UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

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

   For the fiscal year ended December 31, 2003 Commission File Number 0-22787

                             FOUR OAKS FINCORP, INC.
                 (Name of small business issuer 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
                    (Address of principal executive offices)

                                      27524
                                   (Zip Code)

                    Issuer's telephone number: (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)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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

     Check if no disclosure of delinquent filers in response to Item 405 of
 Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
                       amendment to this Form 10-KSB. [ X ]


                                   $22,340,884
                                   -----------
             (Registrant's revenues for its most recent fiscal year)

                                   $49,783,558
                                   -----------
 (Aggregate 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 March 8, 2004)

                                    2,706,538
                                    ---------

          (Number of shares of Common Stock, par value $1.00 per share,
                        outstanding as of March 8, 2004)

     Documents Incorporated by Reference                Where Incorporated
     -----------------------------------                ------------------

     (1) Proxy Statement for the 2004 Annual            Part III
         Meeting of Shareholders to be held
         April 26, 2004



<PAGE>

Forward Looking Information

     Information  set  forth in this  Annual  Report  on Form  10-KSB  under the
caption  "Business"  and  "Managements  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
risks and  uncertainties  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,  the low
trading volume of our common stock, other considerations described in connection
with specific forward looking statements and other cautionary elements specified
in documents incorporated by reference in this Annual Report on Form 10-KSB.

                                     PART I


Item 1 - Business.

     On February 5, 1997, Four Oaks Bank & Trust Company  (referred to herein as
the "bank")  formed Four Oaks Fincorp,  Inc. (the  "Company") for the purpose of
serving as a holding  company for the bank. We have no significant  assets other
than cash and the capital  stock of the bank as well as  $595,000 in  securities
available for sale. Our corporate offices are located at 6114 US 301 South, Four
Oaks, North Carolina 27524.

     The bank was incorporated  under the laws of the State of North Carolina in
1912. The bank is a  state-chartered  member of the Federal Reserve  System.  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,  North  Carolina at 102 East Main Street,  two in Smithfield,
North Carolina at 128 North Second Street,  and 403 South Brightleaf  Boulevard,
one in Garner, North Carolina at 200 Glen Road, one in Benson, North Carolina at
200 East Church Street,  one in Fuquay-Varina,  North Carolina at 325 North Judd
Parkway Northeast,  and one in Wallace,  North Carolina at 406 East Main Street.
The Holly Springs  office opened during June of 2003 and is located at 101 Avent
Ferry Road, Holly Springs, North Carolina.

     The bank is a  community  bank  engaged in the general  commercial  banking
business in Johnston, Wake, and Duplin Counties, North Carolina. 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. Duplin County is contiguous to Pender, Sampson, Wayne, Lenoir,
Jones and Onslow counties.

     As of  December  31,  2003,  we had  assets  of $341.7  million,  net loans
outstanding  of $269.2 million and deposits of $272.9  million.  We have enjoyed
considerable  growth  over the  past  five (5)  years  as  evidenced  by the 59%
increase  in assets,  the 76%  increase  in net loans  outstanding,  and the 45%
increase in deposits since December 31, 1998.

     The bank provides a full range of banking services, including such services
as checking accounts,  savings accounts,  individual  retirement  accounts,  NOW
accounts, money market accounts, certificates of deposit, a student checking and
savings program; loans for businesses,  agriculture, real estate, personal uses,
home improvement and automobiles; mortgage loans; equity lines of credit; credit
cards;  safe deposit boxes;  money orders;  electronic funds transfer  services,
including  wire  transfers;  internet  banking and bill pay services;  telephone
banking;  cashier's checks;  traveler's  checks; and 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,  IRA's, discount brokerage
services,  employee  benefit plans,  401(k)'s and SEP's.  In addition,  the bank
provides  worldwide  automated  teller  machine access to its customers 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.  In 2003, the
bank began issuing  stored value cards which are marketed by  independent  sales
organizations and provide access to funds

                                       2
<PAGE>


through  the  Visa,  Plus,  Interlink,  Mastercard,  Maestro,  Cirrus,  and Star
networks.  At  present,  the  bank  does not  provide  the  services  of a trust
department.

     The  majority  of  the  bank's  customers  are  individuals  and  small  to
medium-size  businesses  located in  Johnston,  Wake,  and Duplin  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.

     From its  headquarters  located in Four Oaks and its ten offices located in
Four Oaks, Clayton,  Smithfield,  Garner,  Benson,  Fuquay-Varina,  Wallace, and
Holly Springs,  the bank serves a major portion of Johnston County, part of Wake
and Harnett  Counties and part of Duplin County.  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.

     In an effort to offer a more  diversified and  competitive  product line to
better serve our customers and community,  we have 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. During 2003,
Four  Oaks  Mortgage  Company,  L.P.  started  providing  secondary  market-type
mortgages and will be the vehicle  through which all of our mortgage and funding
business will be run going forward.  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  have  been  immaterial  over the past two  years.  At
December 31, 2003, the bank employed 126 full time equivalent employees.

     The following table sets forth certain of our financial data and ratios for
the years ended December 31, 2003,  2002, and 2001. 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>

                                                                2003                2002                 2001
                                                          ----------------     ---------------     ----------------
                                                                        (In thousands, except ratios)
<S>                                                       <C>                  <C>                 <C>
Net Income                                                $          2,918     $         2,916     $          2,656
Average equity capital accounts                           $         32,341     $        29,931     $         27,306
Ratio of net income to average equity capital accounts               9.02%               9.74%                9.73%
Average daily total deposits                              $        256,397     $       242,878     $        226,476
Ratio of net income to average daily total deposits                  1.14%               1.20%                1.17%

Average daily loans (gross)                               $        250,599     $       216,620     $        202,500
Ratio of average daily loans to average daily total deposits        97.74%              89.19%               89.41%

</TABLE>

Competition

     Commercial banking in North Carolina is extremely  competitive due in large
part to statewide  branching.  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 and credit unions, as well as consumer finance companies,  mortgage
companies and other lenders engaged in the business of extending credit. 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.

     The  enactment of  legislation  authorizing  interstate  banking has caused
great  increases  in the  size and  financial  resources  of some of the  bank's
competitors.  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. See "Holding Company Regulation" below.

     Despite the competition in its market areas,  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,

                                       3
<PAGE>


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 is not intended to be
an  exhaustive  description  of the statutes or  regulations  applicable  to our
business or the business of the bank. Supervision, regulation and examination of
us and the  bank by bank  regulatory  agencies  is  intended  primarily  for the
protection of the bank's depositors rather than our shareholders.



Holding Company Regulation

     General. We are 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,  conducting  securities  brokerage
activities,  performing  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 has  reasonable
cause to believe 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,  to engage in a broader  range of
nonbanking   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.


                                       4

<PAGE>

     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.

     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.

                                       5


<PAGE>


     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  substantially  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, 2003,  we had Tier 1  risk-adjusted,  total  regulatory
capital  and  leverage  capital  of  approximately  11.80%,  13.05%  and  9.67%,
respectively,  all  in  excess  of the  minimum  requirements  to be  considered
well-capitalized under prompt corrective action provisions.

     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 Community Reinvestment Act of
1977 (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 Bank  Insurance  Fund
(the "BIF") of the Federal Deposit  Insurance  Corporation  (the "FDIC") up to a
maximum of one hundred thousand dollars  ($100,000) per insured  depositor.  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.  In  general,  our  ability  to pay cash
dividends is dependent  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.

                                       6

<PAGE>


     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, 2003, the bank had Tier 1  risk-adjusted,  total
regulatory  capital and leverage  capital of  approximately  11.05%,  12.30% and
9.05%,  respectively,  in excess of the minimum  requirements  to be  considered
well-capitalized under prompt corrective action provisions.

     The bank is subject to insurance assessments imposed by the FDIC, including
a risk-based  assessment  schedule providing for annual assessment rates ranging
from 0% to .27% of an  institution's  average  assessment  base,  applicable  to
institutions insured by both the BIF and the Savings Association  Insurance Fund
("SAIF").  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  BIF  (Subgroup  B) or  whether  such  weaknesses  pose a
substantial risk of loss to the BIF unless  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.

     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"   and
"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.


                                       7

<PAGE>




Monetary Policy and Economic Controls

     Both us 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:

<TABLE>
                                                               Positions and offices with Four Oaks
                                          Year first           Fincorp, Inc. and the bank and business
       Name                Age            employed             experience during past five (5) years
       ----                ---            --------          -------------------------------------------------

   <S>                      <C>             <C>             <C>
   Ayden R. Lee, Jr.        55              1980            Chief Executive Officer, President and Director
                                                            of Four Oaks  Fincorp, Inc. and Four Oaks Bank
                                                            & Trust Company

   Clifton L. Painter       54              1986            Senior Executive Vice President, Chief Operating
                                                            Officer of Four Oaks Fincorp, Inc. and Four Oaks
                                                            Bank & Trust Company

   Nancy S. Wise            48              1991            Senior Vice President, Chief Financial Officer of Four Oaks
                                                            Fincorp, Inc. and Four Oaks Bank & Trust Company

   W. Leon Hiatt, III       36              1994            Senior Vice President of Four Oaks Fincorp, Inc. and Four Oaks
                                                            Bank & Trust Company, Loan Administrator of Four Oaks Bank & Trust
                                                            Company

</TABLE>


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 one of our  directors  as well as a director  of the
bank.  Under the terms of the lease,  which the bank believes to be arms-length,
the bank paid $891 per month in rent in 2003. 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 Avent Ferry Road, Holly Springs, North Carolina.  Under the terms
of the lease, the bank will pay $2,166 per month for a period of five years. 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 the
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 the
administrative  offices,  data  operations,  loan operations and the bank's wide
area network central link. In addition, the bank owns the following:


                                       8
<PAGE>


<TABLE>

          <S>                                 <C>                     <C>                       <C>
              Location                        Year Built              Present Function          Square Feet
              --------                        ----------              ----------------          -----------

         102 East Main Street
         Clayton, North Carolina                 1986                 Branch Office                 4,700

         200 East Church Street
         Benson, North Carolina                  1987                 Branch Office                 2,000

         128 North Second Street
         Smithfield, North Carolina              1991                 Branch Office                 5,000

         403 South Brightleaf Blvd.
         Smithfield, North Carolina              1995                 Limited-Service Facility       720

         200 Glen Road
         Garner, North Carolina                  1996                 Branch Office                 3,600

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

         406 East Main Street
         Wallace, North Carolina                 2003                 Branch Office (modular)       2,800

Management believes each of the properties referenced above is adequately covered by insurance.

</TABLE>


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 and Related Stockholder Matters.

     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, is as
follows (prices reflect inter-dealer prices,  without retail mark-up,  mark-down
or commissions and may not necessarily represent actual transactions):
<TABLE>
                                                                 Fiscal Year Ended December 31,
                                               --------------------------------------------------------------------
                                                             2002                                2003
                                               -------------------------------     --------------------------------
                                                   High                Low              High               Low
                                               ---------------  --------------     ----------------  --------------
<S>                                             <C>               <C>                <C>               <C>
First quarter                                   $   18.80         $   16.40          $   18.80         $   17.64
Second quarter                                      18.40             16.80              19.20             18.04
Third quarter                                       18.41             18.08              18.40             17.60
Fourth quarter                                      18.80             18.00              26.00             18.00
</TABLE>

     As of December 31, 2003, the approximate number of holders of record of our
common stock was 1,200. We have no other class of equity securities.  The bank's
ability to declare a dividend to us and our 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 us.  Subject
to the legal  availability of funds to pay dividends,  cash dividends paid by us
in 2003 and 2002,  after giving  effect to the 5-for-4  stock split during 2003,
were $.36 and $.32 per share, respectively.


                                       9

<PAGE>


Item 6 - 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  Consolidated
Financial  Statements  and Notes  thereto  which are  contained  in this report.
Additional  discussion  and analysis  related to fiscal 2003 is contained in our
Quarterly  Reports on Form 10-QSB for the fiscal  quarters ended March 31, 2003,
June 30, 2003 and September 30, 2003, respectively.

Overview

     We have  experienced  significant  sustained  growth in assets and deposits
over the last five years.  Our assets  have  increased  from  $214.4  million at
December  31,  1998 to $341.7  million at  December  31,  2003,  while our total
deposits have  increased  from $188.4  million to $272.9  million over that same
span. In addition,  for 68 consecutive years, we have paid dividends (of course,
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 25% of our average net income.

     We set  interest  rates on deposits  and loans at  competitive  rates while
maintaining spreads of 3.87% and 3.59% in 2003 and 2002,  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
$155.6  million at December  31, 1998 to $272.6  million at December  31,  2003,
while our average net annual chargeoffs over the same period were $727,000.  The
sustained growth provided by operations resulted in increases in total assets of
7%, 6% and 16% for 2003, 2002 and 2001, respectively.

     Our gross loans grew 19% and 9% in 2003 and 2002,  respectively.  Our total
investments  (including  interest earning deposits and FHLB stock) decreased 32%
and 6% in 2003  and  2002,  respectively.  We  closely  monitor  changes  in the
financial  markets in order to maximize  the yield on our assets.  The growth in
loans is funded by the growth in total  deposits  of 9% and 6% in 2003 and 2002,
the reduction of lower  yielding  investments  and net income of $2.9 million in
both 2003 and 2002.  Net income for 2002  increased  by 10% over 2001 due to our
repricing of deposits, which lowered our cost of funds.

     In an effort to offer a more  diversified and  competitive  product line to
better serve our customers and community,  in 2002 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. During 2003,
Four  Oaks  Mortgage  Company,  L.P.  started  providing  secondary  market-type
mortgages  and became the vehicle  through which all of our mortgage and funding
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.

     Management  historically has monitored and controlled increases in overhead
expenses  while being  committed  to  developing  the skills and  enhancing  the
professionalism of our employees.  Employee turnover has been minimal, while the
number of full-time  equivalent  employees has increased from 86 at December 31,
1998 to 126 at December 31, 2003.

Results of Operations

Comparison of Financial Condition at December 31, 2003 and 2002

     During 2003,  our total assets  increased by $23.4 million,  or 7.4%,  from
$318.3 million at December 31, 2002 to $341.7 million at December 31, 2003. This
increase in our total assets  resulted  primarily  from growth in our net loans,
which  increased  from $226.7  million at December 31, 2002 to $269.2 million at
the end of 2003, an increase of $42.5  million.  Additionally,  our other assets
increased  $3.1  million  in  2003  due to our  investment  in  bank-owned  life
insurance  during the year of $2.9 million.  These  increases in our assets were
partially  offset  by the  decrease  during  2003 in our  liquid  assets,  which
consists  of cash and  cash  equivalents  and  investment  securities,  of $22.4
million.  This decrease in our liquid assets resulted  principally  from the net
decrease  in our  securities  portfolio  during  the year of $18.6  million.  In
addition to the  aforementioned  use of our liquid  assets,  the funding for our
loan growth and  investment in bank-owned  life  insurance  came from  deposits,
which  increased by $22.3 million  during 2003 to $272.9 million at December 31,
2003 compared with $250.6 million at December 31, 2002.


                                       10

<PAGE>

     Shareholders'  equity  increased  by $1.7 million  during 2003  compared to
2002.  This  increase  resulted  from our net income of $2.9  million,  dividend
reinvestment  plan  proceeds of $469,000 and proceeds from the exercise of stock
options  of  $300,000,  net of  repurchases  of  stock  totaling  $993,000,  and
dividends paid of $952,000.

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002

Net Income

     We earned  net  income  of $2.9  million  or $1.09  per share for 2003,  as
compared  with net income of $2.9  million or $1.10 per share for 2002.  We were
able to maintain the level of our earnings  despite the challenges  presented by
the  historically low rates during the year, which fell to their lowest level in
June 2003. We believe  strategic pricing of both our loans and deposits improved
our net interest margin by lowering our overall cost of funds and allowing us to
attract the higher balance, higher quality loans in our market. Cost containment
initiatives that began in prior years continue to positively impact our overhead
levels.  Despite opening one new branch and permanently locating a branch opened
in temporary  quarters late in 2002,  our  non-interest  expenses only increased
11.6% in 2003 as compared to 2002.

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 noninterest-bearing liabilities and capital.

     Net interest  income  increased to $13.0  million in 2003,  compared to the
$12.1 million earned in 2002, an increase of $876,000. During 2003, our level of
average  interest earning assets increased from $290.2 million in 2002 to $300.7
million,  but the average rate we earned on those assets dropped 52 basis points
from 6.82% in 2002 to 6.30% in 2003. This decrease in the average rate we earned
on our  assets  more than  offset  the  effect of the  increase  in our  average
interest  earning  assets  during the year and  resulted in the  decrease in our
interest  income of $842,000 in 2003.  This  decrease  in our  interest  income,
however,  was negated by the decrease in our interest expense during 2003. While
our average  interest-bearing  liabilities increased from $236.7 million in 2002
to $244.0 million in 2003, it is important to note that 16.1% of the increase in
deposits  occurred  in our money  market  and  interest-bearing  demand  deposit
accounts,   which  have  rates  significantly  less  than  our  other  types  of
interest-bearing  liabilities. The average rate we paid for our interest-bearing
liabilities  during the year dropped 80 basis  points  during 2003 from 3.23% in
2002 to 2.43% in 2003,  resulting  in a  decrease  of $1.7  million in our total
interest  expense  in 2003.  We also  grew  noninterest-bearing  demand  deposit
accounts by 18.7% in 2003 compared to 2002.

Provision for Loan Losses and Asset Quality

     Our provision for loan losses was $1.4 million during 2003 and $1.2 million
in 2002.  Loan  charge-offs in 2003 and 2002 were $1.1 million and $1.2 million,
respectively.  This  increase  resulted  primarily  from the  growth in our loan
portfolio  during the year.  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 the borrower, past and expected loss experience,  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.  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.

     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,
decreased from $2.1 million at December 31, 2002 to $1.8 million at December 31,
2003.  Our allowance for loan losses,  expressed as a percentage of gross loans,
was 1.25% at both  December  31,  2003 and  2002.  At  December  31,  2003,  the
allowance for loan losses amounted to $3.4 million, which management believes is
adequate to absorb losses inherent in its loan portfolio.


                                       11
<PAGE>



Non-interest Income

     Non-interest  income  increased 23.5% from $2.8 million during 2002 to $3.5
million in 2003.  Our  non-interest  income is  comprised  primarily  of service
charges  on deposit  accounts,  insurance  commissions,  gain or loss on sale of
investment  securities,  gain on sale of loans,  merchant fees,  bank-owned life
insurance  income and various other sources of miscellaneous  operating  income.
The  $660,000  increase  in  non-interest  income  from  2002 to 2003  primarily
resulted  from  increases in the net gains on sale of securities of $281,000 and
merchant fees of $115,000,  as well as increases in income from  bank-owned life
insurance of $159,000.

Non-interest Expense

     Our  non-interest  expense  increased  from $9.5  million  in 2002 to $10.6
million  in 2003,  an  increase  of $1.1  million.  Approximately  64.5% of this
increase was due to salaries and benefits expenses.  We opened one new office in
June of 2003.  Another  office which opened in temporary  quarters late in 2002,
relocated  to their  permanent  location in January  2003.  These new  locations
contributed  to the increase in salaries and benefits and to the increase in our
occupancy and equipment expenses during 2003.

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, federal funds sold, and 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,  to
purchase federal funds from other financial institutions and to obtain wholesale
deposits.  Our  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 $32.9 million or 9.6% of total
assets  at  December  31,  2003 and  $31.2  million  or 9.8% of total  assets at
December 31, 2002.

Contractual Obligations and Commitments

     The  following  table  shows  our  expected   long-term  debt  amortization
schedule,  future capital lease commitments  (including  principal and interest)
and future operating lease commitments as of December 31, 2003 (in thousands):
<TABLE>

                                                                     Payments Due by Period
                                          -------------------------------------------------------------------------
                                                           Less than                                    More than
                                              Total         1 year        1-3 years       3-5 years       5 years
                                          ------------   ------------   ------------   -------------   ------------

<S>                                       <C>            <C>            <C>            <C>             <C>
Borrowings                                $     33,160   $          -   $        160   $           -   $     33,000
Operating leases                                   111             26             78               7              -
Deposits                                       165,219        117,879         36,968           5,370          5,002
Purchase obligations                               800            800              -               -              -
                                          ------------   ------------   ------------   -------------   ------------

     Total                                $    199,290   $    118,705   $     37,206   $       5,377   $     38,002
                                          ============   ============   ============   =============   ============
</TABLE>
     The  following  table  shows  our  undisbursed   lines  of  credit,   other
commitments to extend,  undisbursed  portion of  construction  loans and standby
letters of credit as of December 31, 2003 (in thousands):
<TABLE>

                                                           Amount of Commitment Expiration Per Period
                                                           ------------------------------------------
                                                           Less than                                    More than
                                              Total         1 year        1-3 years       3-5 years       5 years
                                          ------------   ------------   ------------   -------------   ------------

<S>                                       <C>            <C>            <C>            <C>             <C>
Undisbursed lines of credit               $     18,246   $         84   $      6,717   $         330   $     11,115
Other commitments to extend                     28,286         20,328          5,937             626          1,395
Undisbursed portion of construction loans       22,199         18,863          3,336               -              -
Standby letters of credit                        1,003            657            343               3              -
                                          ------------   ------------   ------------   -------------   ------------

   Total                                  $     69,734   $     39,932   $     16,333   $         959   $     12,510
                                          ============   ============   ============   =============   ============
</TABLE>


                                       12
<PAGE>


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 2003 and
2002  were  36%  and  31%,  respectively.  These  changes  were  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.

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

     The following  schedule  presents average balance sheet information for the
years 2003, 2002 and 2001, along with related interest earned and average yields
for  interest-earning  assets  and the  interest  paid  and  average  rates  for
interest-bearing liabilities:
<TABLE>
<CAPTION>
                                                                 Average Daily Balances, Interest Income/Expense, Average Yield/Rate

                                                                 For the Years Ended December 31,
                               -----------------------------------------------------------------------------------------------------
                                             2003                                2002                             2001
                               ---------------------------------  ----------------------------------   -----------------------------
                               Average                Average      Average                  Average    Average               Average
                               balance    Interest      rate       balance     Interest      Rate      balance    Interest    Rate
                               --------   --------     ------     ----------- -----------  --------  ----------- ----------- -------
                                                                         (Dollars in thousands)
<S>                                <C>         <C>        <C>         <C>          <C>        <C>          <C>         <C>      <C>
Interest-earning assets:
  Loans                        $249,240    $17,318      6.95%     $216,620      $16,746      7.73%     $202,500     $18,431    9.10%
  Investment securities
   - taxable                     43,084      1,272      2.95%       54,560        2,596      4.76%       46,289       2,702    5.84%
  Investment securities
   - tax-exempt                   4,968        212      4.27%        4,716          213      4.52%        4,635         219    4.72%
  Other                           3,380        141      4.17%       14,398          230      1.60%        3,052         110    3.60%
                               --------   --------             -----------  -----------               ---------  ----------

    Total interest-earning
     assets                     300,672     18,943      6.30%       290,294      19,785      6.82%       256,476     21,462    8.37%
                                          --------     ------               -----------  --------                ----------  -------

Other assets                    23,550                               18,040                               17,578
                              --------                              -------                             --------

    Total assets              $324,222                             $308,334                             $274,054
                              ========                             ========                             ========

Interest-bearing liabilities:
  Deposits:
    NOW and money market      $ 39,313         238      0.61%       $32,431         302      0.93%      $ 27,764        458   1.65%
    Savings                     12,659          63      0.50%        11,427         124      1.09%        10,442        188   1.80%
    Time deposits greater
       than $100,000            70,567       1,878      2.66%        70,543       2,541      3.60%        65,121      3,718   5.71%
    Other time deposits         87,285       2,186      2.50%        89,100       3,136      3.52%        87,925      4,883   5.55%
  Borrowings                    34,200       1,557      4.55%        33,160       1,537      4.64%        17,129        920   5.37%
                               --------   --------              ----------- -----------              ----------- -----------
    Total interest-bearing
     liabilities               244,024       5,922      2.43%       236,661       7,640      3.23%       208,381     10,167    4.88%
                                          --------     ------               -----------  --------                ----------- -------

  Noninterest-bearing deposits  45,214                               39,377                              35,224
  Other liabilities              2,643                                2,365                               3,143
  Shareholders' equity          32,341                               29,931                              27,306
                               --------                             -------                            --------

    Total liabilities and
      shareholders' equity    $324,222                             $308,334                            $274,054
                              ========                             ========                            ========

Net interest income and
   interest rate spread                    $13,021      3.87%                   $12,145      3.59%                  $11,295    3.49%
                                           =======    =======                   =======     ======                  =======  =======

Net yield on average interest-
  earning assets                                        4.33%                                4.18%                             4.40%
                                                      =======                               ======                           =======

Ratio of average interest-earning
   assets to average interest-bearing
   liabilities                                        123.21%                              122.66%                           123.08%
                                                     ========                              =======                          ========
</TABLE>

                                       13
<PAGE>


     The  following  table  shows  changes in  interest  income  and  expense by
category and  rate/volume  variances  for the years ended  December 31, 2003 and
2002.  The  changes  due to rate and volume  were  allocated  on their  absolute
values:
<TABLE>
<CAPTION>
                                                  Year Ended                               Year Ended
                                          December 31, 2003 vs. 2002               December 31, 2002 vs. 2001
                                    -----------------------------------         ---------------------------------
                                          Increase (Decrease) Due to               Increase (Decrease) Due to
                                    -----------------------------------         ---------------------------------
                                       Volume        Rate        Total             Volume        Rate       Total
                                    -----------  ------------ ---------         -----------  ------------ ---------
                                                                      (In thousands)

Interest income:
<S>                                  <C>          <C>         <C>             <C>          <C>          <C>
  Loans                              $   2,487    $   (1,915) $   572         $   1,188    $   (2,873)  $   (1,685)
  Investment securities - taxable         (442)         (882)  (1,324)              438          (544)        (106)
  Investment securities - tax-exempt        11           (12)      (1)                4           (10)          (6)
  Other interest-earning assets           (318)          229      (89)              295          (175)         120
                                     -----------   ---------- --------      -----------  -----------   -----------

      Total interest income              1,738        (2,580)    (842)            1,925        (3,602)      (1,677)
                                     -----------   ---------- --------      -----------  -----------   -----------

Interest expense:
  Deposits:
    NOW and money market                    53          (117)     (64)               60          (216)        (156)
    Savings                                 10           (71)     (61)               14           (78)         (64)
    Time deposits greater
      than $100,000                          1          (664)    (663)              252        (1,429)      (1,177)
    Other time deposits                    (55)         (895)    (950)               53        (1,800)      (1,747)
  Borrowings                                48           (28)      20               802          (185)         617
                                     -----------   ----------   -----       -----------  -----------   -----------

      Total interest expense                57        (1,775)  (1,718)            1,181        (3,708)      (2,527)
                                     -----------   ----------   -----       -----------  -----------   -----------

      Net interest income increase
        (decrease)                   $   1,681      $   (805) $   876           $   744       $   106      $   850
                                     ===========   ==========   =====       ===========  ===========   ===========
</TABLE>

Investment Portfolio

     The  valuations  of investment  securities  at December 31, 2003,  2002 and
2001, respectively, were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                 Available for Sale
                                    -------------------------------------------------------------------------------
                                              2003                       2002                        2001
                                    ------------------------   -------------------------  -------------------------
                                      Amortized    Estimated    Amortized     Estimated    Amortized     Estimated
                                        cost      fair value      cost        fair value     cost        fair value
                                    -----------   ----------   -----------   -----------  -----------   -----------

<S>                                       <C>            <C>          <C>            <C>         <C>          <C>
U.S. Government and agency
  securities                        $    15,866   $   15,914   $    27,147   $    27,361  $    52,356   $    52,356
State and municipal securities            4,664        4,955         4,616         4,860        4,892         5,025
Mortgage-backed securities               16,535       16,502        23,671        23,933        4,315         4,279
Other                                       567          832           552           635          542           542
                                    -----------   ----------   -----------   -----------  -----------   -----------

Total securities                    $    37,632   $   38,203   $    55,986   $    56,789  $    62,105   $    62,202
                                    ===========   ==========   ===========   ===========  ===========   ===========

Pledged securities                                $   12,329                 $    15,339                $    17,244
                                                  ==========                 ===========                ===========

</TABLE>


                                       14
<PAGE>

     The following table sets forth the carrying value of our available for sale
investment portfolio at December 31, 2003 (in thousands):
<TABLE>
                                                                        Carrying Value
                                    -------------------------------------------------------------------------------
                                                         After 1 year   After 5 years
                                                           through        through          After
                                             1 year        5 years       10 years        10 years         Total
                                          ------------   ------------   ------------   -------------   ------------
<S>                                                <C>            <C>           <C>              <C>          <C>
U.S. Government and agency
 securities                                      $   -     $   14,117      $   1,797       $       -     $   15,914
State and municipal securities                       -          1,140          2,288           1,527          4,955
Mortgage-backed securities                           -          1,592         14,910               -         16,502
Other                                                -              -              -             832            832
                                          ------------   ------------   ------------   -------------   ------------

     Total                                       $   -     $   16,849     $   18,995       $   2,359     $   38,203
                                          ============   ============   ============   =============   ============
</TABLE>

     The  following  table sets forth the weighted  average yield by maturity of
our available for sale investment portfolio at December 31, 2003:
<TABLE>
<CAPTION>
                                                                   Weighted Average Yields
                                    -------------------------------------------------------------------------------
                                                         After 1 year   After 5 years
                                                           through        through          After
                                             1 year        5 years       10 years        10 years         Total
                                          ------------   ------------   ------------   -------------   ------------
<S>                                               <C>            <C>            <C>            <C>             <C>
U.S. Government and agency
 securities                                          -          3.40%          2.98%              -           3.35%
State and municipal securities                       -          5.21%          4.37%           3.83%          4.65%
Mortgage-backed securities                           -          3.20%          3.85%               -          3.79%
Other                                                -              -              -           3.19%          3.19%
                                          ------------   ------------   ------------   -------------   ------------

      Total weighted average yields                  -          3.50%          3.83%           3.75%          3.64%
                                          ============   ============   ============   =============   ============
</TABLE>

                                       15

<PAGE>

Loan Portfolio

     Loans  consisted of the  following,  as extracted  from the Call Reports of
December 31, 2003, 2002, 2001, 2000 and 1999 (in thousands):
<TABLE>
                                              2003           2002           2001            2000           1999
                                          ------------   ------------   ------------   -------------   ------------

Loans receivable:
 Loans secured by real estate:
<S>                                       <C>              <C>               <C>            <C>             <C>
   Construction and land development      $     66,242   $     56,780   $     44,770   $      35,751   $     31,464
   Secured by farmland                          13,384          8,290          7,171           7,576          7,252
   Secured by 1-4 family residential properties:
      Revolving open-end loans & lines
       of credit                                18,879         16,569         14,603          12,394          9,134
       All other                                55,113         43,821         48,190          48,589         40,277
   Secured by multifamily residential
     properties                                  3,634          3,265          2,621           1,170          1,261
   Secured by nonfarm nonresidential
     properties                                 63,372         42,941         38,446          31,300         21,478
Loans to finance agricultural production
   and other loans to farmers                    5,084          6,277          6,329           5,954          7,088
Commercial and industrial loans                 27,872         29,908         26,420          30,344         26,838
Loans to individuals for household,
   family and other personal expenditures:
     Credit cards and related plans              1,978          1,948          1,695           2,354          2,039
     Other                                      14,497         18,756         18,391          18,120         18,767
Obligations of states and political
 subdivisions in the U.S.:
     Tax exempt obligations                        332              -            202             280            330
All other loans                                  2,393            921            953             712            834
Lease financing receivables                         13             14             20              33             46
Deferred cost (unearned income) on loans           170             80             11             (80)          (232)
                                          ------------   ------------   ------------   -------------   ------------

Total loans                                    272,623        229,570        209,822         194,497        166,576
Allowance for loan losses                       (3,430)        (2,860)        (2,650)         (2,770)        (2,350)
                                          ------------   ------------   ------------   -------------   -------------

   Net loans                              $    269,193   $    226,710   $    207,172   $     191,727   $    164,226
                                          ============   ============   ============   =============   ============

Commitments and contingencies:
Commitments to make loans                 $     68,731   $     44,525   $     45,510   $      35,810   $     34,864

Standby letters of credit                 $      1,003   $      2,408   $        653   $       1,473   $      1,594
</TABLE>


                                       16
<PAGE>

Certain Loan Maturities

     The  maturities  and carrying  amounts of certain  loans as of December 31,
2003 are summarized as follows (in thousands):
<TABLE>
                                                                                  Real Estate
                                                            Commercial           Construction
                                                             Financial            and Land
                                                           Agricultural          Development              Total
                                                      --------------------  ---------------------- -------------------

<S>                                                      <C>                 <C>                  <C>
Due within one year                                      $        29,111     $           50,372   $          79,483

Due after one year to five years:
   Fixed rate                                                     41,268                  7,262              48,530
   Variable rate                                                  30,707                  7,647              38,354

Due after five years:
   Fixed rate                                                      4,295                    396               4,691
   Variable rate                                                   3,727                    494               4,221
                                                         ---------------     ------------------   -----------------

Total                                                    $       109,108     $           66,171   $         175,279
                                                         ===============     ==================   =================

</TABLE>

Risk Elements

     Past due and  nonaccrual  loans,  as  extracted  from the Call  Reports  of
December 31, 2003, 2002, 2001, 2000 and 1999 were as follows (in thousands):
<TABLE>
                                              2003           2002           2001            2000           1999
                                          ------------   ------------   ------------   -------------   ------------
Nonaccrual loans:
<S>                                       <C>            <C>            <C>            <C>             <C>
   Real estate loans                      $        739   $      1,059   $      1,651   $       1,150   $        203
   Installment loans                                96            191             62             445             87
   Commercial and all other loans                  224            287            331              59             56
                                          ------------   ------------   ------------   -------------   ------------

     Total                                $      1,059   $      1,537   $      2,044   $       1,654   $        346
                                          ============   ============   ============   =============   ============

Agricultural loans included above         $        110   $        163   $         82   $          10   $         12
                                          ============   ============   ============   =============   ============

Past due 90 days or more and still accruing:
   Real estate loans                      $        597   $          -   $         24   $         367   $        633
   Installment loans                                 5             36             19              21            144
   Credit cards and related plans                   18             17              9              22             11
   Commercial and all other loans                   15             30             65               -             49
                                          ------------   ------------   ------------   -------------   ------------

     Total                                $        635   $         83   $        117   $         410   $        837
                                          ============   ============   ============   =============   ============

Agricultural loans included above         $          -   $         17   $         65   $           -   $          -
                                          ============   ============   ============   =============   ============
</TABLE>


     Foreclosed  assets  (included  in other  assets)  were  $75,000,  $442,000,
$170,000,  $85,000 and $501,000 at December 31, 2003, 2002, 2001, 2000 and 1999,
respectively.

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 losses on
loans are  charged  against  the  allowance  when  realized.  The  amount of the
allowance  is  based  upon an  evaluation  of the  portfolio,  current  economic
conditions,  historical loan loss experience, and other factors management deems
appropriate.  The bank's  management  believes its  allowance for loan losses is
adequate under existing economic conditions.


                                       17
<PAGE>

     The following  table  summarizes  the bank's loan loss  experience  for the
years ending December 31, 2003, 2002, 2001, 2000 and 1999 (in thousands,  except
ratios):
<TABLE>
                                              2003           2002           2001            2000           1999
                                          ------------   ------------   ------------   -------------   ------------

<S>                                       <C>            <C>            <C>            <C>             <C>
Balance at beginning of period            $      2,860   $      2,650   $      2,770   $       2,350   $      1,945

Charge-offs:
   Commercial and other                            311            604            668             192            209
   Real estate                                     342            240            174              39             36
   Installment loans to individuals                396            283            176             240            286
   Credit cards and related plans                   88             72             60              75             53
                                          ------------   ------------   ------------   -------------   ------------
                                                 1,137          1,199          1,078             546            584
                                          ------------   ------------   ------------   -------------   ------------
Recoveries:
   Commercial and other                             31             74             38              32             53
   Real estate                                     134             13             24              12              2
   Installment loans                               159             62             53              97             71
   Credit cards and related plans                   10             12              9              17              6
                                          ------------   ------------   ------------   -------------   ------------
                                                   334            161            124             158            132
                                          ------------   ------------   ------------   -------------   ------------

Net charge-offs                                    803          1,038            954             388            452
                                          ------------   ------------   ------------   -------------   ------------

Additions charged to operations                  1,373          1,248            834             808            857
                                          ------------   ------------   ------------   -------------   ------------

Balance at end of year                    $      3,430   $      2,860   $      2,650   $       2,770   $      2,350
                                          ============   ============   ============   =============   ============

Ratio of net charge-offs during
   the year to average gross loans
   outstanding during the year                   0.32%          0.48%          0.47%           0.21%          0.27%

</TABLE>

     The following table summarizes the bank's  allocation of allowance for loan
losses for the years ending  December 31, 2003,  2002,  2001,  2000 and 1999 (in
thousands, except ratios):
<TABLE>
<CAPTION>
                                                                      At December 31,
                                         --------------------------------------------------------------------------
                                                  2003                      2002                     2001
                                         -----------------------  -----------------------   -----------------------
                                                     % of Total               % of Total                % of Total
                                           Amount     Loans (1)      Amount    Loans (1)       Amount     Loans (1)
                                         ---------- ------------  ---------- ------------   -----------  ----------

<S>                                      <C>               <C>      <C>              <C>        <C>            <C>
         Real estate loans               $   2,206       0.80%     $   1,717      0.76%        $  1,564      0.74%
         Commercial and industrial loans       333       0.12%           353      0.15%             327      0.16%
         Installment loans                     206       0.08%           216      0.09%             213      0.10%
         Unallocated                           685       0.25%           574      0.25%             546      0.26%
                                         ---------- ------------  ---------- ------------   -----------  ----------

             Total                       $   3,430       1.25%     $   2,860      1.25%       $  2,650       1.26%
                                         ========== ============  =========== ============  ===========  ==========

                                                                      At December 31,
                                                      ------------------------------------------------
                                                               2000                     1999
                                                      -----------------------  -----------------------
                                                                  % of Total                % of Total
<CAPTION>
                                                        Amount     Loans (1)     Amount      Loans (1)

<S>                                                   <C>               <C>    <C>               <C>
          Real estate loans                           $    1,376        0.70%  $    1,110        0.67%
          Commercial and industrial loans                    363        0.19%         339        0.20%
         Installment loans                                   214        0.11%         218        0.13%
         Unallocated                                         817        0.42%         683        0.41%
                                                      ----------  -----------  ----------   ----------

          Total                                       $    2,770        1.42%  $    2,350        1.41%
                                                      ==========  ===========  ==========   ==========
</TABLE>
--------------------------------------------
(1) Represents  total of all outstanding  loans in each category as a percentage
of total loans outstanding.



                                       18
<PAGE>

Deposits

     Time  certificates  in amounts of $100,000 or more  outstanding at December
31, 2003 by maturity were as follows (in thousands):

Three months or less                                     $        28,037
Over three months through twelve months                           31,182
Over twelve months through three years                            18,912
Over three years                                                   6,969
                                                             ---------------

Total                                                    $        85,100
                                                             ===============

Borrowings

     The bank  borrows  funds  principally  from the  Federal  Home Loan Bank of
Atlanta.  Information  regarding  such  borrowings is as follows (in  thousands,
except rates):
<TABLE>
                                                                2003                2002                 2001
                                                          ----------------     ---------------     ----------------

<S>                                      <C>              <C>                  <C>                 <C>
         Balance outstanding at December 31               $         33,160     $        33,160     $         33,013
         Weighted average rate at December 31                        4.60%               4.60%                4.58%
         Maximum borrowings during the year               $         35,760     $        33,160     $         33,013
         Average amounts outstanding during year          $         34,200     $        33,160     $         17,179
         Weighted average rate during year                           4.55%               4.64%                5.37%
</TABLE>

Key Ratios

     The  following  schedule  of key ratios is  presented  for the years  ended
December 31, 2003, 2002 and 2001:
<TABLE>

                                                                2003                2002                 2001
                                                          ----------------     ---------------     ----------------

<S>                                                                  <C>                 <C>                  <C>
         Return on average assets                                    0.90%               0.95%                0.97%
         Return on average equity                                    9.02%               9.74%                9.73%
         Dividend payout ratio                                      33.03%              29.20%               28.33%
         Equity to assets (averages)                                 9.97%               9.71%                9.96%
         Ending equity to ending assets                              9.62%               9.80%                9.35%
         Average interest earning assets to average
           total assets                                             92.74%              94.15%               93.59%
         Average net loans to average total deposits                97.51%              88.08%               88.24%
         Average interest bearing liabilities to average
           interest earning assets                                  81.16%              81.52%               81.24%

</TABLE>

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 the Company's accounting
policy for the allowance for loan losses.


                                       19
<PAGE>


Item 7 - Financial Statements.

                  [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

                                       20
<PAGE>


                          INDEPENDENT AUDITORS' REPORT



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, 2003 and 2002 and the related
consolidated  statements  of  operations,  comprehensive  income,  shareholders'
equity and cash flows for the years then  ended.  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 auditing standards generally accepted
in the  United  States of  America.  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, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes PLLC

Sanford, North Carolina
February 24, 2004


                                       21
<PAGE>

<TABLE>
<CAPTION>

Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                 2003                  2002
                                                                         -------------------    -------------------
                                                                                    (Amounts in thousands)
ASSETS

<S>                                                                            <C>                    <C>
Cash and due from banks                                                        $   10,548             $   11,388
Interest-earning deposits                                                           5,277                  8,278
Investment securities available for sale                                           38,203                 56,789

Loans                                                                             272,623                229,570
Allowance for loan losses                                                          (3,430)                (2,860)
                                                                          ------------------      -----------------
   Net loans                                                                      269,193                226,710

Accrued interest receivable                                                         1,893                  1,771
Bank premises and equipment, net                                                   10,582                 10,666
FHLB stock                                                                          1,923                  1,650
Other assets                                                                        4,102                  1,037
                                                                          ------------------      -----------------

            Total assets                                                      $   341,721            $   318,289
                                                                          ==================      =================

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
   Noninterest-bearing demand                                                 $       50,829          $   42,809
   Money market and NOW accounts                                                      43,927              36,920
   Savings                                                                            13,038              11,690
   Time deposits, $100,000 and over                                                   85,100              71,429
   Other time deposits                                                                80,024              87,725
                                                                          ------------------      -----------------
            Total deposits                                                           272,918             250,573

Borrowings                                                                            33,160              33,160
Accrued interest payable                                                               1,284               1,785
Other liabilities                                                                      1,479               1,578
                                                                          ------------------      -----------------
            Total liabilities                                                        308,841             287,096
                                                                          ------------------      -----------------

Shareholders' equity:
   Common stock; $1.00 par value, 5,000,000
     shares authorized; 2,676,263 and  2,144,211 shares issued
     and outstanding at December 31, 2003 and 2002, respectively                       2,676               2,144
   Additional paid-in capital                                                          8,029               7,716
   Retained earnings                                                                  21,867              20,850
   Accumulated other comprehensive income                                                308                 483
                                                                          ------------------      -----------------
            Total shareholders' equity                                                32,880              31,193
                                                                          ------------------      -----------------

            Total liabilities and shareholders' equity                           $   341,721         $   318,289
                                                                          ==================      =================
</TABLE>


                                       22
<PAGE>


<TABLE>

Four Oaks Fincorp, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    2003                2002
                                                                              ----------------    ----------------
                                                                                      (Amounts in thousands,
                                                                                      except per share data)
Interest and dividend income:
<S>                                                                               <C>                 <C>
  Loans, including fees                                                           $   17,318          $   16,746
  Investment securities:
     Taxable                                                                           1,272               2,482
     Tax-exempt                                                                          212                 213
  Dividends                                                                               88                 114
  Interest-earning deposits                                                               53                 230
                                                                              ----------------    ----------------
              Total interest and dividend income                                      18,943              19,785
                                                                              ----------------    ----------------

Interest expense:
  Deposits                                                                             4,365               6,103
  Borrowings                                                                           1,557               1,537
                                                                              ----------------    ----------------
              Total interest expense                                                   5,922               7,640
                                                                              ----------------    ----------------

              Net interest income                                                     13,021              12,145

Provision for loan losses                                                              1,373               1,248
                                                                              ----------------    ----------------

Net interest income after
  provision for loan losses                                                           11,648              10,897
                                                                              ----------------    ----------------

Non-interest income:
  Service charges on deposit accounts                                                  1,867               1,827
  Mortgage loan origination fees                                                          83                 175
  Other service charges, commissions and fees                                            876                 641
  Gains (losses) on sale of investment securities                                        273                  (8)
  Gain on sale of loans                                                                  212                 175
  Income from investment in bank-owned life insurance                                    159                 -
                                                                              ----------------    ----------------
              Total non-interest income                                                3,470               2,810
                                                                              ----------------    ----------------

Non-interest expenses:
  Salaries                                                                             4,934               4,320
  Employee benefits                                                                    1,008                 910
  Occupancy expenses                                                                     493                 397
  Equipment expenses                                                                   1,124                 983
  Professional and consulting fees                                                       664                 730
  Other taxes and licenses                                                               251                 164
  Merchant fees                                                                          277                 192
  Other operating expenses                                                             1,837               1,789
                                                                              ----------------    ----------------
              Total non-interest expenses                                             10,588               9,485
                                                                              ----------------    ----------------

Income before income taxes                                                             4,530               4,222

Provision for income taxes                                                             1,612               1,306
                                                                              ----------------    ----------------

              Net income                                                           $   2,918           $   2,916
                                                                              ================    ================

Basic net income per common share                                                  $    1.09           $    1.10
                                                                              ===============     ================

Diluted net income per common share                                                $    1.08           $    1.09
                                                                              ===============     ================
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                     2003               2002
                                                                              ------------------  -----------------
                                                                                       (Amounts in thousands)

<S>                                                                           <C>                 <C>
Net income                                                                    $            2,918  $           2,916
                                                                              ------------------  -----------------

Other comprehensive income:
  Securities available for sale:
    Unrealized holding gains on available for sale securities                                 40                699
      Tax effect                                                                             (17)              (280)
    Reclassification of (gains) losses recognized in net income                             (272)                 8
      Tax effect                                                                             108                 (3)
                                                                              ------------------  -----------------
    Net of tax amount                                                                       (141)               424
                                                                              ------------------  -----------------

  Cash flow hedging activities:
    Unrealized holding gains (losses) on cash flow hedging activities                        (56)                 -
      Tax effect                                                                              22                  -
                                                                              ------------------  -----------------
    Net of tax amount                                                                        (34)                 -
                                                                              ------------------  -----------------

      Total other comprehensive income (loss)                                               (175)               424
                                                                              ------------------  -----------------

Comprehensive income                                                          $            2,743  $           3,340
                                                                              ==================  =================
</TABLE>

                                       24
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2003 and 2002
------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Accumulated
                                                          Additional                        other          Total
                                     Common stock           paid-in       Retained     comprehensive   shareholders'
                                 ----------------------     capital       earnings         income         equity
                                   Shares      Amount
                                 ---------  -----------  ------------   ------------   -------------   ------------
                                                     (Amounts in thousands, except share data)

<S>                                   <C>          <C>           <C>            <C>         <C>               <C>
BALANCE, DECEMBER 31, 2001      2,106,477    $  2,106      $  6,706       $  19,154       $  59           $  28,025

   Net income                           -           -             -           2,916           -               2,916

   Other comprehensive income           -            -            -               -         424                 424

   Exercise of stock options       54,655           55          957               -           -               1,012

   Current income tax benefit           -            -           53               -           -                  53

   Purchases and retirement
     of common stock              (16,921)         (17)           -            (368)          -                (385)

   Cash dividends of $.32 per share     -             -           -            (852)          -                (852)
                                 ---------  -----------  ------------   ------------   -------------   ------------


BALANCE, DECEMBER 31, 2002       2,144,211        2,144        7,716         20,850          483             31,193

   Net income                            -            -            -          2,918            -              2,918

   Other comprehensive loss              -            -            -              -         (175)              (175)

   Effect of 5-for-4 stock split   533,706          534         (542)             -            -                 (8)

   Exercise of stock options        42,014           42          837              -            -                879

     Current income tax benefit          -            -           18              -            -                 18

   Purchases and retirement
     of common stock               (43,668)         (44)           -           (949)            -              (993)

   Cash dividends of $.36 per share      -            -            -           (952)            -              (952)
                                    ------      ---------     --------     ---------      --------        ----------
BALANCE, DECEMBER 31, 2003      2,676,263       $  2,676      $  8,029     $  21,867        $  308         $  32,880
                               ===========      =========     =========    ==========     =========       ===========

</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002
------------------------------------------------------------------------------------------------------------------------------------


                                                                                       2003              2002
                                                                                 ----------------  ----------------
                                                                                         (Amounts in thousands)
<S>                                                                                       <C>                   <C>
  Cash flows from operating activities:
   Net income                                                                    $          2,918   $         2,916
   Adjustments to reconcile net income to net cash
      provided by operations:
         Provision for loan losses                                                          1,373             1,248
         Provision for depreciation and amortization                                          946               824
         Deferred income tax expense (benefit)                                               (129)               32
         Net amortization of bond premiums and discounts                                      595               290
         Gain on sale of loans                                                               (212)             (175)
         (Gain) loss on sale of investment securities                                        (273)                8
         Loss on sale of foreclosed assets                                                     15                26
         Gain on disposition of premises and equipment                                          -                (5)
         Changes in assets and liabilities:
            Other assets                                                                     (289)              349
            Loans held for sale                                                                 -             1,483
            Interest receivable                                                              (122)              339
            Other liabilities                                                                (155)            1,357
            Interest payable                                                                 (501)             (946)
                                                                                 ----------------   ---------------
                Net cash provided by operating activities                                   4,166             7,746
                                                                                 ----------------   ---------------

  Cash flows from investing activities:
   Proceeds from sales and calls of investment
      securities available for sale                                                        44,835           100,678
   Proceeds from maturities of investment
      securities available for sale                                                        10,516             2,739
   Purchase of investment securities available for sale                                   (37,320)          (97,595)
   Purchase of FHLB stock                                                                    (273)                -
   Net increase in loans                                                                  (43,811)          (22,679)
   Addition to premises and equipment                                                        (848)           (1,867)
   Purchases of bank-owned life insurance                                                  (2,896)                -
   Proceeds from sale of foreclosed assets                                                    521               302
   Expenditures on foreclosed assets                                                           (2)              (15)
                                                                                 ----------------   ---------------
                Net cash used by investing activities                                     (29,278)          (18,437)
                                                                                 ----------------   ---------------

  Cash flows from financing activities:
   Net proceeds from borrowings                                                                 -               (13)
   Net increase in deposit accounts                                                        22,345            14,877
   Proceeds from issuance of common stock                                                     879             1,012
   Purchases and retirement of common stock                                                  (993)             (385)
   Cash dividends paid                                                                       (960)             (852)
                                                                                 ----------------   ---------------
                Net cash provided by financing activities                                  21,271            14,639
                                                                                 ----------------   ---------------

                Net increase (decrease) in cash and cash equivalents                       (3,841)            3,948

  Cash and cash equivalents at beginning of year                                           19,666            15,718
                                                                                 ----------------   ---------------
  Cash and cash equivalents at end of year                                       $         15,825   $        19,666
                                                                                 ================   ===============
</TABLE>

                                       26
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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.

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 subsidiary, the Bank. The Bank operates ten 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and 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 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, 2003, the
daily average gross reserve requirement was $2.2 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

                                       27
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


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

Investment Securities (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 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, while all  collateral-dependent  loans are measured for
impairment based on the fair value of the collateral.

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.  The provision for loan losses
is based  upon such  factors  as  changes  in the  nature and volume of the loan
portfolio,  overall  portfolio  quality,  review of specific  problem loans, and
current economic conditions and trends that may affect the borrowers' ability to
pay.  Because  these  factors  may  change,  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.

                                       28
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


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

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.

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.

Loans Held for Sale

Loans  originated  and intended for sale in the secondary  market are carried at
the lower of cost or  estimated  fair  value in the  aggregate.  Net  unrealized
losses,  if any,  are  recognized  through a valuation  allowance  by charges to
income.

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

Bank premises 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 35 years for premises.  Expenditures  for repairs and  maintenance
are charged to expense as incurred.

                                       29
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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

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  carryforwards.
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 Federal
Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.

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.

Accumulated other comprehensive income at December 31, 2003 and 2002 consists of
the following:
<TABLE>

                                                                                      2003                2002
                                                                                 ---------------     --------------
                                                                                         (Amounts in thousands)
<S>                                                                              <C>                 <C>
Unrealized holding gains - investment securities available for sale              $           571     $          803
   Deferred income taxes                                                                    (229)              (320)
                                                                                 ---------------     --------------
     Net unrealized holding gains - investment securities available for sale                 342                483
                                                                                 ---------------     --------------

Unrealized holding losses - cash flow hedge instruments                                      (56)                 -
   Deferred income taxes                                                                      22                  -
                                                                                 ---------------     --------------
     Net unrealized holding losses - cash flow hedge instruments                             (34)                 -
                                                                                 ---------------     --------------

     Total accumulated other comprehensive income                                $           308     $          483
                                                                                 ===============     ==============

</TABLE>


                                       30
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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

Stock Compensation Plans

SFAS No. 123, Accounting for Stock-Based  Compensation,  encourages all entities
to adopt a fair value based method of accounting for employee stock compensation
plans,  whereby  compensation  cost is  measured  at the grant date based on the
value of the award and is recognized over the service  period,  which is usually
the  vesting  period.  However,  it also allows an entity to continue to measure
compensation  cost for those plans  using the  intrinsic  value based  method of
accounting  prescribed by Accounting  Principles  Board ("APB")  Opinion No. 25,
Accounting  for Stock  Issued to  Employees,  whereby  compensation  cost is the
excess,  if any, of the quoted  market  price of the stock at the grant date (or
other  measurement  date) over the amount an  employee  must pay to acquire  the
stock.  Stock  options  issued  under the  Company's  stock option plans have no
intrinsic value at the grant date and, under APB No. 25, no compensation cost is
recognized  for them.  The Company has elected to continue  with the  accounting
methodology in APB No. 25 and, as a result,  has provided pro forma  disclosures
of net income and earnings per share and other  disclosures as if the fair value
based method of accounting had been applied.
<TABLE>
                                                                                               2003                   2002
                                                                                         ----------------        ---------------
                                                                                                  (Amounts in thousands,
                                                                                                  except per share data)
Net income:
<S>                                                                                      <C>                 <C>
As reported                                                                              $          2,918    $         2,916
  Deduct:   Total stock-based employee compensation
            expense determined under fair value method
            for all awards, net of related tax effects                                                (68)               (52)
                                                                                         ----------------        ------------

Pro forma                                                                                $          2,850     $         2,864
                                                                                         ================        ============

Basic earnings per share:
As reported                                                                              $          1.09      $          1.10
Pro forma                                                                                           1.06                 1.08

Diluted earnings per share:
As reported                                                                              $          1.08      $          1.09
Pro forma                                                                                           1.06                 1.07

Net Income Per Common Share and Common Shares Outstanding
</TABLE>

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.
The weighted average number of shares  outstanding  during each period have been
retroactively  adjusted for a 25% stock dividend  distributed November 10, 2003.
Potential  common  shares  that may be issued by the  Company  relate  solely to
outstanding stock options.

                                       31
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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

Net Income Per Common Share and Common Shares Outstanding (Continued)

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>
                                                                                            2003                  2002
                                                                                        -------------       ---------------

<S>                                                                                           <C>                  <C>
Weighted average number of common shares used
 in computing basic net income per common share                                           2,694,856             2,660,768

Effect of dilutive stock options                                                              9,577                 8,725
                                                                                       ---------------      ---------------
Weighted average number of common shares and
 dilutive potential common shares used in computing
 diluted net income per common share                                                      2,694,433             2,669,493
                                                                                       ===============      ===============
</TABLE>

There were no antidilutive  shares  outstanding for the years ended December 31,
2003 and 2002.

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.


                                       32
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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

New Accounting Standards

In January 2003, the Financial  Accounting  Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities. This
interpretation  addresses the consolidation by business  enterprises of variable
interest entities as defined in the  interpretation.  In December 2003, the FASB
issued a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of FIN
46 and to exempt certain  entities from its  requirements.  FIN 46R is effective
for public entities that have interests in structures that are commonly referred
to as  special-purpose  entities  for periods  ending  after  December 15, 2003.
Application by small business issuers to variable  interest  entities other than
special-purpose entities is required for periods ending after December 15, 2004.
The Company is in the process of determining the impact of FIN 46 and FIN 46R on
its consolidated financial statements.

In April 2003,  the FASB issued SFAS No. 149,  Amendment of Statement No. 133 on
Derivative  Instruments and Hedging Activities.  SFAS No. 149 improves financial
reporting  by  requiring  that  contracts  with  comparable  characteristics  be
accounted  for  similarly.  In  particular,  SFAS No. 149  clarifies  under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative,  clarifies  when a derivative  contains a financing  component,
amends the definition of an  "underlying"  to conform it to language used in FIN
45 and amends certain other existing  pronouncements.  SFAS No. 149 is effective
for  contracts  entered into or modified  after June 30,  2003,  and for hedging
relationships designated after June 30, 2003. In addition, with some exceptions,
all provisions of SFAS No. 149 should be applied prospectively.  The adoption of
SFAS No.  149 did not  have a  material  impact  on the  Company's  consolidated
financial statements.

In May 2003,  the FASB  issued SFAS No. 150,  Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity. This Statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances).  This Statement is effective
for financial  instruments entered into or modified by the Company after May 31,
2003,  and is effective at the beginning of the first interim  period  beginning
after  June  15,  2003.  However,   the  FASB  has  deferred   indefinitely  the
classification and measurement provisions as they related to certain mandatorily
redeemable noncontrolling interests. The adoption of SFAS No. 150 did not have a
material impact on the Company's consolidated financial statements.

In November  2003,  the Emerging  Issues Task Force  ("EITF")  reached a partial
consensus on Issue 03-1, The Meaning of Other-Than-Temporary  Impairment and Its
Application to Certain Investments. Issue 03-1 requires certain quantitative and
qualitative  disclosures for investments subject to SFAS No. 115, Accounting for
Certain  Investments  in Debt and Equity  Securities,  that are  impaired at the
balance sheet date but for which an other-than-temporary impairment has not been
recognized.  The Company adopted the partial consensus on Issue 03-1 during 2003
and has provided the new disclosures in Note B. The EITF is expected to continue
deliberating   other  aspects  of  Issue  03-1,   including  when  to  recognize
other-than-temporary impairment.

Reclassifications

Certain items included in the 2002 financial  statements have been  reclassified
to conform to the 2003 presentation.  These  reclassifications have no effect on
the net income or shareholders' equity previously reported.


                                       33
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

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, 2003 and 2002 are as
follows:
<TABLE>
                                                                      Gross            Gross
                                                 Amortized          Unrealized       Unrealized
                                                   Cost               Gains            Losses          Fair Value
                                              -------------       -----------       -----------      ---------------
                                                                      (Amounts in thousands)
2003:
<S>                                           <C>                 <C>               <C>              <C>
U.S. Government and agency securities         $      15,866       $          54     $           6    $       15,914
State and municipal securities                        4,664                 291                 -             4,955
Mortgage-backed securities                           16,535                  41                74            16,502
Other                                                   567                 265                 -               832
                                              -------------       -------------     -------------    --------------
                                              $      37,632       $         651     $          80    $       38,203
                                              =============       =============     =============    ==============

                                                                      Gross            Gross
                                                 Amortized          Unrealized       Unrealized
                                                   Cost               Gains            Losses          Fair Value
                                              -------------       -----------       -----------      ---------------
                                                                      (Amounts in thousands)
2002:
U.S. Government and agency securities         $      27,147       $         228     $          14    $       27,361
State and municipal securities                        4,616                 279                35             4,860
Mortgage-backed securities                           23,671                 278                16            23,933
Other                                                   552                  83                 -               635
                                              -------------       -------------     -------------    --------------
                                              $      55,986       $         868     $          65    $       56,789
                                              =============       =============     =============    ==============
</TABLE>

The following table shows  investments'  gross unrealized losses and fair value,
aggregated  by  investment  category  and  length  of time  that the  individual
securities have been in a continuous  unrealized loss position,  at December 31,
2003.  All  unrealized  losses  on  investment   securities  are  considered  by
management  to be  temporarily  impaired  given  the  credit  ratings  on  these
investment securities and the short duration of the unrealized loss.
<TABLE>
                                              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:
<S>                                          <C>             <C>       <C>            <C>        <C>             <C>
U.S. government and
 agency securities                     $       750   $         6   $        -    $       -   $       750    $         6
Mortgage-backed securities                   8,938            74            -            -         8,938             74
                                          --------      --------     --------     --------      --------     ----------

Total temporarily impaired
 securities                            $     9,688   $        80   $        -    $       -    $    9,688     $       80
                                          ========      ========     ========     ========      ========     ==========
</TABLE>


                                       34
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE B - INVESTMENT SECURITIES (Continued)

The  amortized  cost and fair value of debt  securities  at December 31, 2003 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 after one year through five years       $        16,712  $        16,849
Due after five years through ten years               18,891           18,995
Due after ten years                                   2,029            2,359
                                            ---------------  ---------------

                                            $       37,632   $        38,203
                                            ===============  ===============

Securities  with a  carrying  value of  approximately  $12.3  million  and $15.3
million at December  31,  2003 and 2002,  respectively,  were  pledged to secure
public deposits and for other purposes required or permitted by law.

Sales of  securities  available  for sale during 2003 and 2002  generated  gross
realized gains of $295,000 and $33,000,  respectively, and gross realized losses
of $22,000 and $41,000 during 2003 and 2002, respectively.


NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans as of December 31, 2003 and 2002 are summarized
as follows:
                                                 2003                2002
                                            ----------------     ---------------
                                                  (Amounts in thousands)
Real estate - residential and other         $       140,998    $        106,596
Real estate - agricultural                           13,384               8,290
Construction and land development                    66,242              56,780
Other agricultural                                    5,084               6,277
Consumer loans                                       16,475              20,704
Commercial loans                                     27,872              29,908
Other loans                                           2,738                 935
                                             -------------      ---------------
                                                    272,793             229,490
Less:
Net deferred loan costs                                (170)                 80
Allowance for loan losses                            (3,430)             (2,860)
                                             --------------     ---------------

                                            $       269,193    $        226,710
                                             ================   ===============


                                       35
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Nonperforming assets at December 31, 2003 and 2002 consist of the following:

                                                2003                  2002
                                           ------------        ----------------
                                                  (Amounts in thousands)

Loans past due ninety days or more          $       635          $        83
Nonaccrual loans                                  1,059                1,537
Foreclosed assets (included in other assets)         75                  442
                                            -----------         ------------

                                            $     1,769           $    2,062
                                            ===========         ============

At December  31, 2003 and 2002,  the  recorded  investment  in loans  considered
impaired in accordance  with SFAS No. 114 totaled $1.1 million and $1.5 million,
respectively, and consisted entirely of nonaccrual loans. Impaired loans of $1.1
million and $1.5 million had related  allowances for loan losses of $165,000 and
$246,000  at  December  31,  2003 and 2002,  respectively.  For the years  ended
December 31, 2003 and 2002,  the average  recorded  investment in impaired loans
was  approximately  $1.2 million and $1.5 million,  respectively.  The amount of
interest  recognized on impaired  loans during the portion of the year that they
were impaired was not material.

A summary of the allowance for loan losses for the years ended December 31, 2003
and 2002 is as follows:

                                                 2003                2002
                                            ----------------    ----------------
                                                   (Amounts in thousands)
Balance, beginning                         $          2,860    $          2,650
Provision for loan losses                             1,373               1,248
Loans charged-off                                    (1,137)             (1,199)
Recoveries of loans previously
 charged-off                                            334                 161
                                            ---------------     ---------------

Balance, ending                             $         3,430    $          2,860
                                            ================    ===============

The Bank 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, 2002                   $          2,783
         New loans                                                 5,768
         Principal repayments                                     (3,498)
                                                         ---------------

         Balance at December 31, 2003                   $          5,053
                                                          ================

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, 2003, the Company had  pre-approved  but unused
lines of credit  totaling  $274,000 to executive  officers,  directors and their
affiliates.

                                       36
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------



NOTE D - BANK PREMISES AND EQUIPMENT

Bank premises and equipment at December 31, 2003 and 2002 are as follows:

                                                 2003                  2002
                                            ---------------    ----------------
                                                   (Amounts in thousands)

Land                                       $          2,237    $          2,237
Building                                              6,957               6,744
Furniture and equipment                               6,522               5,888
                                            ---------------     ---------------
                                                     15,716              14,869
Less accumulated depreciation                        (5,134)             (4,203)
                                            ---------------     ---------------

                                           $         10,582     $        10,666
                                            ===============     ===============

Depreciation  expense for the years ended December 31, 2003 and 2002 amounted to
approximately $932,000 and $800,000, respectively.


NOTE E - DEPOSITS

At December 31, 2003,  the scheduled  maturities of time deposits are as follows
(amounts in thousands):

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

Within one year                           $   58,565   $   59,219   $   117,784
Over one year through three years             18,056       18,912        36,968
Over three years                               3,403        6,969        10,372
                                         -----------  -----------  ------------

                                          $   80,024   $   85,100   $   165,124
                                         ===========  ===========  =============

NOTE F - BORROWINGS

At December 31, 2003 and 2002,  borrowed  funds  consisted of the following FHLB
advances (amounts in thousands):

    Maturity        Interest Rate                  2003              2002
---------------   ----------------            -------------     --------------

   July 2010            5.75%                $      10,000     $       10,000
   July 2010            4.44%                        5,000              5,000
   September 2011       4.38%                        3,000              3,000
   October 2011         4.30%                        7,000              7,000
   November 2011        3.54%                        8,000              8,000
                                              -------------     --------------

                                              $     33,000       $     33,000
                                              ============       =============


                                       37
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE F - BORROWINGS (Continued)

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, 2003,  the Company had  available  lines of credit  totaling  $87.9
million at various financial  institutions for borrowing,  dependent on adequate
collateralization.  The  weighted  average  rates  for the above  borrowings  at
December 31, 2003 and 2002 was 4.58%.  All of the Company's FHLB advances are at
fixed rates.

At December 31, 2003 and 2002,  the Company was obligated  under an  outstanding
promissory  note for $160,000  for the purchase of property.  The note calls for
set monthly  interest only payments,  with a balloon payment at maturity on June
2006. The note bears interest at 7.50%.


NOTE G - INCOME TAXES

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

                                                  Years Ended December 31,
                                                  2003                2002
                                            ----------------    ----------------
                                                   (Amounts in thousands)
  Current tax expense:
      Federal                               $          1,470    $          1,085
      State                                              271                 189
                                            ----------------    ----------------
                                                       1,741               1,274
                                            ----------------    ----------------
   Deferred tax expense:
      Federal                                           (106)                 26
      State                                              (23)                  6
                                            ----------------    ----------------
                                                        (129)                 32
                                            ----------------    ----------------

                                            $          1,612    $          1,306
                                            ================    ================

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

                                                  Years Ended December 31,
                                                  2003                2002
                                            ----------------    ----------------
                                                  (Amounts in thousands)

Expense computed at statutory rate of 34%  $          1,540    $          1,435
Effect of state income taxes, net of
 federal benefit                                        164                 129
Tax exempt income                                      (123)               (203)
Other, net                                               31                 (55)
                                            ----------------    ----------------

                                           $          1,612    $          1,306
                                            ================    ================


                                       38
<PAGE>
Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002
--------------------------------------------------------------------------------


NOTE G - INCOME TAXES (Continued)

Deferred income taxes consist of the following:
                                            Years Ended December 31,
                                            2003                2002
                                      ----------------    ----------------
                                            (Amounts in thousands)
Deferred tax assets:
 Allowance for loan losses            $          1,277    $          1,058
 Unamortized investment premiums                    44                 135
 Net deferred loan fees                             66                   -
 Other                                              31                  53
                                       ----------------    ----------------
    Total deferred tax assets                    1,418               1,246
                                       ----------------    ----------------

Deferred tax liabilities:
 Property and equipment                            818                 744
 Other comprehensive income                        207                 320
 Net deferred loan costs                             -                  31
 Unaccreted investment discounts                     -                   -
                                       ----------------    ----------------
    Total deferred tax liabilities               1,025               1,095
                                       ----------------    ----------------

    Net deferred tax assets           $            393    $            151
                                       ================    ================


NOTE H - 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, 2003,  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,  2003,  that the Bank meets all capital  adequacy
requirements to which it is subject.

As of December 31, 2003, 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.


                                       39
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


NOTE H - REGULATORY RESTRICTIONS (Continued)

The Bank's  actual  capital  amounts and ratios are also  presented in the table
below (amounts in thousands, except ratios):
<TABLE>

                                                                                                    Minimum
                                                                                                   To Be Well
                                                                           Minimum              Capitalized Under
                                                                         For Capital            Prompt Corrective
                                                 Actual               Adequacy Purposes         Action Provisions
                                                --------             -------------------       -------------------
                                            Amount      Ratio          Amount    Ratio          Amount       Ratio
                                           --------    -------        --------- --------       --------- ---------
As of December 31, 2003:
-----------------------
<S>                                       <C>             <C>      <C>            <C>        <C>             <C>
Total Capital (to Risk Weighted Assets)   $   33,792      12.3%    $   21,973     8.0%       $  27,467       10.0%
Tier I Capital (to Risk Weighted Assets)      30,362      11.1%        10,987     4.0%          16,480        6.0%
Tier I Capital (to Average Assets)            30,362       9.0%        13,421     4.0%          16,776        5.0%

As of December 31, 2002:
-----------------------
Total Capital (to Risk Weighted Assets)   $   31,515      13.2%    $   19,043     8.0%       $  23,803       10.0%
Tier I Capital (to Risk Weighted Assets)      28,655      12.0%         9,521     4.0%          14,282        6.0%
Tier I Capital (to Average Assets)            28,655       9.1%        12,649     4.0%          15,811        5.0%
</TABLE>

The Company is also subject to these capital requirements. At December 31, 2003
and 2002, the Company's total capital to risk weighted assets, Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets were 13.1% and 14.0%,
9.7% and 9.7%, and 11.8% and 12.8%, respectively.

NOTE I - 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.


                                       40
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


NOTE I - 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  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  interest
receipts  therefore,  generally hedges a portion of its  variable-rate  interest
receipts.  To meet this  objective,  management  enters into  interest rate swap
agreements  whereby the Company  receives fixed rate payments and makes variable
interest rate payments during the contract period.

At December 31, 2003, the information pertaining to an outstanding interest rate
swap  agreement  used to hedge  variable  rate loans is as follows  (amounts  in
thousands):

                                                 2003                 2002
                                             ------------       ----------------

Notional amount                             $       25,000     $            -
Weighted average pay rate                            4.00%                  -%
Weighted average receive rate                        5.85%                  -%
Weighted average maturity in years                    3.7                   -
Unrealized loss relating to
 interest rate swaps                        $         (56)     $            -

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, 2003,  the Company's  interest rate swaps used to hedge variable
rate loans  reflected an  unrealized  loss of $56,000.  The  unrealized  loss is
included  in  other  comprehensive  income,  net of  tax,  in  the  accompanying
consolidated balance sheet. There was no interest rate swap in 2002.

Risk  management  results for the year ended  December  31, 2003  related to the
balance sheet hedging of variable rate loans  indicate that the hedges were 100%
effective and that there was no component of the derivative instruments' gain or
loss which was excluded from the assessment of hedge effectiveness.

At December 31, 2003, the unrealized loss relating to use of interest rate swaps
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.

                                       41
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE I - DERIVATIVES (Continued)

Interest Rate Risk Management - Fair Value Hedging Instruments

The Company uses fixed rate time deposits for use in its lending and  investment
activities and 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,  on December 30, 2003, 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, 2003, the  information  pertaining to outstanding  interest rate
swap agreements used to hedge fixed-rate funding is as follows:

Notional amount                                                  $    5,000,000
Weighted average pay rate                                                  1.17%
Weighted average receive rate                                              3.25%
Weighted average maturity in years                                          5.5
Unrealized gain relating to interest rate swaps                  $            -

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.

No  interest  rate  swap  agreements  used  to  hedge  fixed-rate  funding  were
terminated  during 2003.  Since the interest rate swap contract was entered into
on December  30,  2003,  there were no  unrealized  gain or loss to report as of
December 31, 2002.


NOTE J - COMMITMENTS AND CONTINGENCIES

The Bank 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
Bank  uses the same  credit  policies  in  making  commitments  and  conditional
obligations as it does for on-balance-sheet instruments.

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  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary by the Bank, 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.

                                       42
<PAGE>
Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE J - COMMITMENTS AND CONTINGENCIES (Continued)

A summary of the contract  amount of the Bank's  exposure to  off-balance  sheet
credit risk as of December 31, 2003 is as follows (amounts in thousands):

Financial instruments whose contract amounts represent credit risk:

         Commitments to extend credit                         $          50,485
         Undisbursed lines of credit                                     18,246
         Financial stand-by letters of credit                               385
         Performance stand-by letters of credit                             618


NOTE K - 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 625,000 shares of common
stock. Options are granted at the discretion of the Company's Board of Directors
at a price approximating  market, 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 the status of the Company's stock options, after giving retroactive
effect to stock splits, as of December 31, 2003F and 2002, and changes during
the years ending on those dates is presented below:

                                              Options          Option Price
                                              Outstanding        Per Share
                                              -----------     -------------
Balance December 31, 2001                         119,428     $9.24 - 16.54
  Granted                                          30,700     $16.00
  Exercised                                       (35,928)    $11.38 - 16.54
  Forfeited                                        (8,401)    $15.46 - 16.54
                                              --------------

Balance December 31, 2002                         105,799     $9.24 - 16.54

  Granted                                          36,063     $18.00
  Exercised                                       (19,565)    $15.46
  Forfeited                                            -         -
  Expired                                            (122)    $15.46
                                              --------------

Balance December 31, 2003                         122,175     $9.24 - 17.60
                                              ==============

The weighted average  exercise price of all outstanding  options at December 31,
2003 is $16.49.  There were  297,031  shares  reserved  for future  issuance  at
December 31, 2003.


                                       43
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE K - STOCK OPTION PLAN (Continued)

Additional  information  concerning the Company's  stock options at December 31,
2003 is as follows:

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

$9.24                           4,219            3.3 years              4,219
$16.00                         52,831            1.7 years             52,831
$16.54                         29,062             .2 years             29,062
$18.00                         36,063            3.2 years                 -
                             -----------                            ------------

                              122,175                                  86,112
                             ===========                             ===========

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 2003 and 2002:

                                                2003                2002
                                             -------------     ---------------

Dividend yield                                   10%                10%
Expected volatility                           21.65%             22.04%
Risk free interest rate                        2.82%              3.00%
Expected life                                4 years            4 years

The  weighted  average  fair value of options  granted  during 2003 and 2002 was
$3.21 and $2.91, respectively.


NOTE L - 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.  Plan  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 plan  amounts to $79,000 and  $61,000 at  December  31, 2003 and 2002,
respectively.  During  2003 and  2002,  the  expense  attributable  to this plan
amounted to $18,000 and $16,000, 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 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.

                                       44
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


NOTE L - OTHER EMPLOYEE BENEFITS (Continued)

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 $12,000 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, 2003 and 2002 were $245,000 and
$242,000, respectively. Contributions under the plan are made at the discretion
of the Company's Board of Directors.

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 our 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 equal to five percent (5%) of their compensation, up
to $1,000. 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 our matching grant to purchase
shares of our common stock.

As of December 31, 2003, 125,000 shares of our common stock had been reserved
for issuance under the Purchase Plan, and 62,972 shares had been purchased.
During 2003, 5,656 shares were purchased under the Purchase Plan.


NOTE M - LEASES

The Bank has entered into a non-cancelable operating lease for a branch
facility. Future minimum lease payments under this lease for year ending
December 31, 2003 is as follows (amounts in thousands):

      2004                                         $   26
      2005                                             26
      2006                                             26
      2007                                             26
      2008                                              7
                                               ----------------
                                                  $   111
                                               ================

In addition, the Bank has leased a building from one of its directors for $891
and $870 per month in 2003 and 2002, respectively under an operating lease on a
month-to-month basis.

Total rental expense under operating leases for the years ended December 31,
2003 and 2002 amounted to $31,000 and $14,000, respectively.


                                       45
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE N - PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp, Inc., the parent company,
at December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002
is presented below:

                                                    2003               2002
                                                -------------     -------------
                                                     (Amounts in thousands)
Condensed Balance Sheets

Assets:
   Cash and cash equivalents                 $          1,709   $         1,612
   Equity investment in subsidiaries                   30,681            29,215
   Securities available for sale                          595               397
   Other assets                                             -                 1
                                                -------------     -------------

      Total assets                           $         32,985   $        31,225
                                                =============     ==============

Liabilities and Shareholders' Equity:
Liabilities:
   Other liabilities                         $            105   $            32

   Shareholders' equity                                32,880            31,193
                                              ----------------   ---------------

    Total liabilities and shareholders'
     equity                                  $         32,985   $        31,225
                                              ================   ===============


                                                   2003              2002
                                              ----------------   ---------------
                                                   (Amounts in thousands)
Condensed Statements of Operations

Equity in earnings of subsidiaries           $          2,897    $        2,922
Interest income                                            22                34
Other investment income                                    17                 9
Miscellaneous expenses                                    (18)              (49)
                                              ----------------    --------------

      Net income                              $          2,918    $        2,916
                                              ================    ==============

                                       46
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE N - PARENT COMPANY FINANCIAL INFORMATION (Continued)

                                                    2003              2002
                                              ----------------   ---------------
                                                  (Amounts in thousands)
Condensed Statements of Cash Flows

Operating activities:
Net income                                   $          2,918    $        2,916
Equity in undistributed earnings of subsidiaries       (2,897)           (2,922)
Amortization                                                -                10
Decrease in other assets                                    -                67
                                              ----------------    --------------
  Cash flows provided by operating activities              21                71
                                              ----------------    --------------

Investing activities:
Purchase of securities available for sale                 (16)               (9)
Investment in subsidiaries                                  -               (31)
Upstream dividend received from subsidiary              1,166               584
                                              ----------------    --------------
  Cash flows provided by investing activities           1,150               544
                                              ----------------    --------------

Financing activities:
Proceeds from issuance of common stock                    879             1,012
Purchases and retirements of common stock                (993)             (385)
Dividends paid                                           (960)             (852)
                                               ---------------    --------------
  Cash flows used by financing activities              (1,074)             (225)
                                              ----------------    --------------

  Net increase in cash and cash equivalents                97               390

Cash and cash equivalents, beginning of year            1,612             1,222
                                              ----------------    --------------

Cash and cash equivalents, end of year       $          1,709    $        1,612
                                              ================    ==============


NOTE O - 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.


                                       47
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

                                       48
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The following table presents information for financial assets and liabilities as
of December 31, 2003 and 2002 (amounts in thousands):
<TABLE>

                                                            2003                           2002
                                                   --------------------------   ----------------------------------
                                                   Carrying        Estimated       Carrying         Estimated
                                                    Value          Fair Value       Value           Fair Value
                                                   ---------      -----------   ---------------    ---------------
Financial assets:
<S>                                           <C>               <C>              <C>              <C>
  Cash and cash equivalents                   $      15,825     $       15,825   $      19,066    $        19,066
  Securities available for sale                      38,203             38,203          56,789             56,789
  Loans, net                                        269,193            271,566         226,710            239,309
  FHLB stock                                          1,923              1,923           1,650              1,650
  Investment in life insurance                        2,896              2,896               -                  -
  Accrued interest receivable                         1,893              1,893           1,771              1,771

Financial liabilities:
Deposits                                      $     272,918     $      270,127   $       250,573    $       264,482
  Borrowings                                         33,160             30,665            33,160             29,966
  Accrued interest payable                            1,284              1,284             1,785              1,785

Derivative financial instruments:
  Interest rate swap                                     56                 56                 -                  -


NOTE P - CASH FLOW SUPPLEMENTAL DISCLOSURES

<CAPTION>
The following information is supplemental information regarding the cash flows for the years ended December 31, 2003 and 2002:
                                                                                       2003                 2002
                                                                                ----------------     ---------------
                                                                                       (Amounts in thousands)
  Cash paid for:
<S>                                                                            <C>                 <C>
   Interest on deposits and borrowings                                         $          4,365    $          8,586
   Income taxes                                                                           1,637                 997

  Summary of noncash investing and financing activities:
      Transfer from loans to foreclosed assets                                              167                 585
      Loans to facilitate the sale of foreclosed assets                                     111                 137

  Tax benefit from the exercise of non-qualified stock options                               18                  53

  Increase (decrease) in fair value of securities available for sale, net of tax           (141)                424
  Decrease in fair value of cash flow hedge, net of tax                                     (34)                  -
</TABLE>

                                       49
<PAGE>
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------


NOTE Q - 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. During 2002,
the Company purchased 16,921 shares at an average cost of $22.78 per share
pursuant to the program. On December 10, 2002, the Company's Board of Directors
extended this stock purchase plan until December 31, 2003. During 2003, the
Company purchased 43,668 shares at an average cost of $21.73 per share. Both
2003 and 2002 purchase amounts are not reflective of the 5-for-4 stock split
during 2003. In December 2003, the Company's Board of Directors extended this
stock purchase plan until December 31, 2004.


                                       50
<PAGE>

Item 8 -  Changes  In and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

         Not Applicable.


Item 8A - Controls and Procedures

         As required by paragraph (b) of Rule 13a-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), our Chief Executive
Officer and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, our Chief Executive Officer and our Chief
Financial Officer conclude that, as of the end of the period covered by this
report, our disclosure controls and procedures are effective, in that they
provide reasonable assurance that the 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 United States Securities and Exchange Commission's rules and forms.

         There have been no changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

                                    PART III


Item  9  -  Directors,   Executive  Officers,  Promoters  and  Control  Persons;
Compliance With Section 16(a) of the Exchange Act.

         Director information is incorporated by reference from the sections
entitled "Information About Our Board of Directors," "Proposal 1: Election of
Directors," and under the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in our Proxy Statement for the 2004 Annual Meeting of
Shareholders. Information on our executive officers is included under the
caption "Our Executive Officers" on Page 8 of this report. Information about our
Code of Ethics is incorporated by reference from the section entitled "Code of
Ethics" in our Proxy Statement for the 2004 Annual Meeting of Shareholders.


Item 10 - Executive Compensation.

         This information is incorporated by reference from the section entitled
"Executive Compensation" in our Proxy Statement for the 2004 Annual Meeting of
Shareholders.


Item 11 - 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 Purchases and Bonus Plan" in our Proxy
Statement for the 2004 Annual Meeting of Shareholders.


Item 12 - Certain Relationships and Related Transactions.

         This information is incorporated by reference from the section entitled
"Certain Transactions" in our Proxy Statement for the 2004 Annual Meeting of
Shareholders.


                                       51
<PAGE>

Item 13 - Exhibits and Reports on Form 8-K.

         (a) Exhibits. The following exhibits are filed as part of this annual
report. Management contracts or compensatory plans or arrangements are listed in
Exhibits 10.1, 10.2, 10.3, 10.4,10.6, 10.7, 10.8, 10.9, 10.10, 10.11 and 10.12
below:

Exhibit No.    Description of Exhibit
-----------    ----------------------

2(1)           Agreement and Plan of Reorganization and Merger by and
               between Four Oaks Bank & Trust Company and Four Oaks Fincorp,
               Inc. dated February 24, 1997
3.1(1)         Articles of Incorporation of Four Oaks Fincorp, Inc.
3.2(1)         Bylaws of Four Oaks Fincorp, Inc.
4(1)           Specimen of certificate for Four Oaks Fincorp, Inc. Common Stock
10.1(2)        Employment Agreement with Ayden R. Lee, Jr.
10.2(2)        Severance Compensation Agreement with Ayden R. Lee, Jr.
10.3(1)        Nonqualified Stock Option Plan
10.4(1)        Employee Stock Purchase and Bonus Plan
10.5(1)        Dividend Reinvestment and Stock Purchase Plan
10.6(3)        Four Oaks Bank & Trust Company Supplemental Executive
               Retirement Plan
10.7(4)        Employment Agreement with Clifton L. Painter
10.8(5)        Severance Compensation Agreement with Clifton L. Painter
10.9           Executive Employment Agreement with W. Leon Hiatt, III
10.10          Severance Compensation Agreement with Leon Hiatt, III
10.11          Executive Employment Agreement with Nancy S. Wise
10.12          Severance Compensation Agreement with Nancy S. Wise
21             Subsidiaries of Four Oaks Fincorp, Inc.
23             Consent of Dixon Hughes PLLC
31.1           Certification of Chief Executive Officer Pursuant to Section 302
               of the Sarbanes- Oxley Act of 2002
31.2           Certification of Chief Financial Officer Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002
32             Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
               of 2002
-----------------------
(1)  Filed as an exhibit to the Form 8-K12G3  filed with the SEC on July 2, 1997
     and incorporated herein by reference.
(2)  Filed as an  exhibit  to the  Quarterly  Report on Form 10-Q for the period
     ended June 30, 1997 and incorporated herein by reference.
(3)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 1998 and incorporated herein by reference.
(4)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 2001 and incorporated herein by reference.
(5)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 2002 and incorporated herein by reference.

(b)          Reports on Form 8-K.

             The Company filed a Current Report on Form 8-K on October 24, 2003
containing its press release announcing that the Board of Directors approved a
five-for-four split of the Company's common stock.

             The Company furnished a Current Report on Form 8-K on October 28,
2003, containing its press release announcing results for the three and nine
months ended September 30, 2003. Information furnished in the Form 8-K
referenced in the prior sentence is not deemed to be filed with the SEC.

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
our Proxy Statement for the 2004 Annual Meeting of Shareholders.

                                       52
<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 22, 2004                 By: /s/ Ayden R. Lee, Jr.
                                           ------------------------------
                                           Ayden R. Lee, Jr.
                                           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 22, 2004                 By: /s/ Ayden R. Lee, Jr.
                                           ------------------------------
                                           Ayden R. Lee, Jr.
                                           President and Chief Executive Officer
                                           and Director

  Date: March 22, 2004                 By: /s/ Nancy S. Wise
                                           ------------------------------
                                           Nancy S. Wise
                                           Senior Vice President and Chief
                                           Financial Officer

  Date: March 22, 2004                 By: /s/ William J. Edwards
                                           ------------------------------
                                           William J. Edwards
                                           Director

  Date: March 22, 2004                 By: /s/ Warren L. Grimes
                                           ------------------------------
                                           Warren L. Grimes
                                           Director

  Date: March 22, 2004                 By: /s/ Dr. R. Max Raynor, Jr.
                                           ------------------------------
                                           Dr. R. Max Raynor, Jr.
                                           Director

  Date: March 22, 2004                 By: /s/ Percy Y. Lee
                                           ------------------------------
                                           Percy Y. Lee
                                           Director

  Date: March 22, 2004                 By: /s/ Merwin S. Canaday
                                           ------------------------------
                                           Merwin S. Canaday
                                           Director

  Date: March 22, 2004                 By: /s/ Paula C. Bowman
                                           ------------------------------
                                           Paula C. Bowman
                                           Director

  Date: March 22, 2004                 By: /s/ William Ashley Turner
                                           ------------------------------
                                           William Ashley Turner
                                           Director


                                       53
<PAGE>

                                  EXHIBIT INDEX

 Exhibit No.   Description of Exhibit
 -----------   ----------------------

  2(1)         Agreement and Plan of Reorganization and Merger by and
               between Four Oaks Bank & Trust Company and Four Oaks Fincorp,
               Inc. dated February 24, 1997
  3.1(1)       Articles of Incorporation of Four Oaks Fincorp, Inc.
  3.2(1)       Bylaws of Four Oaks Fincorp, Inc.
  4(1)         Specimen of certificate for Four Oaks Fincorp, Inc.
               Common Stock
  10.1(2)      Employment Agreement with Ayden R. Lee, Jr.
  10.2(2)      Severance Compensation Agreement with Ayden R. Lee,
               Jr.
  10.3(1)      Nonqualified Stock Option Plan
  10.4(1)      Employee Stock Purchase and Bonus Plan
  10.5(1)      Dividend Reinvestment and Stock Purchase Plan
  10.6(3)      Four Oaks Bank & Trust Company Supplemental Executive
               Retirement Plan
  10.7(4)      Employment Agreement with Clifton L. Painter
  10.8(5)      Severance Compensation Agreement with Clifton L. Painter
  10.9         Executive Employment Agreement with W. Leon Hiatt, III
  10.10        Severance Compensation Agreement with Leon Hiatt, III
  10.11        Executive Employment Agreement with Nancy S. Wise
  10.12        Severance Compensation Agreement with Nancy S. Wise
  21           Subsidiaries of Four Oaks Fincorp, Inc.
  23           Consent of Dixon Hughes PLLC
  31.1         Certification of Chief Executive Officer Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002
  31.2         Certification of Chief Financial Officer Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002
  32           Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
               of 2002
 -----------------------
(1)  Filed as an exhibit to the Form 8-K12G3  filed with the SEC on July 2, 1997
     and incorporated herein by reference.
(2)  Filed as an  exhibit  to the  Quarterly  Report on Form 10-Q for the period
     ended June 30, 1997 and incorporated herein by reference.
(3)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 1998 and incorporated herein by reference.
(4)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 2001 and incorporated herein by reference.
(5)  Filed as an  exhibit  to the  Annual  Report on Form  10-KSB for the period
     ended December 31, 2002 and incorporated herein by reference.