

The amortized cost, gross  unrealized  gains,  gross unrealized  losses and fair
values of securities  available for sale as of December 31, 2007 and 2006 are as
follows:

<TABLE>
<CAPTION>
<S>                                               <C>                  <C>               <C>             <C>

                                               Amortized       Gross Unrealized         Gross Unrealized
                                                 Cost              Gains            Losses          Fair Value
                                            ---------------   ---------------   ---------------   ---------------
                                                   (Amounts in thousands)
 2007:
 U.S. government and agency securities            $ 92,651             $ 559               $ 2          $ 93,208
 State and municipal securities                      6,136                17                 5           $ 6,148
 Mortgage-backed securities                         12,985               122                20          $ 13,087
 Other                                               1,789                69                 -           $ 1,858
                                            ---------------   ---------------   ---------------   ---------------
                                                 $ 113,561             $ 767              $ 27         $ 114,301
                                            ===============   ===============   ===============   ===============


                                               Amortized       Gross Unrealized         Gross Unrealized
                                                 Cost              Gains            Losses          Fair Value
                                            ---------------   ---------------   ---------------   ---------------
                                                 (Amounts in thousands)
 2006:
 U.S. government and agency securities            $ 85,730              $ 83             $ 566          $ 85,247
 State and municipal securities                      4,623                16                30           $ 4,609
 Mortgage-backed securities                          9,882                52                74           $ 9,860
 Other                                               1,441               236                 -           $ 1,677
                                            ---------------   ---------------   ---------------   ---------------
                                                 $ 101,676             $ 387             $ 670         $ 101,393
                                            ===============   ===============   ===============   ===============
</TABLE>


The following table shows gross unrealized  losses and fair values of investment
securities,  aggregated  by  investment  category  and  length  of time that the
individual  securities have been in a continuous  unrealized  loss position,  at
December  31, 2007 and 2006.  As of December  31, 2007,  the  unrealized  losses
relate  to  eight  U.S.  government  agency  securities,  three  mortgage-backed
securities and five municipal  securities.  Four of the municipal securities and
three of the mortgage  backed  securities had continuous  unrealized  losses for
more than twelve months.  The unrealized  losses relate to debt  securities that
have incurred fair value  reductions  due to higher market  interest rates since
the securities were purchased.  The unrealized  losses are not likely to reverse
unless and until market  interest  rates decline to the levels that existed when
the securities were purchased. Since none of the unrealized losses relate to the
marketability  of the  securities  or the issuer's  ability to honor  redemption
obligations,  none of the  securities  are deemed to be other  than  temporarily
impaired.

                                       55
<PAGE>
NOTE B - INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
<S>                                    <C>               <C>         <C>           <C>         <C>            <C>
                                                                          2007
                                    ----------------------------------------------------------------------------------

                                       Less Than 12 Months          12 Months or More          Total
                                    --------------------------  --------------------------  --------------------------
                                       Fair       Unrealized       Fair       Unrealized       Fair       Unrealized
                                       value        losses         value        losses         value        losses
                                    ------------  ------------  ------------  ------------  ------------  ------------
                                                                (Amounts in thousands)
Securities available for sale:
  U.S. government and
   agency securities                   $ 14,983          $  2      $      -         $   -      $ 14,983         $   2
  State and municipal securities            139             -         1,519             5         1,658             5
  Mortgage-backed securities                  -             -         2,439            20         2,439            20
                                    ------------  ------------  ------------  ------------  ------------  ------------
  Total temporarily impaired
   securities                          $ 15,122          $  2      $  3,958         $  25      $ 19,080         $  27
                                    ============  ============  ============  ============  ============  ============


                                                                          2006
                                    ----------------------------------------------------------------------------------
                                       Less Than 12 Months          12 Months or More          Total
                                    --------------------------  --------------------------  --------------------------
                                       Fair       Unrealized       Fair       Unrealized       Fair       Unrealized
                                       value        losses         value        losses         value        losses
                                    --------------------------  ------------  ------------  ------------  ------------
                                                                (Amounts in thousands)
Securities available for sale:
  U.S. government and
   agency securities                   $ 11,967          $ 22      $ 48,225         $ 544      $ 60,192         $ 566
  State and municipal securities            138             -         2,349            30         2,487            30
  Mortgage-backed securities                549             -         4,320            74         4,869            74
                                    ------------  ------------  ------------  ------------  ------------  ------------
  Total temporarily impaired
   securities                          $ 12,654          $ 22      $ 54,894         $ 648      $ 67,548         $ 670
                                    ============  ============  ============  ============  ============  ============
</TABLE>

The amortized  cost and fair value of available for sale  securities at December
31, 2007 by contractual  maturities are shown below.  Expected  maturities  will
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

                                         Amortized Cost      Fair Value
                                        ----------------   ----------------
                                              (Amounts in thousands)

Due within one year                      $          587     $          590
Due after one year through five years            20,248             20,309
Due after five years through ten years           70,028             70,528
Due after ten years                              22,699             22,874
                                        ----------------   ----------------

                                         $      113,561     $      114,301
                                        ================   ================


                                       56
<PAGE>


NOTE B - INVESTMENT SECURITIES (Continued)

Securities  with a  carrying  value of  approximately  $98.5  million  and $69.2
million at December  31,  2007 and 2006,  respectively,  were  pledged to secure
public deposits and for other purposes required or permitted by law.

Sales and calls of  securities  available  for sale during  2007,  2006 and 2005
generated gross realized gains of $82,000,  $15,000,  and $74,000,  respectively
and gross realized losses of $119,000, $135,000, and $460,000, respectively.


NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major  classifications  of loans as of December 31, 2007 and 2006 are summarized
as follows:

                                                     2007          2006
                                                   ----------    ----------
                                                   (Amounts in thousands)
Real estate - residential and other                $ 217,247     $ 197,195
Real estate - agricultural                            12,700        12,326
Construction and land development                    252,449       194,460
Other agricultural                                     3,119         2,724
Consumer loans                                        12,566        16,618
Commercial loans                                      45,653        37,622
Other loans                                            1,779         1,101
                                                   ----------    ----------
                                                     545,513       462,046
Less:
Net deferred loan costs                                 (243)         (283)
Allowance for loan losses                             (6,653)       (5,566)
                                                   ----------    ----------

                                                   $ 538,617     $ 456,197
                                                   ==========    ==========

Nonperforming  assets at December 31, 2007 and 2006 consist of the following:

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

Loans past due ninety days or more                      $ 52          $ 33
Nonaccrual loans                                       1,254           967
Foreclosed assets (included in other assets)           1,688           327
                                                   ----------    ----------

                                                     $ 2,994       $ 1,327
                                                   ==========    ==========

At December 31, 2007, the recorded  investment in loans  considered  impaired in
accordance with SFAS No. 114 totaled $5.6 million. This amount consisted of both
accrual and  nonaccrual  loans in the amount of $4.4  million and $1.2  million,
respectively.  At December 31, 2006, the investment in loans considered impaired
consisted of both accrual and nonaccrual loans in the amount of $4.4 million and
$1.0 million, respectively.  Impaired loans of $4.4 million and $4.4 million had
related  allowances for loan losses of $2.2 million and $1.7 million at December
31, 2007 and 2006, respectively. For the years ended December 31, 2007 and 2006,
the average recorded investment in impaired loans was approximately $5.0 million
and $4.9 million,  respectively.  The amount of interest  recognized on impaired
loans during the portion of the year that they were impaired was not material.

                                       57
<PAGE>
NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

A summary of the  allowance  for loan  losses for the years ended  December  31,
2007, 2006 and 2005 is as follows:


                                             2007        2006         2005
                                           ----------  ----------   ---------
                                                (Amounts in thousands)

Balance, beginning                          $   5,566   $   4,965   $   4,055
Provision for loan losses                       1,362         873       1,403
Loans charged-off                                (504)       (458)       (696)
Recoveries of loans previously charged-off        229         186         203
                                           ----------  ----------   ---------

Balance, ending                             $   6,653   $   5,566   $   4,965
                                           ==========  ==========   =========

The Company had loan and deposit  relationships with most of its
directors and executive officers and with companies with which certain directors
and executive  officers are  associated.  The following is a  reconciliation  of
loans  directly  outstanding  to  executive  officers,   directors,   and  their
affiliates (amounts in thousands):

Balance at December 31, 2006                                      $  7,254
New loans                                                            2,752
Principal repayments                                                (3,060)
                                                                  ---------
Balance at December 31, 2007                                      $  6,946
                                                                  =========

As a matter  of  policy,  these  loans and  credit  lines  are  approved  by the
Company's  Board of  Directors  and are made with  interest  rates,  terms,  and
collateral  requirements comparable to those required of other borrowers. In the
opinion of  management,  these loans do not involve more than the normal risk of
collectibility.  At December 31, 2007, the Company had  pre-approved  but unused
lines of credit totaling $1.4 million to executive officers, directors and their
affiliates.

                                       58
<PAGE>

NOTE D - BANK PREMISES AND EQUIPMENT

Company premises and equipment at December 31, 2007 and 2006 are as follows:


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

Land                                                $   2,815         2,814
Buildings                                               9,501         8,410
Furniture and equipment                                 9,159         8,383
                                                    ----------    ----------
                                                       21,475        19,607
Less accumulated depreciation                          (8,848)       (7,977)
                                                    ----------    ----------
                                                    $  12,627     $  11,630
                                                    ==========    ==========

Depreciation  expense  for the years  ended  December  31,  2007,  2006 and 2005
amounted to $1.0 million for each year.

NOTE E - DEPOSITS

At December 31, 2007,  the scheduled  maturities of time deposits are as follows
(amounts in thousands):

                                           Less than   $100,000      Total
                                           $100,000       more
                                           ----------------------------------

Within one year                            $ 128,493   $ 132,969    $ 261,462
Over one year through three years              6,052      37,671       43,723
Over three years                               1,677       1,873        3,550
                                           ----------  ----------   ----------
                                           $ 136,222   $ 172,513    $ 308,735
                                           ==========  ==========   ==========

                                       59
<PAGE>

NOTE F - BORROWINGS

At December  31, 2007 and 2006,  borrowed  funds  included  the  following  FHLB
advances (amounts in thousands):

       Maturity             Interest Rate          2007         2006
-----------------        ---------------------  -----------  ---------

June 27, 2008               4.40% Variable        10,000      10,000
July 19, 2010               5.75% Fixed           10,000      10,000
November 16, 2011           5.39% Variable             -       8,000
August 12, 2015             3.77% Fixed                -      10,000
May 25, 2016                4.46% Fixed            5,000       5,000
October 3, 2016             4.01% Fixed                -      10,000
October 19, 2016            4.13% Fixed                -       5,000
November 17, 2016           4.11% Fixed            5,000       5,000
November 30, 2016           4.09% Fixed            7,000       7,000
June 5, 2017                4.35% Fixed           10,000           -
July 3, 2017                4.36% Fixed           13,000           -
July 24, 2017               4.34% Fixed            5,000           -
July 31, 2017               4.35% Fixed            5,000           -
August 14, 2017             4.08% Fixed            5,000           -
August 14, 2017             3.94% Fixed            5,000           -
October 4, 2017             3.95% Fixed            7,000           -
                                                -----------  ---------
                                                $ 87,000     $70,000
                                                ===========  =========


The above  advances are secured by a floating lien  covering the Company's  loan
portfolio  of  qualifying  residential  (1-4 units)  first  mortgage  loans.  At
December 31, 2007,  the Company has available  lines of credit  totaling  $141.7
million with the FHLB for borrowing dependent on adequate collateralization. The
weighted  average  rates for the above  borrowings at December 31, 2007 and 2006
were 4.73% and 4.65%, respectively.  The Company has no short-term FHLB advances
outstanding as of December 31, 2007 and 2006.

 In  addition  to the above  advances,  the Company has lines of credit of $32.7
million from  various  financial  institutions  to purchase  federal  funds on a
short-term  basis. The Company has $10.0 million  outstanding as of December 31,
2007. The Company had $3.4 million outstanding as of December 31, 2006.

                                       60

<PAGE>
NOTE G - TRUST PREFERRED SECURITIES

On March 30, 2006, $12.0 million of trust preferred securities ("Trust Preferred
Securities")  were placed  through  the Trust.  The Trust has  invested  the net
proceeds from the sale of the Trust Preferred  Securities in Junior Subordinated
Deferrable  Interest  Debentures  (the  "Debentures")  issued by the Company and
recorded in borrowings on the accompanying consolidated balance sheet. The Trust
Preferred  Securities pay cumulative cash  distributions  quarterly at an annual
rate, reset quarterly, equal to three month LIBOR plus 1.35%. The dividends paid
to holders of the Trust Preferred Securities, which will be recorded as interest
expense, are deductible for income tax purposes.  The Trust Preferred Securities
are  redeemable  on June 15, 2011 or afterwards in whole or in part, on any June
15,  September 15, December 15 or March 15.  Redemption is mandatory by June 15,
2036. The Company has fully and  unconditionally  guaranteed the Trust Preferred
Securities  through the combined  operation of the  Debentures and other related
documents.  The  Company's  obligation  under the  guarantee  is  unsecured  and
subordinate to senior and  subordinated  indebtedness of the Company.  The Trust
Preferred  Securities  qualify as Tier I capital for regulatory capital purposes
subject to certain limitations.


NOTE H - INCOME TAXES

Allocation  of income tax expense  between  current and deferred  portions is as
follows:

                                                 Years Ended December 31,
                                                --------------------------
                                                  2007     2006     2005
                                                -------- -------- --------
                                                  (Amounts in thousands)
Current tax expense:
    Federal                                      $3,384   $3,513   $2,947
    State                                           326      433      463
                                                -------- -------- --------
                                                  3,710    3,946    3,410
                                                -------- -------- --------
Deferred tax expense:
    Federal                                        (426)    (269)    (559)
    State                                           (97)     (50)    (113)
                                                -------- -------- --------
                                                   (523)    (319)    (672)
                                                -------- -------- --------

                                                 $3,187   $3,627   $2,738
                                                ======== ======== ========


The  reconciliation  of expected income tax at the  statutory  federal  rate of
34% with income tax expense is as follows:

                                                 Years Ended December 31,
                                                --------------------------
                                                  2007     2006     2005
                                                -------- -------- --------
                                                  (Amounts in thousands)

 Expense computed at statutory rate of 34%       $3,005   $3,619   $2,631
 Effect of state income taxes, net of federal
  benefit                                           151      253      232
 Tax exempt income                                  (59)     (51)     (36)
 (Income) loss from investment in life insurance     70     (187)    (102)
 Other, net                                          20       (7)      13
                                                -------- -------- --------

                                                 $3,187   $3,627   $2,738
                                                ======== ======== ========

                                       61

<PAGE>

NOTE H - INCOME TAXES (Continued)

Deferred income taxes consist of the following:

                                         Years Ended December 31,
                                         ------------------------
                                            2007          2006
                                          --------      --------
                                          (Amounts in thousands)
Deferred tax assets:
    Allowance for loan losses             $ 2,520       $ 2,101
    Non-qualified stock options               148            60
    Unamortized investment premiums            15             1
    Net deferred loan fees                     94           109
    Other comprehensive loss                    -           273
    Other                                      97            57
                                          --------      --------
      Total deferred tax assets             2,874         2,601
                                          --------      --------

Deferred tax liabilities:
    Property and equipment                $   640           641
    Unrealized gain on securities             297             -
    Prepaid expense                           132           105
    Unaccreted investment discounts             -            20
    Other                                      16             -
                                          --------      --------
      Total deferred tax liabilities        1,085           766
                                          --------      --------

      Net deferred tax asset included in
       other assets                       $ 1,789       $ 1,835
                                          ========      ========
NOTE I - REGULATORY RESTRICTIONS

The Bank,  as a North  Carolina  banking  corporation,  may pay dividends to the
Company only out of undivided  profits as determined  pursuant to North Carolina
General  Statutes  Section  53-87.  However,  regulatory  authorities  may limit
payment of dividends by any bank when it is determined that such a limitation is
in the public interest and is necessary to ensure the financial soundness of the
bank.

Current  Federal  regulations  require that the Bank maintain a minimum ratio of
total capital to risk weighted  assets of 8%, with at least 4% being in the form
of Tier 1 capital,  as defined in the  regulations.  In addition,  the Bank must
maintain a leverage  ratio of 4%. As of December  31, 2007,  the Bank's  capital
exceeded  the  current  capital  requirements.  The Bank  currently  expects  to
continue  to exceed  these  minimums  without  altering  current  operations  or
strategy.

The Bank is subject to various regulatory capital  requirements  administered by
the  federal  and  state  banking  agencies.  Failure  to meet  minimum  capital
requirements   can  initiate   certain   mandatory   and   possibly   additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material  effect  on the  Bank's  financial  statements.  Quantitative  measures
established  by  regulation  to  ensure  capital  adequacy  require  the Bank to
maintain minimum amounts and ratios, as set forth in the table below. Management
believes,  as of December  31,  2007,  that the Bank meets all capital  adequacy
requirements to which it is subject.


As of December 31, 2007, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum  amounts  and  ratios  as set  forth in the  table  below.  There are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.


                                       62
<PAGE>


NOTE I - REGULATORY RESTRICTIONS (Continued)

The Bank's  actual  capital  amounts and ratios are also  presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
<S>                                   <C>     <C>       <C>       <C>        <C>       <C>
                                    Actual           Minimum for Capital  Minimum To Be Well
                                                       Adequacy Purposes   Capitalized Under
                                                                           Prompt Corrective
                                                                           Action Provisions
                                 --------------------------------------- -------------------
                                      Amount   Ratio     Amount   Ratio       Amount   Ratio
                                 --------------------------------------- -------------------
As of December 31, 2007:
---------------------------------
Total Capital (to Risk Weighted
 Assets)                             $67,505   11.9%    $45,458    8.0%      $56,822   10.0%
Tier I Capital (to Risk Weighted
 Assets)                              60,852   10.7%     22,729    4.0%       34,093    6.0%
Tier I Capital (to Average
 Assets)                              60,852    8.9%     27,501    4.0%       34,376    5.0%

As of December 31, 2006:
---------------------------------
Total Capital (to Risk Weighted
 Assets)                             $61,618   12.8%    $38,543    8.0%      $48,179   10.0%
Tier I Capital (to Risk Weighted
 Assets)                              56,052   11.6%     19,272    4.0%       28,908    6.0%
Tier I Capital (to Average
 Assets)                              56,052    9.3%     24,070    4.0%       30,090    5.0%
</TABLE>

The Company is also subject to these capital requirements.  At December 31, 2007
and 2006, the Company's total capital to risk weighted assets, Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets were 11.7%, 12.9%, and
10.2%, and 12.9%, 14.0%, and 10.3%, respectively.


NOTE J - DERIVATIVES

Derivative Financial Instruments

The Company has  stand-alone  derivative  financial  instruments  in the form of
interest rate swap agreements, which derive their value from underlying interest
rates.  These  transactions  involve both credit and market  risk.  The notional
amounts  are  amounts  on which  calculations,  payments,  and the  value of the
derivative are based. Notional amounts do not represent direct credit exposures.
Direct credit  exposure is limited to the net difference  between the calculated
amounts to be received and paid, if any. Such  difference,  which represents the
fair  value  of the  derivative  instruments,  is  reflected  on  the  Company's
consolidated balance sheets as derivative assets and derivative liabilities.

The Company is exposed to  credit-related  losses in the event of nonperformance
by the counterparties to these agreements.  The Company controls the credit risk
of its financial  contracts  through  credit  approvals,  limits and  monitoring
procedures,  and does not expect any  counterparties to fail their  obligations.
The Company deals only with primary dealers.

Derivative instruments are generally either negotiated  over-the-counter ("OTC")
contracts  or  standardized   contracts  executed  on  a  recognized   exchange.
Negotiated  OTC  derivative  contracts  are  generally  entered into between two
counterparties   that  negotiate  specific   agreements  terms,   including  the
underlying instruments, amount, exercise prices and maturity.


                                       63
<PAGE>
NOTE J - DERIVATIVES (Continued)

Risk Management Policies - Hedging Instruments

The primary  focus of the  Company's  asset/liability  management  program is to
monitor the  sensitivity  of the Company's  net  portfolio  value and net income
under varying  interest rate scenarios to take steps to control its risks.  On a
quarterly  basis,  the Company  simulates the net portfolio value and net income
expected  to be  earned  over  a  twelve-month  period  following  the  date  of
simulation.  The simulation is based on a projection of market interest rates at
varying  levels and  estimates  the impact of such market rates on the levels of
interest-earning assets and interest-bearing  liabilities during the measurement
period. Based upon the outcome of the simulation analysis, the Company considers
the use of  derivatives  as a means of reducing the  volatility of net portfolio
value and  projected net income within  certain  ranges of projected  changes in
interest rates.  The Company  evaluates the  effectiveness  of entering into any
derivative  instrument  agreement by measuring  the cost of such an agreement in
relation  to the  reduction  in net  portfolio  value and net income  volatility
within an assumed range of interest rates.

Interest Rate Risk Management - Cash Flow Hedging Instruments

The Company originates  variable rate loans for its loan portfolio.  These loans
expose  the  Company to  variability  in cash  flows,  primarily  from  interest
receipts due to changes to interest rates. If interest rates increase,  interest
income  increases.  Conversely,  if interest  rates  decrease,  interest  income
decreases.  Management  believes  it is  prudent to limit the  variability  of a
portion of its cash flows on variable rate loans  therefore,  generally hedges a
portion of its variable-rate receipts. To meet this objective, management enters
into  interest  rate swap  agreements  whereby the Company  receives  fixed rate
payments and makes variable rate payments during the contract period.

At December 31, 2007 there were no  outstanding  interest  rate swap  agreements
used to hedge  variable  rate  loans.  At December  31,  2006,  the  information
pertaining to an outstanding interest rate swap agreement used to hedge variable
rate loans is as follows (dollars in thousands):

Notional amount                                 $ 25,000
Weighted average pay rate                           7.96%
Weighted average receive rate                       5.85%
Weighted average maturity in years                   0.7
Unrealized loss relating to interest rate swaps $   (402)


This  agreement  requires  the  Company  to make  payments  at a  variable  rate
determined by a specified index (prime) in exchange for receiving  payments at a
fixed rate.

At December 31, 2006,  the Company's  interest rate swap used to hedge  variable
rate loans  reflected an unrealized  loss of $402,000.  The  unrealized  loss is
included  in  other  comprehensive  income,  net of  tax,  in  the  accompanying
consolidated balance sheet.

Risk  management  results for the year ended  December  31, 2006  related to the
balance sheet  hedging of variable  rate loans  indicate that the hedge was 100%
effective and that there was no component of the derivative instrument's gain or
loss which was excluded from the assessment of hedge effectiveness.

At December 31, 2006 the  unrealized  loss  relating to use of the interest rate
swap was recorded in derivative  liabilities  in  accordance  with SFAS No. 133.
Changes  in the  fair  value  of  interest  rate  swaps  designated  as  hedging
instruments of the variability of cash flows associated with variable rate loans
are reported in other comprehensive income.

                                       64
<PAGE>

NOTE J - DERIVATIVES (Continued)

Interest Rate Risk Management - Fair Value Hedging Instruments

The  Company  uses  funds  from  fixed rate time  deposits  in its  lending  and
investment  activities and for other general  purposes.  These debt  obligations
expose  the  Company  to  variability  in their fair value due to changes in the
level of interest  rates.  Management  believes  that it is prudent to limit the
variability in the fair value of a portion of its fixed-rate  funding. It is the
Company's  objective  to hedge the  change in fair value of  fixed-rate  funding
coverage levels that are  appropriate,  given  anticipated or existing  interest
rate levels and other  market  considerations,  as well as the  relationship  of
change in this  liability  to other  liabilities  of the  Company.  To meet this
objective,  the  Company  utilized  interest  rate  swaps as an  asset/liability
management  strategy  to hedge the change in value of the funding due to changes
in expected interest rate  assumptions.  These interest rate swap agreements are
contracts to make a series of floating rate payments in exchange for receiving a
series of fixed rate payments.

At  December  31,  2007 and 2006,  the  information  pertaining  to  outstanding
interest rate swap  agreements  used to hedge  fixed-rate  funding is as follows
(dollars in thousands):

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

Notional amount                                         $33,301   $38,611
Weighted average pay rate                                  4.93%     5.32%
Weighted average receive rate                              4.25%     3.90%
Weighted average maturity in years                          2.2       3.1
Unrealized gain (loss) relating to interest rate swaps  $   (16)  $  (145)


These  agreements   require  the  Company  to  make  payments  at  variable-rate
determined by a specified index (LIBOR) in exchange for receiving  payments at a
fixed-rate.

The interest rate swap  agreement used to hedge variable rate loans expired July
30, 2007. No other interest rate swaps were  terminated  during 2007 or 2006. At
December  31, 2007 and 2006,  the  Company's  interest  rate swaps used to hedge
fixed-rate  funding  reflected  an  unrealized  loss of  $16,000  and  $145,000,
respectively.  For the years ended  December  31, 2007 and 2006,  the  Company's
interest  rate swaps not  designated  as a fair value hedge  reflected a gain of
$165,000 and a loss of $262,000, respectively. The above interest rate swaps are
recorded in other liabilities in the accompanying consolidated balance sheet.

NOTE K - COMMITMENTS AND CONTINGENCIES

The Company is a party to financial  instruments with  off-balance  sheet credit
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  These financial instruments include commitments to extend credit and
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit and interest rate risk in excess of the amount  recognized in the balance
sheet. The contract or notional amounts of those instruments  reflect the extent
of involvement the Bank has in particular classes of financial instruments.  The
Company  uses the same credit  policies in making  commitments  and  conditional
obligations as it does for on-balance-sheet instruments.


                                       65
<PAGE>
NOTE K - COMMITMENTS AND CONTINGENCIES (Continued)

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of conditions  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since some of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by  the  Company,  upon  extension  of  credit  is  based  on
management's  credit evaluation of the borrower.  Collateral obtained varies but
may include real estate, stocks, bonds, and certificates of deposit.

Unfunded  commitments  under lines of credit are commitments for possible future
extensions of credit to existing customers. These lines of credit usually do not
contain a specified  maturity date and may not be drawn upon to the total extent
to which the Bank is committed.

Stand-by  letters of credit are conditional  lending  commitments  issued by the
Bank to guarantee the performance of a customer to a third party.  Those letters
of  credit  are  primarily  issued  to  support  public  and  private  borrowing
arrangements.  Essentially  all letters of credit issued have  expiration  dates
within  one year.  The credit  risk  involved  in  issuing  letters of credit is
essentially the same as that involved in extending loan facilities to customers.

A summary of the contract  amount of the Bank's  exposure to  off-balance  sheet
credit risk as of December 31, 2007 is as follows (dollars in thousands):

Financial instruments whose contract amounts represent credit risk:

      Commitments to extend credit          $ 110,651
      Undisbursed lines of credit              30,860
      Financial stand-by letters of credit        575
      Performance stand-by letters of credit    2,036

NOTE L - STOCK OPTION PLAN

The  Company has a  non-qualified  stock  option plan for certain key  employees
under which it is  authorized  to issue  options for up to  1,342,773  shares of
common stock.  Options are granted at the  discretion of the Company's  Board of
Directors at an exercise price  approximating  market value,  as determined by a
committee of Board members.  All options granted  subsequent to a 1997 amendment
will be 100%  vested one year from the grant date and will  expire  after such a
period as is determined by the Board at the time of grant. Options granted prior
to the amendment have ten year lives and a five year level vesting provision.

A summary  of option  activity  under the Plan for the year ended  December  31,
2007, after giving  retroactive  effect to the 10% stock dividend,  is presented
below:

                                       66
<PAGE>
NOTE L - STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
<S>                                    <C>      <C>            <C>           <C>
                                                                 Weighted-
                                                                  Average
                                                                 Remaining     Aggregate
                                                 Option Price   Contractual     Intrinsic
                                        Shares    Per Share         Term          Value
                                       --------- ------------  -------------  ------------

Outstanding at January 1, 2007          177,309  $     12.05

   Granted                               41,140        24.41
   Exercised                            (42,237)        8.65
   Forfeited                             (2,578)       13.24
   Expired                               (7,606)        6.76
                                       ---------

Balance December 31, 2007               166,028  $     16.20           1.67   $   601,000
                                       ========= ============  =============  ============

Excercisable at December 31, 2007       124,888  $     13.50           1.18   $   281,000
                                       ========= ============  =============  ============
</TABLE>

The weighted average  exercise price of all exercisable  options at December 31,
2007 is $13.50.  There were  419,271  shares  reserved  for future  issuance  at
December 31, 2007.

As of December 31, 2007,  there was $20,000 of  unrecognized  compensation  cost
related  to  non-vested  share-based  compensation  arrangements.  That  cost is
expected to be recognized in 2008.

Additional information concerning the Company's stock options at December 31,
2007 is as follows:

                                               Remaining
               Exercise Price    Number        Contractual      Number
                                 Outstanding      Life         Exercisable
--------------------------------------------------------------------------

   $10.24                            41,791      0.15 years         41,791
   $13.24                            37,860      1.15 years         37,860
   $16.73                            45,237      2.15 years         45,237
   $24.41                            41,140      3.16 years              -
                                -----------                   ------------

                                    166,028                        124,888
                                ===========                   ============

                                       67
<PAGE>
NOTE L - STOCK OPTION PLAN (Continued)

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option-pricing  model  with the  following  assumptions  used for
grants in 2007, 2006 and 2005:

                                   2007            2006            2005
                               --------------  --------------  -------------

Dividend yield                         1.20%           1.53%          1.84%
Expected volatility                   23.76%          20.72%         24.31%
Risk free interest rate                4.65%           4.73%          3.75%
Expected life                        4 years         4 years        4 years


The weighted  average fair value of options  granted during 2007,  2006 and 2005
was $5.76, $3.84, and $3.04, respectively.


NOTE M - OTHER EMPLOYEE BENEFITS

Supplemental Retirement

In 1998, the Company's  subsidiary,  Four Oaks Bank & Trust  Company,  adopted a
Supplemental  Executive Retirement Plan ("SERP") for its president.  The Company
has purchased  life  insurance  policies in order to provide  future  funding of
benefit  payments.  SERP  benefits  will  accrue  and vest  during the period of
employment  and will be paid in  annual  benefit  payments  over  the  officer's
remaining life commencing with the officer's  retirement.  The liability accrued
under the SERP plan  amounts to $175,000  and  $147,000 at December 31, 2007 and
2006, respectively. During 2007, 2006, and 2005, the expense attributable to the
SERP amounted to $28,000, $25,000, and $23,000, respectively.

Employment Agreements

The Company has entered into employment agreements with certain of its executive
officers  to ensure a stable  and  competent  management  base.  The  agreements
provide for benefits as spelled out in the contracts and cannot be terminated by
the Company's  Board of Directors,  except for cause,  without  prejudicing  the
officers' rights to receive certain vested rights,  including  compensation.  In
addition,  the Company has entered into severance  compensation  agreements with
certain  of its  executive  officers  and key  employees  to  provide  them with
severance  pay benefits in the event of a change in control of the  Company,  as
outlined  in the  agreements;  the  acquirer  will be bound to the  terms of the
contracts.

Defined Contribution Plan

The  Company  sponsors  a  contributory   profit-sharing   plan  in  effect  for
substantially  all  employees.  Participants  may make  voluntary  contributions
resulting in salary  deferrals in accordance with Section 401(k) of the Internal
Revenue Code. The plans provide for employee  contributions up to $15,500 of the
participant's annual salary and an employer  contribution of 25% matching of the
first 6% of pre-tax salary contributed by each participant.  Expenses related to
these plans for the years ended  December 31, 2007,  2006 and 2005 were $97,000,
$66,000, and $79,000, respectively. Contributions under the plan are made at the
discretion of the Company's Board of Directors.


                                       68
<PAGE>
NOTE M - OTHER EMPLOYEE BENEFITS (Continued)

Employee Stock Ownership Plan

The Company  sponsors an employee  stock  ownership  plan (ESOP) which makes the
employees of the Company,  owners of stock in the Company.  The Four Oaks Bank &
Trust  Company's  Employee  Stock  Ownership  Trust is  available  to  full-time
employees  at least 21 years of age after six months of  service.  Contributions
are voluntary by the Company and employees  cannot  contribute.  Stock issued is
purchased  on the open  market  and the  Company  does not issue  new  shares in
conjunction  with this  plan.  Voluntary  contributions  are  determined  by the
Company's  Board of  Directors  annually  based on Company  performance  and are
allocated to employees based on annual compensation.  Contribution  expenses for
this plan for the years ended 2007, 2006, and 2005 were $300,000,  $249,000, and
$223,000, respectively.

Employee Stock Purchase and Bonus Plan

The Employee Stock Purchase and Bonus Plan (the "Purchase  Plan") is a voluntary
plan that enables  full-time  employees of the Company and its  subsidiaries  to
purchase shares of the Company's common stock. The Purchase Plan is administered
by a  committee  of the  Board  of  Directors,  which  has  broad  discretionary
authority to administer the Purchase Plan. The Company's  Board of Directors may
amend or terminate  the  Purchase  Plan at any time.  The  Purchase  Plan is not
intended to be qualified as an employee stock purchase plan under Section 423 of
the Internal Revenue Code of 1986, as amended.

Once a year,  participants  in the Purchase Plan  purchase the Company's  common
stock at fair market value.  Participants are permitted to purchase shares under
the  Purchase  Plan up to (5%) of their  compensation,  with a maximum  purchase
amount of $1,000 per year. The Company matches,  in cash, fifty percent (50%) of
the amount of each  participant's  purchase,  up to $500. After  withholding for
income and  employment  taxes,  participants  use the  balance of the  Company's
matching grant to purchase shares of the Company's common stock.

As of December 31, 2007,  268,555 shares of the Company's  common stock had been
reserved  for  issuance  under the Purchase  Plan,  and 170,388  shares had been
purchased.  During the years ended  December 31, 2007 and 2006,  5,785 and 8,554
shares, respectively, were purchased under the Purchase Plan.

NOTE N - LEASES

The Company has entered into  non-cancelable  operating  leases for three branch
facilities.  Future minimum lease payments under the leases for future years are
as follows (amounts in thousands):

2008                           $    144
2009                                142
2010                                123
2011                                127
2012                                129
2013 and beyond                     441
                             ----------

                               $  1,106
                             ==========



In addition,  the Company has leased a building from one of its former directors
for approximately $1,000 per month in 2007 and 2006, under an operating lease on
a month-to-month basis.

Total rental  expense under  operating  leases for the years ended  December 31,
2007, 2006 and 2005 amounted to $152,000, $116,000 and $57,000, respectively.

                                       69
<PAGE>

NOTE O - PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp,  Inc., the parent company,
at December 31, 2007 and 2006 and for the years ended  December  31, 2007,  2006
and 2005 is presented below:

                                                          2007      2006
                                                       ----------- -------
                                                       (Amounts in thousands)
Condensed Balance Sheets

Assets:
Cash and cash equivalents                                   $3,686  $4,409
Equity investment in subsidiaries                           62,187  56,324
Securities available for sale                                1,153   1,015
Other assets                                                    33      76
                                                       ----------- -------
  Total assets                                             $67,059 $61,824
                                                       =========== =======

Liabilities and Shareholders' Equity:
Other liabilities                                              $57    $129
Subordinated debentures                                     12,372  12,372

Shareholders' equity                                        54,630  49,323
                                                       ----------- -------

  Total liabilities and shareholders' equity               $67,059 $61,824
                                                       =========== =======


                                       70
<PAGE>
NOTE O - PARENT COMPANY FINANCIAL INFORMATION (Continued)

                                                For the Years Ended
                                                     December 31,
                                              ------------------------
                                               2007     2006    2005
                                              ------- -------- -------
                                               (Amounts in thousands)
Condensed Statements of Operations

Dividends received from bank subsidiary        $1,784   $1,448    $937
Equity in undistributed earnings of
 subsidiaries                                   4,464    6,021   4,035
Interest income                                   228      187      81
Other income                                       83       65      17
Other expenses                                   (907)    (704)    (67)
                                              ------- -------- -------

  Net income                                   $5,652   $7,017  $5,003
                                              ======= ======== =======


                                                2007    2006    2005
                                              ------- -------- -------
                                               (Amounts in thousands)
Condensed Statements of Cash Flows

Operating activities:
 Net income                                    $5,652   $7,017  $5,003
 Equity in undistributed earnings of
  subsidiaries                                 (4,464)  (6,021) (4,035)
 Decrease (increase) in other assets               43      (76)      -
 (Decrease) increase in other liabilities         (72)      17       -
                                              ------- -------- -------
  Net cash provided by operating activities     1,159      937     968
                                              ------- -------- -------

Investing activities:
 Investment in subsidiaries                      (315) (12,695)       -
 Purchase of securities available for sale       (138)    (347)    (53)
                                              ------- -------- -------
  Net cash used by investing activities          (453) (13,042)    (53)
                                              ------- -------- -------

Financing activities:
 Proceeds from issuance of common stock         1,665    1,609   1,230
 Excess tax benefits from stock options           203      293       -
 Proceeds from issuance of subordinated
  debentures                                        -   12,372       -
 Purchases and retirements of common stock     (1,513)    (252)      -
 Dividends paid                                (1,784)  (1,448) (1,279)
                                              ------- -------- -------
  Net cash (used) provided by financing
   activities                                  (1,429)  12,574     (49)
                                              ------- -------- -------

  Net (decrease) increase in cash and cash
   equivalents                                   (723)     469     866

Cash and cash equivalents, beginning of year    4,409    3,940   3,074
                                              ------- -------- -------

Cash and cash equivalents, end of year         $3,686   $4,409  $3,940
                                              ======= ======== =======

                                       71
<PAGE>
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107,  Disclosures about Fair Value of Financial  Instruments,  requires
the disclosure of estimated fair values for financial instruments. Quoted market
prices, if available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Company's  financial  instruments,  the fair value of such  instruments has been
derived  based on  management's  assumptions  with  respect  to future  economic
conditions,  the amount and timing of future cash flows and  estimated  discount
rates.   Different  assumptions  could  significantly  affect  these  estimates.
Accordingly,  the net  realizable  value could be materially  different from the
estimates  presented  below.  In addition,  the estimates are only indicative of
individual  financial  instruments'  values  and  should  not be  considered  an
indication  of the fair value of the  Company  taken as a whole.  The  following
methods and  assumptions  were used to estimate  the fair value of each class of
financial instrument.

Cash and Cash Equivalents

The carrying  amounts of cash and cash  equivalents  are equal to the fair value
due to the liquid nature of the financial instruments.


Investment Securities Available for Sale

Fair  values of  investment  securities  available  for sale are based on quoted
market  prices.  If a  quoted  market  price  is not  available,  fair  value is
estimated using quoted market prices for similar securities.

Loans

Fair values have been estimated by type of loan:  residential real estate loans,
consumer loans,  and commercial and other loans.  For  variable-rate  loans that
reprice frequently and with no significant credit risk, fair values are based on
carrying  values.  The  fair  values  of  fixed  rate  loans  are  estimated  by
discounting  the future cash flows  using the current  rates at which loans with
similar terms would be made to borrowers with similar credit ratings and for the
same remaining maturities. The Company has assigned no fair value to off-balance
sheet  financial  instruments  since  they are  either  short  term in nature or
subject to immediate repricing.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

Investment in Life Insurance

The  carrying  value of life  insurance  approximates  fair value  because  this
investment is carried at cash surrender value, as determined by the insurer.

Deposits

The fair value of demand deposits, savings accounts and money market deposits is
the  amount  payable  on demand at  year-end.  Fair  value of time  deposits  is
estimated  by  discounting  the future cash flows using the current rate offered
for similar deposits with the same maturities.

Borrowings and Subordinated Debentures

The fair values are based on  discounting  expected  cash flows at the  interest
rate for debt  with the same or  similar  remaining  maturities  and  collection
requirements.

                                       72
<PAGE>

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

Derivative Financial Instruments

Fair  values  for  interest  rate swap  agreements  are based  upon the  amounts
required to settle the contracts.

The following table presents information for financial assets and liabilities as
of December 31, 2007 and 2006
<TABLE>
<CAPTION>
<S>                                                  <C>             <C>              <C>               <C>
                                                            2007                             2006
                                               -------------------------------   --------------------------------
                                                Carrying Value  Estimated Fair  Carrying Value     Estimated Fair
                                                                     Value                              Value
                                               ---------------  --------------   --------------    --------------
Financial assets:
Cash and cash equivalents                           $  18,275       $  18,275        $  17,711         $  17,711
Securities available for sale                         114,301         114,301          101,393           101,393
Loans, net                                            538,617         537,831          456,197           449,550
FHLB stock                                              5,010           5,010            4,194             4,194
Investment in life insurance                           10,041          10,041            8,424             8,424
Accrued interest receivable                             3,564           3,564            3,614             3,614

Financial liabilities:
Deposits                                            $ 537,763       $ 522,212        $ 466,868         $ 449,771
Subordinated debentures                                12,372          12,381           12,372            12,384
Borrowings                                             97,000          99,905           73,400            74,042
Accrued interest payable                                4,055           4,055            3,258             3,258

Derivative financial instruments:
Interest rate swap agreements:
      Liabilities, net loss                                80              80            1,108             1,108

</TABLE>

                                       73
<PAGE>
NOTE Q - CASH FLOW SUPPLEMENTAL DISCLOSURES

The following information is supplemental information regarding the cash flows
for the years ended December 31, 2007, 2006 and 2005:
<TABLE>
<CAPTION>
<S>                                                                        <C>             <C>              <C>
                                                                            2007           2006           2005
                                                                         -----------    ------------   ------------
                                                                           (Amounts in thousands)
Cash paid for:
    Interest on deposits and borrowings                                    $ 22,902        $ 16,814        $ 8,929
    Income taxes                                                              2,981           4,057          3,684

Summary of noncash investing and financing activities:
    Transfer from loans to foreclosed assets                                  2,570             269            431

    Tax benefit from the exercise of non-qualified stock options                203             293            101

    Increase (decrease) in fair value of securities available for sale,
       net of tax                                                               613             161           (565)

    Increase (decrease) in fair value of cash flow hedge, net of tax            242             187           (173)
</TABLE>

                                       74
<PAGE>
NOTE R - STOCK PURCHASE PLAN

On December 10, 2001, the Company's Board of Directors approved a Stock Purchase
Program   authorizing  the  Company  to  purchase  up  to  100,000  shares,   or
approximately  4.7% of the then outstanding  shares of common stock. On December
20, 2006, the Board of Directors increased the purchase authorization to 200,000
shares.  On November  26, 2007 the Board of  Directors  increased  the  purchase
authorization  to  500,000  shares  and on  December  17,  2007  authorized  the
extension of the Company's  Stock Purchase  Program  through  December 31, 2008.
During 2007, the Company  purchased  75,807 shares at an average cost of $19.97.
At December 31, 2007, there were 350,969 share available for repurchase.


NOTE S - PROPOSED MERGER WITH LONGLEAF COMMUNITY BANK

On  December  10,  2007,  the  Company  announced  that  it had  entered  into a
definitive agreement (the "Agreement") with LongLeaf Community Bank ("LongLeaf")
pursuant to which LongLeaf will merge with and into the Bank. Under the terms of
the  Agreement,  each  share of  LongLeaf  common  stock  will be  automatically
converted into the right to receive either (i) $16.50 in cash, without interest,
(ii) 1.0 share of Company common stock  multiplied by an exchange ratio or (iii)
0.60 shares of Company  common stock  multiplied  by the exchange  ratio plus an
amount  equal to $6.60 in cash,  all on and subject to the terms and  conditions
contained in the Agreement. The exchange ratio is equal to $16.50 divided by the
volume weighted average of the daily closing sales price of the Company's common
stock as quoted on the OTC Bulletin Board during the 20 consecutive trading days
ending three business days prior to the closing date of the Merger (the "Average
Closing Price").  Pursuant to the Agreement, the Average Closing Price can be no
higher than  $19.3397452  per share and no lower than  $14.2945943 per share. In
addition, if (a) as of the later of the date of receipt of the required approval
of regulatory authorities or the date of approval by LongLeaf shareholders,  the
average  closing  price of the  Company's  common  stock is less than 75% of the
Average  Closing  Price as of the date the  Agreement  was  executed and (b) the
Company and Four Oaks do not agree to adjust the exchange  ratio as permitted by
the  Agreement,  then  LongLeaf  will have a right to terminate  the  Agreement.
Finally,  certain  allocation  procedures  will  be  used  to  cause  the  stock
consideration  to be paid to LongLeaf  shareholders to be between 50% and 70% of
the total merger consideration.

On January 30, 2008, the Company filed a Registration Statement on Form S-4 with
the Securities  and Exchange  Commission to register up to 708,461 shares of its
common stock that could be issued in connection  with the proposed  transaction.
LongLeaf mailed the related proxy statement/prospectus to its shareholders on or
about February 28, 2008, setting forth matters relating to the transaction to be
voted upon at its upcoming  Special  Meeting of Shareholders to be held on April
10,  2008.  The Form S-4  describes  the  proposed  transaction  in  detail  and
provides,  among other things,  highlights and terms of the proposed  merger and
pro forma  financial  information.  Subject to receipt of approval by LongLeaf's
shareholders  and  certain  other  closing  conditions,  the  Company  plans  to
consummate the bank merger in the second quarter of 2008.


                                       75
<PAGE>
Item 9 - Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure.

         Not Applicable.

Item 9A - Controls and Procedures.

Disclosure Controls and Procedures

         As  required  by  paragraph  (b) of Rule  13a-15  under the  Securities
Exchange Act of 1934, as amended (the "Exchange Act"), an evaluation was carried
out  under  the  supervision  and  with  the   participation  of  the  Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
of the  effectiveness  of the Company's  disclosure  controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of
the period  covered by this  Annual  Report.  As defined in Rule  13a-15(e)  and
15d-15(e)  under the Exchange Act, the term  disclosure  controls and procedures
means  controls  and other  procedures  of an issuer that are designed to ensure
that  information  required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded,  processed,  summarized and
reported,  within the time  periods  specified  in the  Securities  and Exchange
Commission's (the "SEC's") rules and forms.  Disclosure  controls and procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information  required to be  disclosed by an issuer in the reports that it files
or  submits  under the  Exchange  Act is  accumulated  and  communicated  to the
issuer's  management,  including its principal executive and principal financial
officers,  or persons  performing  similar  functions,  as  appropriate to allow
timely decisions regarding required disclosure.  Based on their evaluation,  the
Chief Executive  Officer and Chief  Financial  Officer have concluded that as of
the end of the period  covered by this Annual Report,  the Company's  disclosure
controls  and  procedures  are  effective,   in  that  they  provide  reasonable
assurances  that  information  required  to be  disclosed  by the Company in the
reports that it files or submits under the Exchange Act is recorded,  processed,
summarized and reported, within the time periods required by the SEC's rules and
forms.

Management's Report on Internal Control Over Financial Reporting

         The  management  of the Company is  responsible  for  establishing  and
maintaining  adequate internal control over financial  reporting.  The Company's
internal  control  system was  designed to provide  reasonable  assurance to its
management  and  board  of  directors   regarding  the   preparation   and  fair
presentation of published financial statements.

         All  internal  control  systems,  no  matter  how well  designed,  have
inherent limitations.  Therefore,  even those systems determined to be effective
can provide  only  reasonable  assurance  with  respect to  financial  statement
preparation and presentation.

         The Company's  management  assessed the  effectiveness of the Company's
internal  control over  financial  reporting as of December 31, 2007.  In making
this  assessment,  management  used the criteria  set forth by the  Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control
-  Integrated  Framework.  Based on that  assessment,  we  believe  that,  as of
December  31,  2007,  the Company  maintained  effective  internal  control over
financial reporting based on those criteria.

         Four Oaks'  independent  auditors  have  issued an audit  report on our
assessment and on the Company's internal control over financial reporting.  This
report appears on page 77.

Changes in Internal Control Over Financial Reporting

         There have been no  changes  in the  Company's  internal  control  over
financial  reporting (as such term is defined in Rules 13d-15(f) and 15(d)-15(f)
under the Exchange Act) that occurred during the fourth quarter of 2007 that the
Company believes have materially affected or is likely to materially affect, its
internal control over financial reporting.


                                       76
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Four Oaks Fincorp, Inc. and Subsidiaries

         We  have  audited  Four  Oaks  Fincorp,   Inc.  and  Subsidiaries  (the
"Company")'s  internal control over financial  reporting as of December 31, 2007
based on criteria established in Internal  Control--Integrated  Framework issued
by the Committee of Sponsoring  Organizations  of the Treadway  Commission.  The
Company's  management is responsible for maintaining  effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over  financial  reporting,  included in the  accompanying  Management's
Report on Internal Control Over Financial  Reporting.  Our  responsibility is to
express an opinion on the Company's  internal  control over financial  reporting
based on our audit.

         We conducted our audit in  accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial  reporting,  assessing the risk that a material  weakness
exists,  and testing and  evaluating the design and operating  effectiveness  of
internal control based on the assessed risk. Our audit also included  performing
such other  procedures  as we  considered  necessary  in the  circumstances.  We
believe that our audit provides a reasonable basis for our opinion.

         A company's  internal  control  over  financial  reporting is a process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance with generally accepted accounting  principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the  transactions  and dispositions of the assets of the company;
(2) provide reasonable  assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

         Because of its inherent  limitations,  internal  control over financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         In our opinion, Four Oaks Fincorp, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control--Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.

         We have also audited,  in  accordance  with the standards of the Public
Company Accounting Oversight Board (United States),  the consolidated  financial
statements of Four Oaks Fincorp,  Inc. and  Subsidiaries  as of and for the year
ended  December  31, 2007,  and our report  dated March 12,  2008,  expressed an
unqualified opinion on those consolidated financial statements.

/s/ Dixon Hughes PLLC
Raleigh, North Carolina
March 12, 2008


                                       77
<PAGE>
Item 9B - Other Information.
         Not Applicable.


                                    PART III

         This Part  incorporates  certain  information from the definitive proxy
statement (the "2008 Proxy  Statement") for the Company's 2008 Annual Meeting of
Shareholders,  to be filed  with the SEC  within  120 days  after the end of the
Company's fiscal year.

Item 10 - Directors, Executive Officers and Corporate Governance.

         Director  information  is  incorporated  by reference from the sections
entitled  "Information  about Our Board of Directors,"  "Election of Directors,"
and under the section  entitled  "Section 16(a) Beneficial  Ownership  Reporting
Compliance," in the 2008 Proxy Statement.  Information on our executive officers
is included under the caption "Our Executive Officers" on Page 9 of this report.
Information  about our Code of  Ethics is  incorporated  by  reference  from the
section  entitled  "Code of  Ethics," in the 2007 Proxy  Statement.  Information
about the procedures by which shareholder  nominations to our board of directors
may be submitted,  including  material  changes to such  procedures,  if any, is
incorporated by reference from the section entitled "Information About our Board
of  Directors--  Board  Committees--The   Corporate  Governance  and  Nominating
Committee"  in the 2008 Proxy  Statement.  Information  regarding  the Company's
audit committee is hereby  incorporated  by reference from the section  entitled
"Information  About  our  Board  of   Directors--Board   Committees--The   Audit
Committee" in the 2008 Proxy Statement.


Item 11 - Executive Compensation.

         This information is incorporated by reference from the section entitled
"Executive  Compensation"  and  "Compensation  Committee  Interlocks and Insider
Participation" in the 2008 Proxy Statement.


Item 12 - Security Ownership of Certain Beneficial Owners and Management and
          Related Shareholder Matters.

         This information is incorporated by reference from the section entitled
"Security  Ownership  of  Management  and  Certain  Beneficial  Owners"  and the
sections entitled "Equity  Compensation Plan Information,"  "Nonqualified  Stock
Option  Plan" and  "Employee  Stock  Purchase  and Bonus Plan" in the 2008 Proxy
Statement.

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

         Information  about certain  relationships  and related  transactions is
incorporated by reference from the section  entitled  "Certain  Transactions" in
the  2008  Proxy   Statement.   Information   about  director   independence  is
incorporated by reference from the section entitled "Information About our Board
of Directors--General" in the 2008 Proxy Statement.


Item 14 - Principal Accountant Fees and Services

         Information   regarding  principal  accountant  fees  and  services  is
incorporated by reference from the section  entitled "Audit Firm Fee Summary" in
the 2008 Proxy Statement.


                                       78
<PAGE>
Item 15 - Exhibits, Financial Statement Schedules.

         (a)(1) Financial  Statements.  The following  financial  statements and
supplementary  data are  included in Item 8 of Part II of this Annual  Report on
Form 10-K.

<TABLE>
<CAPTION>
<S>                                                                                        <C>
                                                                                      Form 10-K Page
Financial Statements
Report of Independent Registered Public Accounting Firm, Dixon Hughes PLLC,                 41
dated March xx, 2008

Consolidated Balance Sheets as of December 31, 2007 and 2006                                42

Consolidated Statements of Operations for the years ended December 31, 2007,                43
2006 and 2005

Consolidated Statements of Comprehensive Income for the years ended December 31,            44
2007, 2006 and 2005

Consolidated Statements of Shareholders' Equity for the years ended December 31,            45
2007, 2006 and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2007,                46
2006 and 2005

Notes to Consolidated Financial Statements                                                  47

</TABLE>

         (a)(2)  Financial  Statement   Schedules.   All  applicable   financial
statement  schedules  required  under  Regulation  S-X have been included in the
Notes to Consolidated Financial Statements.

         (a)(3)  Exhibits.  The  following  exhibits  are  filed as part of this
Annual Report on Form 10-K.


                  Exhibit No.     Description of Exhibit

                  2.1      Merger  Agreement,  dated as of December 10, 2007, by
                           and among Four Oaks Fincorp,  Inc.,  Four Oaks Bank &
                           Trust   Company   and   LongLeaf    Community    Bank
                           (incorporated  by  reference  to  Exhibit  2.1 to the
                           Company's   Current  Report  on  Form  8-K  filed  on
                           December 13, 2007)

                  2.2      List  of  Schedules  Omitted  from  Merger  Agreement
                           included  as  Exhibit  2.1  above   (incorporated  by
                           reference  to Exhibit  2.2 to the  Company's  Current
                           Report on Form 8-K filed on December 13, 2007)

                  3.1      Articles of Incorporation of Four Oaks Fincorp,  Inc.
                           including   Articles  of  Amendment  to  Articles  of
                           Incorporation  (incorporated  by reference to Exhibit
                           3.1 to the  Company's  Annual Report on Form 10-K for
                           the fiscal year ended December 31, 2004)

                  3.2      Bylaws of Four Oaks Fincorp,  Inc.  (incorporated  by
                           reference  to Exhibit  3.2 to the  Company's  Current
                           Report on Form 8-K12G3  filed with the SEC on July 2,
                           1997)

                  4        Specimen of Certificate for Four Oaks Fincorp, Common
                           Stock  (incorporated by reference to Exhibit 4 to the
                           Company's  Current  Report on Form 8-K12G3 filed with
                           the SEC on July 2, 1997)

                  10.1     Employment   Agreement   with   Ayden  R.  Lee,   Jr.
                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 1997)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.2     Severance  Compensation  Agreement with Ayden R. Lee,
                           Jr. (incorporated by reference to Exhibit 10.2 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 1997)  (management  contract or
                           compensatory plan, contract or arrangement)

                                       79
<PAGE>

                  Exhibit No.     Description of Exhibit

                  10.3     Amended and Restated  Nonqualified  Stock Option Plan
                           (incorporated  by  reference  to Exhibit  10.2 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 2004)  (management  contract or
                           compensatory  plan,  contract  or  arrangement)

                  10.4     Amended and  Restated  Employee  Stock  Purchase  and
                           Bonus Plan (incorporated by reference to Exhibit 10.1
                           to the  Company's  Quarterly  Report on Form 10-Q for
                           the period ended June 30, 2004) (management  contract
                           or compensatory plan, contract or arrangement)

                  10.5     Second Amended and Restated Dividend Reinvestment and
                           Stock  Purchase  Plan  (incorporated  by reference to
                           Exhibit 10.1 to the Company's  Current Report on Form
                           8-K  filed  with  the  SEC  on  December   21,  2006)
                           (management  contract or compensatory plan,  contract
                           or arrangement)

                  10.6     Four Oaks Bank & Trust Company Supplemental Executive
                           Retirement Plan (incorporated by reference to Exhibit
                           10.6 to the  Company's  Annual  Report on Form 10-KSB
                           for  the  fiscal  year  ended   December   31,  1998)
                           (management  contract or compensatory plan,  contract
                           or arrangement)

                  10.7     Employment   Agreement   with   Clifton  L.   Painter
                           (incorporated  by  reference  to Exhibit  10.7 to the
                           Company's Annual Report on Form 10-KSB for the fiscal
                           year ended December 31, 2001) (management contract or
                           compensatory plan, contract or arrangement)

                  10.8     Severance  Compensation  Agreement  with  Clifton  L.
                           Painter (incorporated by reference to Exhibit 10.8 to
                           the  Company's  Annual  Report on Form 10-KSB for the
                           period ended December 31, 2002) (management  contract
                           or compensatory plan, contract or arrangement)

                  10.9     Executive  Employment  Agreement  with W. Leon Hiatt,
                           III (incorporated by reference to Exhibit 10.9 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.10    Severance  Compensation Agreement with W. Leon Hiatt,
                           III  (incorporated  by reference to Exhibit  10.10 to
                           the  Company's  Annual  Report on form 10-KSB for the
                           period ended December 31, 2003) (management  contract
                           or compensatory plan, contract or arrangement)

                  10.11    Executive  Employment  Agreement  with  Nancy S. Wise
                           (incorporated  by reference  to Exhibit  10.11 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.12    Severance  Compensation  Agreement with Nancy S. Wise
                           (incorporated  by reference  to Exhibit  10.12 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.13    Form  of   Stock   Option   Agreement   (Non-Employee
                           Director)  (incorporated by reference to Exhibit 10.1
                           to the  Company's  Current  Report  on Form 8-K filed
                           with the SEC on March 1, 2005)  (management  contract
                           or compensatory plan, contract or arrangement)

                  10.14    Form   of   Stock   Option    Agreement    (Employee)
                           (incorporated  by  reference  to Exhibit  10.2 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC  on  March  1,  2005)  (management   contract  or
                           compensatory plan, contract or arrangement)

                  10.15    Executive  Employment  Agreement  with  Jeff D.  Pope
                           (incorporated  by reference  to Exhibit  10.15 to the
                           Company's  Annual  Report on Form 10-K for the fiscal
                           year ended December 31, 2004) (management contract or
                           compensatory plan, contract or arrangement)

                  10.16    Severance  Compensation  Agreement  with Jeff D. Pope
                           (incorporated  by reference  to Exhibit  10.16 to the
                           Company's  Annual  Report on Form 10-K for the fiscal
                           year ended December 31, 2004) (management contract or
                           compensatory plan, contract or arrangement)

                  10.17    Summary   of   Non-Employee   Director   Compensation

                                       80
<PAGE>

                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC on January  25,  2006)  (management  contract  or
                           compensatory plan, contract or arrangement)

                  10.18    Amended  and  Restated  Declaration  of Trust of Four
                           Oaks  Statutory  Trust I, dated as of March 30,  2006
                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC on April 4, 2006)

                  10.19    Guarantee Agreement of Four Oaks Fincorp,  Inc. dated
                           as of March 30, 2006  (incorporated  by  reference to
                           Exhibit 10.2 to the Company's  Current Report on Form
                           8-K filed with the SEC on April 4, 2006)

                  10.20    Indenture,  dated as of March 30, 2006 by and between
                           Four Oaks Fincorp, Inc. and Wilmington Trust Company,
                           as  Trustee,  relating  to Junior  Subordinated  Debt
                           Securities  due  June  15,  2036   (incorporated   by
                           reference  to Exhibit 10.3 to the  Company's  Current
                           Report  on Form  8-K  filed  with the SEC on April 4,
                           2006)

                  21       Subsidiaries of Four Oaks Fincorp, Inc.

                  23       Consent of Dixon Hughes PLLC

                  31.1     Certification of Chief Executive  Officer Pursuant to
                           Rule 13a-14/15d-14 as Adopted Pursuant to Section 302
                           of the Sarbanes-Oxley Act of 2002

                  31.2     Certification of Chief Financial  Officer Pursuant to
                           Rule 13a-14/15d-14 as Adopted Pursuant to Section 302
                           of the Sarbanes-Oxley Act of 2002

                  32.1     Certification of Chief Executive  Officer Pursuant to
                           18  U.S.C.  Section  1350,  as  Adopted  Pursuant  to
                           Section 906 of the  Sarbanes-Oxley Act of 2002. [This
                           exhibit is being furnished pursuant to Section 905 of
                           the  Sarbanes-Oxley Act of 2002 and shall not, except
                           to the extent  required  by that Act, be deemed to be
                           incorporated  by reference into any document or filed
                           herewith  for the  purposes  of  liability  under the
                           Securities  Exchange Act of 1934, as amended,  or the
                           Securities  Act of 1933, as amended,  as the case may
                           be.]

                  32.1     Certification of Chief Financial  Officer to Pursuant
                           to 18 U.S.C.  Section  1350,  as Adopted  Pursuant to
                           Section 906 of the  Sarbanes-Oxley  Act of 2002 [This
                           exhibit is being furnished pursuant to Section 905 of
                           the  Sarbanes-Oxley Act of 2002 and shall not, except
                           to the extent  required  by that Act, be deemed to be
                           incorporated  by reference into any document or filed
                           herewith  for the  purposes  of  liability  under the
                           Securities  Exchange Act of 1934, as amended,  or the
                           Securities  Act of 1933, as amended,  as the case may
                           be.]

(b) See (a) (3) above.

(c) See (a) (2) above.



<PAGE>


                                   SIGNATURES

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

                                        FOUR OAKS FINCORP, INC.

         Date: March 12, 2008           By: /s/ Ayden R. Lee, Jr.
                                            ---------------------
                                            Ayden R. Lee, Jr.
                                            Chairman, President and Chief
                                            Executive Officer

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

         Date: March 12, 2008               /s/ Ayden R. Lee, Jr.
                                            ---------------------
                                            Ayden R. Lee, Jr.
                                            Chairman, President and Chief
                                            Executive Officer


         Date: March 12, 2008               /s/ Nancy S. Wise
                                            -----------------
                                            Nancy S. Wise
                                            Executive  Vice President and Chief
                                            Financial Officer

         Date: March 12, 2008               /s/ William J. Edwards
                                            ----------------------
                                            William J. Edwards
                                            Director

         Date: March 12, 2008               /s/ Warren L. Grimes
                                            --------------------
                                            Warren L. Grimes
                                            Director

         Date: March 12, 2008               /s/ Dr. R. Max Raynor, Jr.
                                            --------------------------
                                            Dr. R. Max Raynor, Jr.
                                            Director

         Date: March 12, 2008               /s/ Percy Y. Lee
                                            ----------------
                                            Percy Y. Lee
                                            Director

         Date: March 12, 2008               /s/ Paula C. Bowman
                                            -------------------
                                            Paula C. Bowman
                                            Director

         Date: March 12, 2008               /s/ William Ashley Turner
                                            -------------------------
                                            William Ashley Turner
                                            Director

         Date: March 12, 2008               /s/ Michael A. Weeks
                                            --------------------
                                            Michael A. Weeks
                                            Director

                                       82
<PAGE>

           Exhibit No.     Description of Exhibit

                  2.1      Merger  Agreement,  dated as of December 10, 2007, by
                           and among Four Oaks Fincorp,  Inc.,  Four Oaks Bank &
                           Trust   Company   and   LongLeaf    Community    Bank
                           (incorporated  by  reference  to  Exhibit  2.1 to the
                           Company's   Current  Report  on  Form  8-K  filed  on
                           December 13, 2007)

                  2.2      List  of  Schedules  Omitted  from  Merger  Agreement
                           included  as  Exhibit  2.1  above   (incorporated  by
                           reference  to Exhibit  2.2 to the  Company's  Current
                           Report on Form 8-K filed on December 13, 2007)

                  3.1      Articles of Incorporation of Four Oaks Fincorp,  Inc.
                           including   Articles  of  Amendment  to  Articles  of
                           Incorporation  (incorporated  by reference to Exhibit
                           3.1 to the  Company's  Annual Report on Form 10-K for
                           the fiscal year ended December 31, 2004)

                  3.2      Bylaws of Four Oaks Fincorp,  Inc.  (incorporated  by
                           reference  to Exhibit  3.2 to the  Company's  Current
                           Report on Form 8-K12G3  filed with the SEC on July 2,
                           1997)

                  4        Specimen of Certificate for Four Oaks Fincorp, Common
                           Stock  (incorporated by reference to Exhibit 4 to the
                           Company's  Current  Report on Form 8-K12G3 filed with
                           the SEC on July 2, 1997)

                  10.1     Employment   Agreement   with   Ayden  R.  Lee,   Jr.
                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 1997)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.2     Severance  Compensation  Agreement with Ayden R. Lee,
                           Jr. (incorporated by reference to Exhibit 10.2 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 1997)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.3     Amended and Restated  Nonqualified  Stock Option Plan
                           (incorporated  by  reference  to Exhibit  10.2 to the
                           Company's  Quarterly  Report  on  Form  10-Q  for the
                           period ended June 30, 2004)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.4     Amended and  Restated  Employee  Stock  Purchase  and
                           Bonus Plan (incorporated by reference to Exhibit 10.1
                           to the  Company's  Quarterly  Report on Form 10-Q for
                           the period ended June 30, 2004) (management  contract
                           or compensatory plan, contract or arrangement)

                  10.5     Second Amended and Restated Dividend Reinvestment and
                           Stock  Purchase  Plan  (incorporated  by reference to
                           Exhibit 10.1 to the Company's  Current Report on Form
                           8-K  filed  with  the  SEC  on  December   21,  2006)
                           (management  contract or compensatory plan,  contract
                           or arrangement)

                  10.6     Four Oaks Bank & Trust Company Supplemental Executive
                           Retirement Plan (incorporated by reference to Exhibit
                           10.6 to the  Company's  Annual  Report on Form 10-KSB
                           for  the  fiscal  year  ended   December   31,  1998)
                           (management  contract or compensatory plan,  contract
                           or arrangement)

                  10.7     Employment   Agreement   with   Clifton  L.   Painter
                           (incorporated  by  reference  to Exhibit  10.7 to the
                           Company's Annual Report on Form 10-KSB for the fiscal
                           year ended December 31, 2001) (management contract or
                           compensatory plan, contract or arrangement)

                  10.8     Severance  Compensation  Agreement  with  Clifton  L.
                           Painter (incorporated by reference to Exhibit 10.8 to
                           the  Company's  Annual  Report on Form 10-KSB for the
                           period ended December 31, 2002) (management  contract
                           or compensatory plan, contract or arrangement)

                  10.9     Executive  Employment  Agreement  with W. Leon Hiatt,
                           III (incorporated by reference to Exhibit 10.9 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.10    Severance  Compensation Agreement with W. Leon Hiatt,
                           III  (incorporated  by reference to Exhibit  10.10 to
                           the  Company's  Annual  Report on form 10-KSB for the
                           period ended December 31, 2003) (management  contract
                           or compensatory plan, contract or arrangement)

                                       43
<PAGE>


                  10.11    Executive  Employment  Agreement  with  Nancy S. Wise
                           (incorporated  by reference  to Exhibit  10.11 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.12    Severance  Compensation  Agreement with Nancy S. Wise
                           (incorporated  by reference  to Exhibit  10.12 to the
                           Company's Annual Report on Form 10-KSB for the period
                           ended  December  31,  2003)  (management  contract or
                           compensatory plan, contract or arrangement)

                  10.13    Form  of   Stock   Option   Agreement   (Non-Employee
                           Director)  (incorporated by reference to Exhibit 10.1
                           to the  Company's  Current  Report  on Form 8-K filed
                           with the SEC on March 1, 2005)  (management  contract
                           or compensatory plan, contract or arrangement)

                  10.14    Form   of   Stock   Option    Agreement    (Employee)
                           (incorporated  by  reference  to Exhibit  10.2 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC  on  March  1,  2005)  (management   contract  or
                           compensatory plan, contract or arrangement)

                  10.15    Executive  Employment  Agreement  with  Jeff D.  Pope
                           (incorporated  by reference  to Exhibit  10.15 to the
                           Company's  Annual  Report on Form 10-K for the fiscal
                           year ended December 31, 2004) (management contract or
                           compensatory plan, contract or arrangement)

                  10.16    Severance  Compensation  Agreement  with Jeff D. Pope
                           (incorporated  by reference  to Exhibit  10.16 to the
                           Company's  Annual  Report on Form 10-K for the fiscal
                           year ended December 31, 2004) (management contract or
                           compensatory plan, contract or arrangement)

                  10.17    Summary   of   Non-Employee   Director   Compensation
                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC on January  25,  2006)  (management  contract  or
                           compensatory plan, contract or arrangement)

                  10.18    Amended  and  Restated  Declaration  of Trust of Four
                           Oaks  Statutory  Trust I, dated as of March 30,  2006
                           (incorporated  by  reference  to Exhibit  10.1 to the
                           Company's  Current  Report on Form 8-K filed with the
                           SEC on April 4, 2006)

                  10.19    Guarantee Agreement of Four Oaks Fincorp,  Inc. dated
                           as of March 30, 2006  (incorporated  by  reference to
                           Exhibit 10.2 to the Company's  Current Report on Form
                           8-K filed with the SEC on April 4, 2006)

                  10.20    Indenture,  dated as of March 30, 2006 by and between
                           Four Oaks Fincorp, Inc. and Wilmington Trust Company,
                           as  Trustee,  relating  to Junior  Subordinated  Debt
                           Securities  due  June  15,  2036   (incorporated   by
                           reference  to Exhibit 10.3 to the  Company's  Current
                           Report  on Form  8-K  filed  with the SEC on April 4,
                           2006)

                  21       Subsidiaries of Four Oaks Fincorp, Inc.

                  23       Consent of Dixon Hughes PLLC

                  31.1     Certification of Chief Executive  Officer Pursuant to
                           Rule 13a-14/15d-14 as Adopted Pursuant to Section 302
                           of the Sarbanes-Oxley Act of 2002

                  31.2     Certification of Chief Financial  Officer Pursuant to
                           Rule 13a-14/15d-14 as Adopted Pursuant to Section 302
                           of the Sarbanes-Oxley Act of 2002

                  32.1     Certification of Chief Executive  Officer Pursuant to
                           18  U.S.C.  Section  1350,  as  Adopted  Pursuant  to
                           Section 906 of the  Sarbanes-Oxley Act of 2002. [This
                           exhibit is being furnished pursuant to Section 905 of
                           the  Sarbanes-Oxley Act of 2002 and shall not, except
                           to the extent  required  by that Act, be deemed to be
                           incorporated  by reference into any document or filed
                           herewith  for the  purposes  of  liability  under the
                           Securities  Exchange Act of 1934, as amended,  or the
                           Securities  Act of 1933, as amended,  as the case may
                           be.]

                  32.1     Certification of Chief Financial  Officer to Pursuant
                           to 18 U.S.C.  Section  1350,  as Adopted  Pursuant to
                           Section 906 of the  Sarbanes-Oxley  Act of 2002 [This
                           exhibit is being furnished pursuant to Section 905 of
                           the  Sarbanes-Oxley Act of 2002 and shall not, except
                           to the extent  required  by that Act, be deemed to be
                           incorporated  by reference into any document or filed
                           herewith  for the  purposes  of  liability  under the
                           Securities  Exchange Act of 1934, as amended,  or the
                           Securities  Act of 1933, as amended,  as the case may
                           be.]