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SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549

# Form 10-KSB

(Mark One)

|[X] | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
|--- | --------------------------------------------------------------------------------------------------------------------------

| | or
| | --

| | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from __________ to ________                             

Commission file no.
333-66734

First Southern Bancorp
(Name of Small Business Issuer in Its Charter)

|Georgia                  | 6021                         | 58-2635782                          
|------------------------ | ---------------------------- | ------------------------------------
|(State of Incorporation) | (Primary Standard Industrial | (I.R.S. Employer Identification No.)
|                         | Classification Code Number)  |                                     

|201 South Main St.                       |  |           
|---------------------------------------- |  | ----------
|Statesboro, Georgia                      |  | 30458     
|(Address of Principal Executive Offices) |  | (Zip Code)

(912) 489-7600Issuers Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:   None
Securities registered pursuant to Section 12(g) of the Act:   Common Stock

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements
for past 90 days.    Yes X   No

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
in this form, and no disclosure will be contained, to the best of 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]

The
issuers revenue (total interest income plus noninterest income) for its most recent
fiscal year was $2,814,551.

The
aggregate market value of the Common Stock held by non-affiliates of the Company on March
26, 2004 was $5,327,970.This calculation is based upon an estimate of the fair
market value of the Common Stock of $10.00 per share, which was the price of the last
trade of which management is aware prior to this date. There is not an active trading
market for the Common Stock and it is not possible to identify precisely the market value
of the Common Stock.

Transitional Small Business Disclosure Format.  (Check one):  
Yes 
    No X

# DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the company's 2003 Annual Report
                
                
                
                
              Part II
Portions of the company's Proxy Statement for the 2004 Annual Meeting of Shareholders
        Part III

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# Item 1. Description of
Business

This
Report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934.
These statements are based on many assumptions and estimates and are not guarantees of
future performance. Our actual results may differ materially from those projected in any
forward-looking statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words may,
would, could, will, expect,
anticipate, believe, intend, plan, and
estimate, as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are not limited
to:

| | o | significant increases in competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| | o | changes in the interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| | o | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| | o | general economic conditions, either nationally or regionally and especially in the primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| | o | changes in technology;
| | - | ----------------------

| | o | the level of the allowance for loan loss;
| | - | -----------------------------------------

| | o | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| | o | the rates of loan growth;
| | - | -------------------------

| | o | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| | o | changes in monetary and tax policies;
| | - | -------------------------------------

| | o | loss of consumer confidence and economic disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| | o | changes in the securities markets; and
| | - | --------------------------------------

| | o | other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict, particularly in light of the
fact that we are a new company with little operating history. Therefore, actual results
may differ materially from those expressed or forecasted in such forward-looking
statements. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. In light
of these risks, uncertainties, and assumptions, the forward-looking events discussed in
this report might not occur.

# General

First
Southern Bancorp was incorporated to operate as a bank holding company in April 2001
pursuant to the Federal Bank Holding Company Act of 1956 and the Financial Institutions
Code of Georgia, and to purchase 100% of the issued and outstanding stock of First
Southern National Bank, an association organized under the laws of the United States, to
conduct a general banking business in Statesboro, Georgia. On September 13, 2001, we
commenced our initial public offering and completed the sale of 919,547 shares of our
common stock at $10.00 per share on January 31, 2002. On February 5, 2002, we opened the
bank for business. Of the net proceeds from the offering, we used $6.7 million to
capitalize the bank.

2

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# Marketing Focus

First
Southern National Bank positions itself as the hometown bank that cares about
its clients. We provide professional and personalized service to our clients by employing
well trained, seasoned bankers who are familiar with our market area and our clients
individual needs. Our primary target market includes individuals and small- to
medium-sized businesses who desire a consistent and professional relationship with a local
banker. Because there is only one other locally owned bank left in Statesboro, we believe
we offer a unique banking alternative for the market by offering a higher level of
customer service and a management team more focused on the needs of the community than
most of our competitors. We believe that this approach is enthusiastically supported by
the community. In order to achieve the level of prompt, responsive service that is
necessary to attract customers and to develop First Southern National Banks image as
a local bank with an individual focus, we leverage our community-oriented board of
directors, convenient branch locations, and local services and decision making to attract
and retain customers.

# Location and Service Area

Our
primary service area consists of an area within a 20 mile radius of our main office in
Statesboro, Georgia, with a primary focus on Bulloch County. Our main office is located in
downtown Statesboro and provides excellent visibility for the bank. Our expansion plans
include the opening of an additional branch strategically located within our service area
in our third year of operation. The branch would extend the market reach of our bank, and
it will increase our personal delivery capabilities in this area to more efficiently
market the services of the bank.

Bulloch
County has a growing and dynamic economic environment centered around educational
services, manufacturing, and agriculture that we believe will support our bank. The
largest employer in the county is Georgia Southern University, which has helped to support
a stable business and educational foundation. The business environment in the county has
also benefited recently from the location of the Briggs & Stratton manufacturing
facility, Viracon, and a Wal-Mart distribution center in the area. Bulloch County is also
the largest row-crop county in Georgia. We believe that there is an opportunity in Bulloch
County for a new locally managed bank focused on the community and personalized service to
individuals and local businesses.

# Lending Activities

General. We emphasize a range of lending services, including real estate, commercial, and
          equity-line and consumer loans to individuals, small- to medium-sized businesses
          and professional concerns that are located in or conduct a substantial portion
          of their business in the banks market area. We compete for these loans
          with competitors who are well established in the Bulloch County area and have
          greater resources and lending limits. As a result, we may have to charge lower
          interest rates to attract borrowers.

Loan
Approval and Review. The banks loan approval policies provide for various levels
of officer lending authority. When the amount of aggregate loans to a single borrower
exceeds that individual officers lending authority, the loan request will be
considered and approved by an officer with a higher lending limit or the board of
directors loan committee. The bank does not make any loans to any director of the
bank unless the loan is approved by the board of directors of the bank and is made on
terms not more favorable to the person than would be available to a person not affiliated
with the bank. The bank currently adheres to Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation guidelines in its mortgage loan review process, but
may choose to alter this policy in the future. The bank expects to sell residential
mortgage loans that it originates on the secondary market.

Lending
Limits. The banks lending activities are subject to a variety of lending limits
imposed by federal law. In general, the bank is subject to a legal limit on loans to a
single borrower equal to 15% of the banks capital and unimpaired surplus. Different
limits may apply in certain circumstances based on the type of loan or the nature of the
borrower, including the borrowers relationship to the bank. These limits increase or
decrease as the banks capital increases or decreases. The bank is able to sell
participations in its loans to other financial institutions, which allows the bank the
ability to meet all of the lending needs of loan customers requiring aggregate extensions
of credit above these limits.

Credit
Risk. The principal credit risk associated with each category of loans is the
creditworthiness of the borrower. Borrower creditworthiness is affected by general
economic conditions and the strength of the manufacturing, services, and retail market
segments. General economic factors affecting a borrowers ability to repay

3

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include interest, inflation, and employment rates and the strength of local and national economy,
as well as other factors affecting a borrowers customers, suppliers, and employees.

Real
Estate Loans. Loans secured by first or second mortgages on real estate make up 73% of
the banks loan portfolio. These loans generally fall into one of two categories:
commercial real estate loans or construction and development loans. We make residential
real estate loans secured by first or second mortgages on real estate. Each of these
categories is discussed in more detail below, including their specific risks. Interest
rates for all categories may be fixed or adjustable, and will more likely be fixed for
shorter-term loans. The bank generally charges an origination fee for each loan.

Real
estate loans are subject to the same general risks as other loans. Real estate loans are
also sensitive to fluctuations in the value of the real estate securing the loan. On first
and second mortgage loans we do not advance more than regulatory limits. We require a
valid mortgage lien on all real property loans along with a title lien policy which
insures the validity and priority of the lien. We also require borrowers to obtain hazard
insurance policies and flood insurance if applicable. Additionally, certain types of real
estate loans have specific risk characteristics that vary according to the collateral type
securing the loan and the terms and repayment sources for the loan.

We
have the ability to originate some real estate loans for sale into the secondary market.
We limit our interest rate and credit risk on these loans by locking the interest rate for
each loan with the secondary investor and receiving the investors underwriting
approval prior to originating the loan.

| | o | Commercial Real Estate Loans. Commercial real estate loans generally have terms of
five years or less, although payments may be structured on a longer amortization basis.
Inherent in commercial real estate loans credit risk is the risk that the primary
source of repayment, the operating commercial real estate company, will be insufficient to
service the debt. If a real estate loan is in default, we also run the risk that a the
value of a commercial real estate loans secured real estate will decrease, and
thereby be insufficient to satisfy the loan. To mitigate these risks, we evaluate each
borrower on an individual basis and attempt to determine its business risks and credit
profile. We attempt to reduce credit risk in the commercial real estate portfolio by
emphasizing loans on owner-occupied office and retail buildings where the loan-to-value
ratio, established by independent appraisals. We typically review all of the personal
financial statements of the principal owners and require their personal guarantees. These
reviews generally reveal secondary sources of payment and liquidity to support a loan
request.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Construction and Development Real Estate Loans.We offer adjustable and fixed rate
residential and commercial construction loans to builders and developers and to consumers
who wish to build their own home. The term of construction and development loans is
generally limited to 18 months, although payments may be structured on a longer
amortization basis. Most loans mature and require payment in full upon the sale of the
property. Construction and development loans generally carry a higher degree of risk than
long term financing of existing properties. Repayment usually depends on the ultimate
completion of the project within cost estimates and on the sale of the property. Specific
risks include:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | cost overruns;
| | - | --------------

| | o | mismanaged construction;
| | - | ------------------------

| | o | inferior or improper construction techniques;
| | - | ---------------------------------------------

| | o | economic changes or downturns during
construction;
| | - | --------------------------------------------------

| | o | a downturn in the real estate market;
| | - | -------------------------------------

| | o | rising interest rates which may
prevent sale of the property; and
| | - | -----------------------------------------------------------------

| | o | failure to sell completed projects in a timely manner.
| | - | ------------------------------------------------------

We
attempt to reduce risk by obtaining personal guarantees where possible, and by keeping the
loan-to-value ratio of the completed project below specified percentages. We may also
reduce risk by selling participations in larger loans to other institutions when possible.

| | o | Residential Real Estate Loans. These loans generally have longer terms up to 30
years. We offer fixed and adjustable rate mortgages, and we sell some or all of the
residential real estate loans that we generate in the secondary market. Inherent in
residential real estate loans credit risk is the risk that the primary
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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| |  | source of
repayment, the residential borrower, is insufficient to service the debt. If a real estate
loan is in default, we also run the risk that a the value of a residential real estate
loans secured real estate will decrease, and thereby be insufficient to satisfy the
loan. To mitigate these risks, we evaluate each borrower on an individual basis and
attempt to determine its credit profile. By selling these loans in the secondary market,
we significantly reduce our exposure to credit risk because the loans are underwritten
through a third party agent without any recourse against the bank.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commercial Loans. The bank makes loans for commercial purposes in various lines of
businesses. Equipment loans are typically made for a term of five years or less at fixed
or variable rates, with the loan fully amortized over the term and secured by the financed
equipment. We focus our efforts on commercial loans of less than $1,000,000. Working
capital loans typically have terms not exceeding one year and are usually secured by
accounts receivable, inventory, or personal guarantees of the principals of the business.
For loans secured by accounts receivable or inventory, principal is typically repaid as
the assets securing the loan are converted into cash, and in other cases principal is
typically due at maturity. Trade letters of credit, standby letters of credit, and foreign
exchange are handled through a correspondent bank as agent for the bank. Commercial loans
primarily have risk that the primary source of repayment, the borrowing business, is
insufficient to service the debt. Often this occurs as the result of changes in local
economic conditions or in the industry in which the borrower operates which impact cash
flow or collateral value.

We
expect to also offer small business loans utilizing government enhancements such as the
Small Business Administrations 7(a) program and SBAs 504 programs. These loans
are typically partially guaranteed by the government which may help to reduce the
banks risk. Government guarantees of SBA loans does not exceed 80% of the loan
value, and is generally less.

Consumer
Loans. The bank makes a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment loans and revolving lines of credit
such as credit cards. Installment loans typically carry balances of less than $50,000 and
are amortized over periods up to 60 months. Consumer loans may be offered on a single
maturity basis where a specific source of repayment is available. Revolving loan products
typically require monthly payments of interest and a portion of the principal. Consumer
loans are generally considered to have greater risk than first or second mortgages on real
estate because they are often dependent on the borrowers employment status as the
sole source of repayment and some of them are unsecured.

We
also offer home equity loans. Our underwriting criteria for and the risks associated with
home equity loans and lines of credit is generally the same as those for first mortgage
loans. Home equity lines of credit typically have terms of 15 years or less, typically
carry balances less than $125,000, and may extend up to 100% of the available equity of
each property.

Relative
Risks of Loans. Each category of loan has a different level of credit risk. Real
estate loans are generally safer than loans secured by other assets because the value of
the underlying security, real estate, is generally ascertainable and does not fluctuate as
much as some other assets. Certain real estate loans are less risky than others.
Residential real estate loans are generally the least risky type of real estate loan,
followed by commercial real estate loans and construction and development loans.
Commercial loans, which can be secured by real estate or other assets, or which can be
unsecured, are generally more risky than real estate loans, but less risky than consumer
loans. Finally, consumer loans, which can also be secured by real estate or other assets,
or which can also be unsecured, are generally considered to be the most risky of these
categories of loans. Any type of loan which is unsecured is generally more risky that
secured loans. These levels of risk are general in nature, and many factors including the
creditworthiness of the borrower or the particular nature of the secured asset may cause
any type of loan to be more or less risky than another.

# Deposit Services

We
offer a full range of deposit services that are typically available in most banks and
savings and loan associations, including checking accounts, NOW accounts, commercial
accounts, savings accounts, and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The transaction accounts and
time certificates are tailored to our principal market area at rates competitive to those
offered in the Bulloch County area. In addition, we offer certain retirement account
services, including IRAs. We solicit these accounts from individuals, businesses, and
other organizations.

5

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# Other Banking Services

The
bank offers other bank services including cash management services such as sweep accounts
for commercial businesses. In addition, lines of credit, 24-hour telephone banking and
PC/internet delivery are being considered for development. We offer safe deposit boxes,
direct deposit of payroll and social security checks, U.S. Savings Bonds, travelers
checks, and automatic drafts for various accounts. The bank is associated with the Honor
and Cirrus ATM networks so that its customers may access their funds throughout the
country. We believe that by being associated with a shared network of ATMs, we are better
able to serve our clients and we are able to attract clients who are accustomed to the
convenience of using ATMs, although we do not believe that maintaining this association is
critical to our success. We began offering these services shortly after opening the bank.
We also offer debit card and credit card services through a correspondent bank as an agent
for the bank. We do not expect the bank to exercise trust powers during its initial years
of operation.

# Competition

The
banking business is highly competitive. We compete with other commercial banks, savings
and loan associations, credit unions and money market mutual funds operating in the
Bulloch County area and elsewhere. As of June 30, 2003, there were 7 commercial banks and
no savings banks operating in Bulloch County. Some of these competitors have been in
business for a long time and have already established their customer base and name
recognition. We believe that our community bank focus, with our emphasis on service to
small businesses, individuals, and professional concerns, gives us an advantage in the
market. Nevertheless, a number of these competitors have greater financial and personnel
resources than we may have. Most of them offer services, including extensive and
established branch networks and trust services, that we do not currently provide. In
addition, competitors that are not depository institutions are generally not subject to
the extensive regulations that apply to our bank. As a result of these competitive
factors, we may have to pay higher rates of interest to attract deposits.

# Market Share

As
of June 30, 2003, the most recent date for which market data is available, total deposits
in Bulloch County were $624,941,000. Our deposits represented approximately 6.65% of the
total deposits in the county as of June 30, 2003.

# Employees

As
of March 26, 2004, the bank had approximately 19 full time employees and six part time
employees. First Southern Bancorp, as the holding company for the bank, does not have any
employees other than its officers, who are also bank employees.

6

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# SUPERVISION AND
REGULATION

We
are subject to extensive state and federal banking laws and regulations which impose
specific requirements or restrictions on, and provide for general regulatory oversight of,
virtually all aspects of our operations. These laws and regulations are generally intended
to protect depositors, not shareholders. The following summary is qualified by reference
to the statutory and regulatory provisions discussed. Changes in applicable laws or
regulations may have a material effect on our business and prospects. Our operations may
be affected by legislative changes and the policies of various regulatory authorities. We
cannot predict the effect that fiscal or monetary policies, economic control, or new
federal or state legislation may have on our business and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# USA Patriot Act of 2001

In
October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks
in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The
Patriot Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards for
verifying client identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying parties
that may be involved in terrorism or money laundering.

# Check 21

On
October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century
Act, also known as Check 21.  The new law, which is not effective until October 28,
2004, gives substitute checks, such as a digital image of a check and
copies made from that image, the same legal standing as the original paper check. 
Some of the major provisions include:

| | o | Allows check truncation without making it mandatory;
| | - | ----------------------------------------------------

| | o | Demands that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the
law;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Legalizes substitutions for and replacements of paper checks without agreement from consumers;
| | - | ----------------------------------------------------------------------------------------------

| | o | Keeps in place the previously mandated electronic collection and return of checks between
financial institutions only when individual agreements are in place;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Cautions that when accountholders request verification, financial institutions must
produce the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Requires recrediting of funds to an individuals account on the next business
day after a consumer proves the financial institution has erred.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

This new legislation will likely have
a dramatic impact on bank capital spending as many financial institutions assess
whether technological or operational changes are necessary to stay competitive and take
advantage of the new opportunities presented by Check 21.

7

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# First Southern Bancorp

Because
it owns the outstanding capital stock of the bank, First Southern Bancorp is a bank
holding company under the federal Bank Holding Company Act of 1956 and the Financial
Institutions Code of Georgia.

The
Bank Holding Company Act. Under the Bank Holding Company Act, First Southern Bancorp
is subject to periodic examination by the Federal Reserve and required to file periodic
reports of its operations and any additional information that the Federal Reserve may
require. Our activities at the bank and holding company level are limited to:

| | o | banking and managing or controlling banks;
| | - | ------------------------------------------

| | o | furnishing services to or performing services for its subsidiaries; and
| | - | -----------------------------------------------------------------------

| | o | engaging in other activities that the Federal Reserve determines to be so closely related
to banking and managing or controlling banks as to be a proper incident thereto.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investments,
Control, and Activities. With certain limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal Reserve
before:

| | o | acquiring substantially all of the assets of any bank;
| | - | ------------------------------------------------------

| | o | acquiring
direct or indirect ownership or control of any voting shares of any bank if after the
acquisition it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | merging or consolidating with another bank holding company.
| | - | -----------------------------------------------------------

In
addition, and subject to certain exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, together with regulations thereunder, require Federal Reserve
approval prior to any person or company acquiring control of a bank holding
company. Control is conclusively presumed to exist if an individual or company acquires
25% or more of any class of voting securities of the bank holding company. Control is
rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any
class of voting securities and either the company has registered securities under Section
12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of
that class of voting securities immediately after the transaction. Our common stock is
registered under the Securities Exchange Act of 1934. The regulations provide a procedure
for challenge of the rebuttable control presumption.

Under
the Bank Holding Company Act, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in nonbanking activities unless the Federal Reserve Board, by order or
regulation, has found those activities to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the business
of a bank holding company include:

| | o | making or servicing loans and certain types of leases;
| | - | ------------------------------------------------------

| | o | engaging in certain insurance and
discount brokerage activities;
| | - | ----------------------------------------------------------------

| | o | performing certain data processing services;
| | - | --------------------------------------------

| | o | acting in
certain circumstances as a fiduciary or investment or financial adviser;
| | - | ----------------------------------------------------------------------------------

| | o | owning savings
associations; and
| | - | --------------------------------

| | o | making investments in certain
corporations or projects designed primarily to promote
community welfare.
| | - | -------------------------------------------------------------------------------------------------------

The
Federal Reserve Board imposes certain capital requirements on First Southern Bancorp under
the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of
qualifying capital to risk-weighted assets. These requirements are described
below under Capital Regulations. Subject to its capital requirements and
certain other restrictions, First Southern Bancorp is able to borrow money to make a
capital contribution to the bank, and these loans may be repaid from dividends paid from
the bank to First Southern Bancorp. Our ability to pay dividends is subject to regulatory
restrictions as described below in The Bank  Dividends. First Southern
Bancorp is also able to raise capital for contribution to the bank by issuing securities
without having to receive regulatory approval, subject to compliance with federal and
state securities laws. As a bank holding company registered under the Financial
Institutions Code of Georgia, we must provide the Georgia Department of Banking and

8

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Finance with information regarding the financial, management, and operation condition of
First Southern Bancorp and First Southern National Bank.

Source
of Strength; Cross-Guarantee. In accordance with Federal Reserve Board policy, First
Southern Bancorp is expected to act as a source of financial strength to the bank and to
commit resources to support the bank in circumstances in which First Southern Bancorp
might not otherwise do so. Under the Bank Holding Company Act, the Federal Reserve Board
may require a bank holding company to terminate any activity or relinquish control of a
nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve
Boards determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the bank
holding company. Further, federal bank regulatory authorities have additional discretion
to require a bank holding company to divest itself of any bank or nonbank subsidiary if
the agency determines that divestiture may aid the depository institutions financial
condition.

The
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act, previously known as the Financial
Services Modernization Act of 1999, was signed into law on November 12, 1999. Among other
things, the Act repeals the restrictions on banks affiliating with securities firms
contained in sections 20 and 32 of the Glass-Steagall Act. The Act also permits bank
holding companies that become financial holding companies to engage in a statutorily
provided list of financial activities, including insurance and securities underwriting and
agency activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are complementary to
financial activities.

The
Act is intended, in part, to grant to community banks certain powers as a matter of right
that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may
have the result of increasing the amount of competition that we face from larger
institutions and other types of companies. In fact, it is not possible to predict the full
effect that the Act will have on us.

# The Bank

The
bank operates as a national banking association incorporated under the laws of the United
States and subject to examination by the Office of the Comptroller of the Currency.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.

The
Office of the Comptroller of the Currency and the FDIC regulates or monitors virtually all
areas of the banks operations, including:

| | o | security devices and procedures;
| | - | --------------------------------

| | o | adequacy of capitalization and loss reserves;
| | - | ---------------------------------------------

| | o | loans;
| | - | ------

| | o | investments;
| | - | ------------

| | o | borrowings;
| | - | -----------

| | o | deposits;
| | - | ---------

| | o | mergers;
| | - | --------

| | o | issuances of securities;
| | - | ------------------------

| | o | payment of dividends;
| | - | ---------------------

| | o | interest rates payable on deposits;
| | - | -----------------------------------

| | o | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| | o | establishment of branches;
| | - | --------------------------

| | o | corporate reorganizations;
| | - | --------------------------

| | o | maintenance of books and records; and
| | - | -------------------------------------

| | o | adequacy of staff training to carry on safe lending and deposit gathering practices.
| | - | ------------------------------------------------------------------------------------

The
Office of the Comptroller of the Currency requires the bank to maintain specified capital
ratios and imposes limitations on the banks aggregate investment in real estate,
bank premises, and furniture and fixtures. The Office of the Comptroller of the Currency
also requires the bank to prepare quarterly reports on the banks financial condition
and to conduct an annual audit of its financial affairs in compliance with its minimum
standards and procedures.

9

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Under
the FDIC Improvement Act, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the FDIC, their federal regulatory
agency, and state supervisor when applicable. The FDIC Improvement Act directs the FDIC to
develop a method for insured depository institutions to provide supplemental disclosure of
the estimated fair market value of assets and liabilities, to the extent feasible and
practicable, in any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. The FDIC Improvement Act also requires the
federal banking regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating, among other
things, to the following:

| | o | internal controls;
| | - | ------------------

| | o | information systems and audit systems;
| | - | --------------------------------------

| | o | loan documentation;
| | - | -------------------

| | o | credit underwriting;
| | - | --------------------

| | o | interest rate risk exposure; and
| | - | --------------------------------

| | o | asset quality.
| | - | --------------

National
banks and their holding companies which have been chartered or registered or have
undergone a change in control within the past two years or which have been deemed by the
Office of the Comptroller of the Currency or the Federal Reserve Board to be troubled
institutions must give the Office of the Comptroller of the Currency or the Federal
Reserve Board 30 days prior notice of the appointment of any senior executive officer or
director. Within the 30 day period, the Office of the Comptroller of the Currency or the
Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.

Deposit
Insurance. The FDIC has adopted a risk-based assessment system for determining an
insured depository institutions insurance assessment rate. The system that takes
into account the risks attributable to different categories and concentrations of assets
and liabilities. An institution is placed into one of three capital categories: (1) well
capitalized; (2) adequately capitalized; or (3) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subgroups, based on the FDICs determination
of the institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institutions capital group and supervisory subgroup. In addition, the FDIC imposes
assessments to help pay off the $780 million in annual interest payments on the $8 billion
Financing Corporation (FICO) bonds issued in the late 1980s as part of the government
rescue of the thrift industry. Although we pay a quarterly FICO assessment, the FDIC
assessment rate on our bank deposits currently is zero. The FDIC may increase or decrease
the assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate
could have a material adverse effect on our earnings, depending on the amount of the
increase.

Transactions
With Affiliates and Insiders.The bank is subject to the provisions of Section 23A of
the Federal Reserve Act, which places limits on the amount of loans or extensions of
credit to, or investments in, or certain other transactions with, affiliates and on the
amount of advances to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the banks capital and surplus and, as to all affiliates
combined, to 20% of the banks capital and surplus. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to avoid the
taking of low quality assets.

The
bank is also subject to the provisions of Section 23B of the Federal Reserve Act which,
among other things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The bank is subject to
certain restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable features.

10

---

The
Federal Reserve Board has recently issued Regulation W, which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with
respect to affiliate transactions. Regulation W incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. In addition, under Regulation W:

| | o | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
| | - | -----------------------------------------------------------------------------------

| | o | covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation
W generally excludes all non-bank and non-savings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. Concurrently with the adoption of Regulation W,
the Federal Reserve Board has proposed a regulation which would further limit the amount
of loans that could be purchased by a bank from an affiliate to not more than 100% of the
banks capital and surplus. This regulation has not yet been adopted.

Dividends.
          A national bank may not pay dividends from its capital. All dividends must be
          paid out of undivided profits then on hand, after deducting expenses, including
          reserves for losses and bad debts. In addition, a national bank is prohibited
          from declaring a dividend on its shares of common stock until its surplus equals
          its stated capital, unless there has been transferred to surplus no less than
          one-tenth of the banks net profits of the preceding two consecutive
          half-year periods (in the case of an annual dividend). The approval of the
          Office of the Comptroller of the Currency is required if the total of all
          dividends declared by a national bank in any calendar year exceeds the total of
          its net profits for that year combined with its retained net profits for the
          preceding two years, less any required transfers to surplus.

Branching.
          National banks are required by the National Bank Act to adhere to branch office
          banking laws applicable to state banks in the states in which they are located.
          Under current Georgia law, the bank may open branch offices throughout Georgia
          with the prior approval of the Office of the Comptroller of the Currency. In
          addition, with prior regulatory approval, the bank is able to acquire existing
          banking operations in Georgia. Furthermore, federal legislation has recently
          been passed which permits interstate branching. The new law permits out-of-state
          acquisitions by bank holding companies, interstate branching by banks if allowed
          by state law, and interstate merging by banks.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, the Federal
Reserve, the FDIC, or the Office of the Comptroller of the Currency, shall evaluate the
record of each financial institution in meeting the credit needs of its local community,
including low and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility. Failure
to adequately meet these criteria could impose additional requirements and limitations on
the bank.

The
Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act, subject to certain
conditions imposed by their respective banking regulators, national and state-chartered
banks are permitted to form financial subsidiaries that may conduct financial
or incidental activities, thereby permitting bank subsidiaries to engage in certain
activities that previously were impermissible. The Gramm-Leach-Bliley Act imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a
bank and its financial subsidiaries similar to restrictions applicable to transactions
between banks and nonbank affiliates.

The
Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy. These
provisions require financial institutions to disclose their policy for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated third parties
except for third parties that market an institutions own products and services.
Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other
marketing to the consumer.

11

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Other
Regulations. Interest and other charges collected or contracted for by the bank are
subject to state usury laws and federal laws concerning interest rates. The banks
loan operations are also subject to federal laws applicable to credit transactions, such
as:

| | o | The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
| | - | ----------------------------------------------------------------------------------------------

| | o | the Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the Equal Credit  Opportunity Act,  prohibiting  discrimination on the basis of race, creed or other prohibited
factors in extending credit;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | o | the Fair Credit  Reporting  Act of 1978,  governing the use and provision of  information  to credit  reporting
agencies;
| | - | -------------------------------------------------------------------------------------------------------------------------

| | o | the Fair Debt  Collection  Act,  governing  the manner in which  consumer  debts may be collected by collection
agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| | o | the rules and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws.
| | - | ----------------------------------------------------------------------------------------------------------------------------

The deposit operations of the bank
also are subject to:

| | o | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that act, which governs automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital
Regulations. The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. We have not received any notice
indicating that either First Southern Bancorp or First Southern National Bank is subject
to higher capital requirements. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital ratio equal
to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common
shareholders equity, qualifying perpetual preferred stock, and minority interests in
equity accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term-preferred
stock, and general reserves for loan and lease losses up to 1% of risk-weighted assets.

Under
these guidelines, banks and bank holding companies assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are
given credit conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight applies. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.

The
federal bank regulatory authorities have also implemented a leverage ratio, which is equal
to Tier 1 capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the leverage ratio
is to place a constraint on the maximum degree to which a bank holding company may
leverage its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional cushion
of at least 100 to 200 basis points.

12

---

The
FDIC Improvement Act established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks which requires the FDIC to choose the least
expensive resolution of bank failures. The new capital-based regulatory framework contains
five categories of compliance with regulatory capital requirements, including well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
To qualify as a well capitalized institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any order or
directive from the appropriate regulatory agency to meet and maintain a specific capital
level. We qualify as well capitalized.

Under
the FDIC Improvement Act regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a
financial institution increases, and the permissible activities of the institution
decreases, as it moves downward through the capital categories. Institutions that fall
into one of the three undercapitalized categories may be required to do some or all of the
following:

| | o | submit a capital restoration plan;
| | - | ----------------------------------

| | o | raise additional capital;
| | - | -------------------------

| | o | restrict their growth, deposit interest rates, and other activities;
| | - | --------------------------------------------------------------------

| | o | improve their management;
| | - | -------------------------

| | o | eliminate management fees; or
| | - | -----------------------------

| | o | divest themselves of all or a part of their
operations.
| | - | -------------------------------------------------------

A
bank that is not well capitalized is also subject to certain limitations
relating to so-called brokered deposits. Bank holding companies controlling
financial institutions can be called upon to boost the institutions capital and to
partially guarantee the institutions performance under their capital restoration
plans.

These
capital guidelines can affect us in several ways. If we grow at a rapid pace, our capital
may be depleted too quickly, and a capital infusion from the holding company may be
necessary, which could impact our ability to pay dividends. Our capital levels are more
than adequate; however, rapid growth, poor loan portfolio performance, poor earnings
performance, or a combination of these factors could change our capital position in a
relatively short period of time.

The
FDIC Improvement Act requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk, and the risks of untraditional activities. We are uncertain
what effect these regulations would have.

Failure
to meet these capital requirements would mean that a bank would be required to develop and
file a plan with its primary federal banking regulator describing the means and a schedule
for achieving the minimum capital requirements. In addition, such a bank would generally
not receive regulatory approval of any application that requires the consideration of
capital adequacy, such as a branch or merger application, unless the bank could
demonstrate a reasonable plan to meet the capital requirement within a reasonable period
of time. A bank that is not well capitalized is also subject to certain
limitations relating to so-called brokered deposits. Bank holding companies
controlling financial institutions can be called upon to boost the institutions
capital and to partially guarantee the institutions performance under their capital
restoration plans.

Enforcement
Powers. The Financial Institution Reform Recovery and Enforcement Act expanded and
increased civil and criminal penalties available for use by the federal regulatory
agencies against depository institutions and certain institution-affiliated
parties. Institution-affiliated parties primarily include management, employees, and
agents of a financial institution, as well as independent contractors and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs. These practices can include the failure of an institution to
timely file required reports or the filing of false or misleading information or the
submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for
such violations. Criminal penalties for some financial institution crimes have been
increased to 20 years. In addition, regulators are provided with greater flexibility to
commence enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance. Furthermore,
banking agencies power to issue cease-and-desist orders were expanded. Such orders
may, among other things, require affirmative action to correct any harm resulting

13

---

from a violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets, rescind agreements or contracts, or take other actions
as determined by the ordering agency to be appropriate.

Recent
Legislative Developments. From time to time, various bills are introduced in the
United States Congress with respect to the regulation of financial institutions. Some of
these proposals, if adopted, could significantly change the regulation of banks and the
financial services industry. We cannot predict whether any of these proposals will be
adopted or, if adopted, what effect these would have.

Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

# Item 2. Description of
Property.

Our
main office is located at 201 South Main Street, Statesboro, Georgia 30458, in downtown
Statesboro. We completed construction of this building at a cost of $2.4 million.

In
August of 2003, First Southern Bancorp purchased property for a future branch site from
FSNB, LLC, a company owned by the directors of First Southern National Bank. The cost of
the property was $265,448.17 for 1.102 acres located on Highway 67 in Statesboro, GA. The
LLC sold the property to the company at its cost.

# Item 3. Legal
Proceedings.

None.

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

No
matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.

# Item 5. Market for
Common Equity and Related Stockholder Matters.

We completed our initial offering in
February 2002. There is no public trading market for our common stock, and there is no
source of the high and low bid price for these shares.

14

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# Item 6.
Managements Discussion and Analysis of Financial Condition and Results of Operation.

# FIRST SOUTHERN NATIONAL BANCORPSELECTED FINANCIAL DATA

|                                 | 2003 | 2002
|-------------------------------- | ---- | ----
|FOR THE YEAR                     |      |     
|Net interest income (expense)    |      |     
|Provision for loan losses        |      |     
|Noninterest income               |      |     
|Noninterest expense              |      |     
|Net loss                         |      |     
|PER COMMON SHARE                 |      |     
|Basic earnings (loss)            |      |     
|Diluted earnings (loss)          |      |     
|Cash dividends declared          |      |     
|Book value                       |      |     
|AT YEAR END                      |      |     
|Loans, net                       |      |     
|Earnings assets                  |      |     
|Assets                           |      |     
|Deposits                         |      |     
|Shareholders' equity             |      |     
|Common shares outstanding        |      |     
|AVERAGE BALANCES                 |      |     
|Loans                            |      |     
|Earnings assets                  |      |     
|Assets                           |      |     
|Deposits                         |      |     
|Shareholders' equity             |      |     
|Weighted average shares          |      |     
|outstanding                      |      |     
|KEY PERFORMANCE RATIOS           |      |     
|Return on average assets         |      |     
|Return on average shareholders'  |      |     
|equity                           |      |     
|Net interest margin              |      |     
|Dividend payout ratio            |      |     
|Average equity to average assets |      |     

15

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# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS

# General

First Southern Bancorp is a bank
holding company headquartered in Statesboro, Georgia organized to own all of the common
stock of its bank subsidiary, First Southern National Bank. The principal activity of the
bank is to provide banking services to domestic markets, principally in Bulloch County,
Georgia. The bank is primarily regulated by the Office of the Comptroller of the Currency
(OCC) and undergoes periodic examinations by this regulatory agency. Our bank
holding company is regulated by the Federal Reserve Bank and also is subject to periodic
examinations.

In 2001, we commenced an initial
public offering of up to 1,000,000 shares of our common stock. The stock sale resulted in
the issuance of 919,547 shares at a price of $10.00 per share. The offering resulted in
capital of $9,124,970, net of offering expenses of $70,500. The bank opened for business
on February 5, 2002 at 201 South Main Street, Statesboro, Georgia 30458.

The following discussion describes
our results of operations for 2003 as compared to 2002 and also analyzes our financial
condition as of December 31, 2003 as compared to December 31, 2002. Like most community
banks, we derive most of our income from interest we receive on our loans and investments.
Our primary source of funds for making these loans and investments is our deposits, on
which we pay interest. Consequently, one of the key measures of our success is our amount
of net interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits. Another key measure is the spread between the yield we earn
on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

We have included a number of tables
to assist in our description of these measures. For example, the Average
Balances table shows the average balance during 2003 and 2002 of each category of
our assets and liabilities, as well as the yield we earned or the rate we paid with
respect to each category. A review of this table shows that our loans typically provide
higher interest yields than do other types of interest earning assets, which is why we
intend to channel a substantial percentage of our earning assets into our loan portfolio.
Similarly, the Rate/Volume Analysis table helps demonstrate the impact of
changing interest rates and changing volume of assets and liabilities during the years
shown. We also track the sensitivity of our various categories of assets and liabilities
to changes in interest rates, and we have included a Sensitivity Analysis
Table to help explain this. Finally, we have included a number of tables that
provide detail about our investment securities, our loans, and our deposits.

Of course, there are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb possible losses on
existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings. In the following
section we have included a detailed discussion of this process.

In addition to earning interest on
our loans and investments, we earn income through fees and other expenses we charge to our
customers. We describe the various components of this noninterest income, as well as our
noninterest expense, in the following discussion.

The following discussion and analysis
also identifies significant factors that have affected our financial position and
operating results during the periods included in the accompanying financial statements. We
encourage you to read this discussion and analysis in conjunction with the financial
statements and the related notes and the other statistical information also included in
this report.

# Forward-Looking
Statements

This Report contains statements which
constitute forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and the Securities Exchange Act of 1934. These statements are based on many
assumptions and estimates and are not guarantees of future performance. Our actual results
may differ materially from those projected in any forward-looking statements, as they will
depend on many factors about which we are unsure, including many factors which are beyond
our control. The words may, would, could,
will, expect, anticipate, believe,
intend, plan, and estimate, as well as similar
expressions, are meant to identify such forward-looking statements. Potential risks and
uncertainties include, but are not limited to:

| | o | significant increases in
competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| | o | changes in the
interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| | o | changes in
political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

16

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# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

# AND RESULTS OF
OPERATIONS, continued

| | o | general economic conditions, either nationally or regionally and especially in primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| | o | changes in technology;
| | - | ----------------------

| | o | changes in monetary and tax policies;
| | - | -------------------------------------

| | o | the level of allowance for loan loss;
| | - | -------------------------------------

| | o | the rate of delinquencies and amounts of
charge-offs;
| | - | -----------------------------------------------------

| | o | the rates of loan growth;
| | - | -------------------------

| | o | adverse changes in asset quality and resulting
credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| | o | loss of consumer confidence and economic
disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| | o | changes in the securities markets; and
| | - | --------------------------------------

| | o | other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

# Critical Accounting
Policies

We have adopted various accounting
policies, which govern the application of accounting principles generally accepted in the
United States of America in the preparation of our financial statements. Our significant
accounting policies are described in note 1 in the footnotes to the consolidated financial
statements at December 31, 2003 included elsewhere in this annual report.

We believe that the allowance for
loan losses is a critical accounting policy that requires the most significant judgments
and estimates used in preparation of our consolidated financial statements. Please refer
to the portion of managements discussion and analysis of financial condition and
results of operations that addresses the allowance for loan losses for a description of
our processes and methodology for determining the allowance for loan losses.

# Results of Operations

# Overview

Net loss for 2003 was $304,797, or
$0.33 per common share, compared to a net loss for 2002 of $966,423, or $1.05 per common
share. Our operational results depend to a large degree on net interest income, which is
the difference between the interest income received from investments (such as loans,
investment securities, federal funds sold, etc.) and the interest expense, which is paid
on deposit liabilities. Net interest income was $1,705,535 for the year ended December 31,
2003 compared to $724,802 for the year ended December 31, 2002.

The provision for loan losses in 2003
was $324,390 compared to $375,000 in 2002. The provision for loan losses reflects
managements estimate of potential losses inherent in the loan portfolio and the
creation of an allowance for loan losses adequate to absorb such losses.

Other operating income for the year
ended December 31, 2003 totaled $467,128, representing a $249,478 (115%) increase from
December 31, 2002. Other operating income includes services charges on deposit accounts
and mortgage origination fee income. Declining interest rates during 2003 provided us with
an opportunity to derive significant income from the origination of mortgage loans. Other
operating expenses in 2003 were $2,153,070, a $619,195 (40%) increase compared with the
2002 amount, due to increases in overall occupancy expense when we moved into our
permanent facility and increases in salaries and benefits for additional personnel. The
largest component of other operating expenses is salaries and benefits, which totaled
$1,000,005 for the year ended December 31, 2003.

In 2003 and 2002, we recognized no
income tax benefit due to the fact that realization of such a benefit is dependent upon
future earnings or our company.

# Net Interest Income

For the year ended December 31, 2003,
net interest income totaled $1,705,535 compared to $724,802 for the same period in 2002.
Interest income from loans including fees was $2,216,948, representing a yield of 6.36%.
Interest expense totaled $641,888 for the year ended December 31, 2003 compared to
$159,232 in 2002. The net interest margin realized on earning assets and the interest rate
spread were 4.13% and 3.79%, respectively, for the year ended December 31, 2003.

17

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

For the year ended December 31, 2002,
the net interest margin realized on earning assets and the interest rate spread were 5.06%
and 4.20%, respectively.

# Average Balances and
Interest Rates

The table below shows the average
balance outstanding for each category of interest earning assets and interest-bearing
liabilities for 2003 and 2002, and the average rate of interest earned or paid thereon.
Average balances have been derived from the daily balances throughout the period
indicated. Yields and rates for 2002 are computed using annualized income and expense
amounts.

|                                       |  | For the Years Ended December 31, |  
|-------------------------------------- |  | -------------------------------- | -
|
|
|
|Assets:                                |  |                                  |  
|Interest earning assets:               |  |                                 
|Loans (including loan fees)            |  |                                  | $
|Investment securities                  |  |                                  |  
|Federal funds sold                     |  |                                  |  
|                                       |  |                                  |  
|Total interest earning assets          |  |                                  |  
|                                       |  |                                  |  
|Other non-interest earning assets      |  |                                  |  
|                                       |  |                                  |  
|Total assets                           |  |                                  | $
|                                       |  |                                  |  
|Liabilities and shareholders' equity:  |  |                                 
|Interest-bearing liabilities:          |  |                                 
|Deposits:                              |  |                                 
|Interest-bearing demand                |  |                                  | $
|Savings                                |  |                                  |  
|Time                                   |  |                                  |  
|Other                                  |  |                                  |  
|                                       |  |                                  |  
|Total interest-bearing                 |  |                                 
|liabilities                            |  |                                  |  
|                                       |  |                                  |  
|Other non-interest bearing liabilities |  |                                  |  
|Shareholders' equity                   |  |                                  |  
|                                       |  |                                  |  
|Total liabilities and                  |  |                                 
|shareholders' equity                   |  |                                  | $
|                                       |  |                                  |  
|Excess of interest-earning assets      |  |                                 
|over interest-bearing liabilities      |  |                                  | $
|                                       |  |                                  |  
|Ratio of interest-earning assets to    |  |                                 
|interest-bearing liabilities           |  |                                  |  
|Net interest income                    |  |                                  |  
|                                       |  |                                  |  
|Net interest spread                    |  |                                  |  
|                                       |  |                                  |  
|Net interest margin                    |  |                                  |  
|                                       |  |                                  |  

Nonaccrual loans and the interest
income that was recorded on these loans, if any, are included in the yield calculation for
loans in all periods reported.

18

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

# AND RESULTS OF
OPERATIONS, continued

# Volume/Rate Analysis

Net interest income can also be
analyzed in terms of the impact of changing rates and changing volume. The following table
describes the extent to which changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities have affected our interest income
and interest expense during the periods indicated.

|                            | 2003 Compared to 2002
|--------------------------- | ---------------------
|
|
|Interest income on:         |                      
|Loans (including loan fees) |                      
|Investment securities       |                      
|Federal funds sold          |                      
|                            |                      
|                            |                      
|                            |                      
|Interest expense on:        |                      
|Interest-bearing demand     |                      
|Savings                     |                      
|Time                        |                      
|Other                       |                      
|                            |                      
|                            |                      
|                            |                      
|                            |                      
|                            |                      

# Interest Rate
Sensitivity and Asset Liability Management

Interest rate sensitivitymeasures the timing and magnitude of the repricing of assets compared with the
repricing of liabilities and is an important part of asset/liability management of a
financial institution. The objective of interest rate sensitivity management is to
generate stable growth in net interest income, and to control the risks associated with
interest rate movements. Management constantly reviews interest rate risk exposure and the
expected interest rate environment so that adjustments in interest rate sensitivity can be
timely made. Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is 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.

Net interest income is the primary
component of net income for financial institutions. Net interest income is affected by the
timing and magnitude of repricing of as well as the mix of interest sensitive and
noninterest sensitive assets and liabilities. Gap is a static measurement of
the difference between the contractual maturities or repricing dates of interest sensitive
assets and interest sensitive liabilities within the following twelve months. Gap is an
attempt to predict the behavior of the banks net interest income in general terms
during periods of movement in interest rates. In general, if the bank is asset sensitive,
more of its interest sensitive assets are expected to reprice within twelve months than
its interest sensitive liabilities over the same period. In a rising interest rate
environment, assets repricing more quickly is expected to enhance net interest income.
Alternatively, decreasing interest rates would be expected to have the opposite effect on
net interest income since assets would theoretically be repricing at lower interest rates
more quickly than interest sensitive liabilities. Although it can be used as a general
predictor, Gap as a predictor of movements in net interest income has limitations due to
the static nature of its definition and due to its inherent assumption that all assets
will reprice immediately and fully at the contractually designated time. At December 31,
2003, the bank, as measured by Gap, is in liability sensitive position. Management has
several tools available to it to evaluate and affect interest rate risk, including deposit
pricing policies and changes in the mix of various types of assets and liabilities.

The following table summarizes the
amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2003, that are expected to mature, prepay, or reprice in each of the future
time periods shown. Except as stated below, the amount of assets or liabilities that
mature or reprice during a particular period was determined in accordance with the
contractual terms of the asset or liability. Adjustable rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate loans and mortgage-backed securities are included in
the periods in which they are anticipated to be repaid based on scheduled maturities. The
banks savings accounts and interest-bearing demand accounts (NOW and money market
deposit accounts), which are generally subject to immediate withdrawal, are included in
the Three Months or Less category, although historical experience has proven
these deposits to be more stable over the course of a year.

19

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS, continued

At December 31, 2003Maturing or Repricing in(dollars in thousands)

|                                           | 3 Months or | 4 Months to | 1 to 5 | Over 5  |   
|------------------------------------------ | ----------- | ----------- | ------ | ------- | --
|
|Interest-earning assets:                   |             |             |        |         |   
|Federal funds sold                         |             |             | $      | 6,217   |   
|Investment securities                      |             |             |        | 504     |   
|Loans                                      |             |             |        | 17,164  |   
|Other investments                          |             |             |        | -       |   
|                                           |             |             |        |         |   
|Total interest-bearing assets:             |             |             |        | 23,885  |   
|                                           |             |             |        |         |   
|Interest-bearing liabilities:              |             |            
|Deposits:                                  |             |            
|Savings and demand                         |             |             |        | 27,941  |   
|Time deposits                              |             |             |        | 8,214   |   
|                                           |             |             |        |         |   
|Total interest-bearing liabilities         |             |             |        | 36,155  |   
|                                           |             |             |        |         |   
|Interest sensitive difference per period   |             |             | $      | (12,270 | ) 
|                                           |             |             |        |         |   
|Cumulative interest sensitivity difference |             |             | $      | (12,270 | ) 
|                                           |             |             |        |         |   
|Cumulative difference to total assets      |             |             |        | (19.39  | %)
|                                           |             |             |        |         |   

At December 31, 2003, the difference
between the banks liabilities and assets repricing or maturing within one year was
$13,098,000.

Certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they may
reflect changes in market interest rates differently. Additionally, certain assets, such
as adjustable-rate mortgages, have features that restrict changes in interest rates, both
on a short-term basis and over the life of the asset. Other factors which may affect the
assumptions made in the table include changes in interest rates, pre-payment rates, early
withdrawal levels, and the ability of borrowers to service their debt.

# Provision and Allowance
for Loan Losses

The provision for loan losses is the
charge to operating earnings that management believes is necessary to maintain the
allowance for loan losses at an adequate level. The provision charged to expense was
$324,390 for the year ended December 31, 2003, compared to $375,000 for the year ended
December 31, 2002. The loan portfolio increased by $21,402,017 during the year ended
December 31, 2003, compared to growth of $24,147,372 in 2002. The provision has been a
result of managements efforts to increase the allowance to match the growth in the
loan portfolio. The allowance for loan losses was 1.48% of gross loans at December 31,
2003 compared to 1.55% at December 31, 2002. There are risks inherent in making all loans,
including risks with respect to the period of time over which loans may be repaid, risks
resulting from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral. We anticipate maintaining an
allowance for loan losses based on, among other things, historical experience, an
evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio
quality. Our judgment about the adequacy of the allowance is based upon a number of
assumptions about future events, which we believe to be reasonable, but which may not
prove to be accurate. Thus, there is a risk that charge-offs in future periods could
exceed the allowance for loan losses or that substantial additional increases in the
allowance for loan losses could be required. Additions to the allowance for loan losses
would result in a decrease of our net income and, possibly, our capital. We have
experienced net charge-offs in 2003 of $26,390. Past due loans greater than 90 days and
nonaccrual loans were $84,104 and $46,927, respectively, as of December 31, 2003. We had
no other real estate or repossessions as of December 31, 2003.

20

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

The following table summarizes
information concerning the allowance for loan losses:

|                                                | December 31,
|----------------------------------------------- | ------------
|
|Total loans outstanding, end of year            |             
|                                                |             
|Average loans outstanding                       |             
|                                                |             
|Balance at beginning of year                    |             
|Charge-offs:                                    |             
|Commercial                                      |             
|Real estate - construction                      |             
|Real estate - mortgage                          |             
|Consumer                                        |             
|                                                |             
|Total charge-offs                               |             
|                                                |             
|Recoveries:                                     |             
|Commercial                                      |             
|Real estate - construction                      |             
|Real estate - mortgage                          |             
|Consumer                                        |             
|                                                |             
|Total recoveries                                |             
|                                                |             
|Net charge-offs                                 |             
|Additions charged to operations                 |             
|                                                |             
|Balance at end of year                          |             
|                                                |             
|Ratio of net charge-offs during the period to   |             
|average loans outstanding during the period     |             
|                                                |             
|Allowance for loan losses to loans, end of year |             
|                                                |             

The Company does not allocate the
allowance for loan losses to various loan categories. The entire allowance is available to
absorb losses from any and all loans. Due to the short time that the bank has been open,
management does not estimate the amount of net charge-offs that will occur in 2004.

Accrual of interest is discontinued
on a loan when management believes, after considering economic and business conditions and
collection efforts, that the borrowers financial condition is such that collection
of interest is doubtful. The following table summarizes past due and non-accrual loans,
other real estate and repossessions, and income that would have been reported on
non-accrual loans as of December 31, 2003 and 2002:

|                                        | December 31,
|--------------------------------------- | ------------
|
|Accruing loans 90 days or more past due |             
|Non-accrual loans                       |             
|Interest on non-accrual loans which     |             
|would have been reported                |             
|Other real estate and repossessions     |             

21

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

# Noninterest Income and
Expense

Noninterest income for the year ended
December 31, 2003 totaled $467,128 as compared to $217,650 for the year ended December 31,
2002. The largest component of other income is residential mortgage origination fees,
which totaled $261,326 during 2003 compared to $166,185 in 2002. Lower market interest
rates created significant refinancing volume in the residential mortgage market, and we
were able to facilitate the origination of a substantial amount of mortgage loans in 2003.
If interest rates increase this year, our mortgage volume and the amount of our
origination fees consequently may decrease. Service charges on deposit accounts totaled
$193,662 during the year ended December 31, 2003. The increase in service charges of
$147,381 from the December 31, 2002 balance of $46,281 was due to an increase in the
number of customers during 2003.

Total noninterest expense for the
year ended December 31, 2003 was $2,153,070 as compared to $1,533,875 for the same period
in 2002. Salaries and benefits, the largest component of noninterest expense, totaled
$1,000,005 for the year ended December 31, 2003, compared to $752,091 for the same period
a year ago. Net occupancy and equipment expense was $280,344 during 2003 and other
operating expenses totaled $872,721, compared to $119,358 and $662,426, respectively,
during 2002. The increase in occupancy expense is due to the completion of our main office
in January of 2003, while the increase in other operating expense is directly related to
the overall growth of the bank.

# Financial Condition

Total assets were $63,290,834 as of
December 31, 2003, compared to $31,913,765 as of December 31, 2002. The primary source of
growth in assets was net loans, which totaled $44,876,389, or 71% of total assets, as of
December 31, 2003. Investment securities available-for-sale totaled $5,570,678 at December
31, 2003, compared to $3,047,889 at December 31, 2002. Total deposits were $55,674,566, or
88% of total assets, at December 31, 2003, compared to $24,063,029, or 75% of total
assets, as of December 31, 2002.

# Interest-Earning Assets

# Loans

Gross loans totaled $45,549,389 at
December 31, 2003, an increase of $21,402,017, or 88%, since December 31, 2002. The
largest classification of loans was in real estate mortgage loans, which totaled
$28,290,032, or 62%, at December 31, 2003. Balances within the major loans receivable
categories as of December 31, 2003 and December 31, 2002 are as follows:

|                                       | 2003 | 2002
|-------------------------------------- | ---- | ----
|Commercial, financial and agricultural |      |     
|Real estate - mortgage                 |      |     
|Real estate - construction             |      |     
|Consumer and other                     |      |     
|                                       |      |     
|                                       |      |     
|                                       |      |     

As of December 31, 2003, maturities
of loans in the indicated classifications were as follows:

|                      |  | Real Estate |  
|--------------------- |  | ----------- | -
|
|MaturityWithin 1 year |  |             | $
|1 to 5 years          |  |             |  
|Over 5 years          |  |             |  
|                      |  |             |  
|Totals                |  |             | $
|                      |  |             |  

22

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

As of December 31, 2003, the interest
terms of loans in the indicated classification for the indicated maturity ranges are as
follows:

|                           | Fixed Interest | Variable Interest |  
|-------------------------- | -------------- | ----------------- | -
|
|Commercial                 |                |                   |  
|1 to 5 years               |                |                   | $
|Over 5 years               |                |                   |  
|Real estate - construction |                |                  
|1 to 5 years               |                |                   |  
|                           |                |                   |  
|                           |                |                   | $
|                           |                |                   |  

# Investment Securities

Investment securities
available-for-sale totaled $5,570,678 at December 31, 2003, compared to $3,047,889 at
December 31, 2002. All of the banks marketable investment securities were designated
as available-for-sale at December 31, 2003 and 2002 and consisted of United States
Government agencies and mortgage backed securities. The amortized cost of these investment
securities was $5,593,912 at December 31, 2003.

The following table presents the
investments by category at December 31, 2003 and 2002:

|                                  | 2003 | 2002
|--------------------------------- | ---- | ----
|
|
|
|United States government agencies |      |     
|Mortgage-backed                   |      |     
|                                  |      |     
|                                  |      |     
|                                  |      |     

The following table presents the maturities
of investment securities at amortized cost and the weighted average yields for each range
of maturities presented. Yields are based on amortized cost of securities. (Amounts
presented in thousands).

|                                |  |  |   |      
|------------------------------- |  |  | - | -----
|
|
|Maturities at December 31, 2003 |  |  |   |      
|Within 1 year                   |  |  | $ | 501  
|                                |  |  |   |      
|After 1 through 5 years         |  |  |   | 1,497
|After 10 years                  |  |  |   | -    
|                                |  |  |   |      
|Totals                          |  |  | $ | 1,998
|                                |  |  |   |      

23

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

# Deposits

At December 31, 2003, deposits
totaled $55,674,566 compared to $24,063,029 for the previous year. Noninterest-bearing
demand deposits were $5,476,791, or 9.84%, of total deposits and interest-bearing deposits
were $50,197,775, or 90.16%, of total deposits, at December 31, 2003.

Balances within the major deposit
categories as of December 31, 2003 and 2002 are as follows:

|                                          | 2003 | 2002
|----------------------------------------- | ---- | ----
|Noninterest-bearing demand deposits       |      |     
|Interest-bearing demand deposits          |      |     
|Savings deposits                          |      |     
|Certificates of deposit $100,000 and over |      |     
|Other time deposits                       |      |     
|                                          |      |     
|                                          |      |     
|                                          |      |     

The average balance of deposits and
the average rates paid on such deposits are summarized for 2003 and 2002 in the following
table. Interest costs for 2002 have been annualized based on the banks opening date
of February 5, 2002.

|                           |  | December 31, |  
|-------------------------- |  | ------------ | -
|
|
|Noninterest-bearing demand |  |              | $
|Interest-bearing demand    |  |              |  
|Savings                    |  |              |  
|Time deposits              |  |              |  
|                           |  |              |  
|Totals                     |  |              | $
|                           |  |              |  

Maturities of time certificates of
deposit of $100,000 or more outstanding at December 31, 2003, are summarized as follows:

|                          | 
|------------------------- | 
|Within 3 months           | 
|After 3 through 6 months  | 
|After 6 through 12 months | 
|After 12 months           | 
|                          | 
|Total                     | 
|                          | 

# Capital Resources

Shareholders equity totaled
$7,449,548 at December 31, 2003 compared to $7,768,369 at December 31, 2002. Our net loss
for the year ended December 31, 2003 was $304,797, and other comprehensive income, net of
tax, decreased $24,024.

Bank holding companies, such as us,
and their banking subsidiaries are required by banking regulators to meet certain minimum
levels of capital adequacy, which are expressed in the form of certain ratios. These
capital requirements currently apply to us only at the bank level. Once we have at least
$150 million in total assets, these requirements will also apply at the holding company
level. Capital is separated into Tier 1 capital (essentially common shareholders
equity less intangible assets) and Tier 2 capital (essentially the allowance for loan
losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on
the degree of credit risk in our assets, provide the weighting of assets

24

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

based on assigned risk factors and
include off-balance sheet items such as loan commitments and stand-by letters of credit.
The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of
total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at
least 8.0%. The capital leverage ratio supplements the risk-based capital guidelines.

Banks and bank holding companies are
required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total
assets of 3.0%.

The following table summarizes the
banks risk-based capital ratios at December 31, 2003:

|                                         | 
|---------------------------------------- | 
|Tier 1 capital (to risk-weighted assets) | 
|Total capital (to risk-weighted assets)  | 
|Tier 1 capital (to total average assets) | 

# Liquidity

The bank must maintain, on a daily basis,
sufficient funds to cover the withdrawals from depositors accounts and to supply new
borrowers with funds. To meet these obligations, the bank keeps cash on hand, maintains
account balances with its correspondent banks, and purchases and sells federal funds and
other short-term investments. Asset and liability maturities are monitored in an attempt
to match the maturities to meet liquidity needs. It is the policy of the bank to monitor
its liquidity to meet regulatory requirements and their local funding requirements.

The bank maintains relationships with
correspondent banks that can provide funds to it on short notice, if needed. Presently,
the bank has arrangements with commercial banks for short term unsecured advances up to
$2,000,000.

Cash and cash equivalents as of
December 31, 2003 increased $6,705,073 from December 31, 2002. Cash provided by operating
activities totaled $177,503 in 2003, while inflows from financing activities totaled
$31,621,537, which were attributable to net deposit increases and proceeds of $10,000 from
the exercise of stock options.

During 2003, investing activities
used $25,093,967. Investing activities included net loans made to customers of
$21,428,407, purchases of investment securities available-for-sale of $4,766,211 and
purchases of premises and equipment of $942,663, partially offset by maturities of
investment securities available-for-sale of $2,123,864.

# Off Balance Sheet
Arrangements

We are a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of our customers. These financial instruments consist of commitments to
extend credit and standby letters of credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the
contract. Standby letters of credit are written conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. Most letters of
credit extend for less than one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers.
Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. A commitment involves, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheets. Our
exposure to credit loss in the event of non-performance by the other party to the
instrument is represented by the contractual notional amount of the instrument.

Since certain commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. We use the same credit policies in making
commitments to extend credit as we do for on-balance-sheet instruments. Collateral held
for commitments to extend credit varies but may include accounts receivable, inventory,
property, plant, equipment, and income-producing commercial properties.

The following table summarizes our
off-balance-sheet financial instruments whose contract amounts represent credit risk as of
December 31, 2003:

|                             | 
|---------------------------- | 
|Commitments to extend credit | 
|Standby letters of credit    | 

25

---

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued

Management is not aware of any
significant concentrations of loans to classes of borrowers or industries that would be
affected similarly by economic conditions. Although the banks loan portfolio is
diversified, a substantial portion of its borrowers ability to honor the terms of
their loans is dependent on the economic conditions in Bulloch County and surrounding
areas.

# Inflation

Inflation impacts the growth in total
assets in the banking industry and causes a need to increase equity capital at higher than
normal rates to meet capital adequacy requirements. We cope with the effects of inflation
through the management of interest rate sensitivity gap position, by periodically
reviewing and adjusting its pricing of services to consider current costs and through
managing our level of net income relative to our dividend payout policy.

# Selected Ratios

The following table sets out certain
ratios of the Company for the years ended December 31, 2003 and 2002.

|                                 | 2003 | 2002
|-------------------------------- | ---- | ----
|Net loss to:                     |      |     
|Average shareholders' equity     |      |     
|Average assets                   |      |     
|Average equity to average assets |      |     
|Dividends to net earnings        |      |     

# Recent Accounting
Pronouncements

Accounting standards that have been
issued or proposed by the Financial Accounting Standards Board and other standard setting
entities that do not require adoption until a future date are not expected to have a
material impact on our consolidated financial statements upon adoption.

26

---

# Item 7. Financial
Statements

# REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

To the Board of DirectorsFirst
Southern BancorpStatesboro, Georgia

We have audited the accompanying
consolidated balance sheets of First Southern Bancorp and subsidiary as of December 31,
2003 and 2002, and the related statements of operations, changes in shareholders
equity, comprehensive income and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these 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 First Southern Bancorp and subsidiary 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/ Porter Keadle Moore, LLPAtlanta, Georgia
February 6, 2004

27

---

# FIRST SOUTHERN BANCORPConsolidated Balance
SheetsDecember 31, 2003 and
2002

|                                                                        |  | 
|----------------------------------------------------------------------- |  | 
|
|Assets                                                                  |  | 
|Cash and due from banks                                                 |  | 
|Federal funds sold                                                      |  | 
|                                                                        |  | 
|Cash and cash equivalents                                               |  | 
|Investment securities available-for-sale                                |  | 
|Other investments                                                       |  | 
|Loans, net                                                              |  | 
|Premises and equipment, net                                             |  | 
|Accrued interest receivable and other assets                            |  | 
|                                                                        |  | 
|                                                                        |  | 
|                                                                        |  | 
|Liabilities and Shareholders' Equity                                    |  | 
|Liabilities:                                                            |  | 
|Deposits:                                                               |  | 
|Noninterest-bearing demand                                              |  | 
|Interest-bearing demand                                                 |  | 
|Savings                                                                 |  | 
|Time                                                                    |  | 
|                                                                        |  | 
|Total deposits                                                          |  | 
|Accrued interest payable and other liabilities                          |  | 
|                                                                        |  | 
|Total liabilities                                                       |  | 
|                                                                        |  | 
|Commitments                                                             |  | 
|Shareholders' equity:                                                   |  | 
|Preferred stock, $.01 par value; 10,000,000 shares authorized;          |  | 
|no shares issued and outstanding                                        |  | 
|Common stock, $.01 par value; 10,000,000 shares authorized; 920,547 and |  | 
|919,547 shares issued and outstanding in 2003 and 2002, respectively    |  | 
|Additional paid-in capital                                              |  | 
|Accumulated deficit                                                     |  | 
|Accumulated other comprehensive income (loss)                           |  | 
|                                                                        |  | 
|Total shareholders' equity                                              |  | 
|                                                                        |  | 
|                                                                        |  | 
|                                                                        |  | 

See accompanying notes to
consolidated financial statements.

28

---

# FIRST SOUTHERN BANCORP
Consolidated Statements of OperationsFor the Years Ended
December 31, 2003 and 2002

|                                                    | 2003 | 2002 |  
|--------------------------------------------------- | ---- | ---- | -
|Interest income:                                    |      |      |  
|Interest and fees on loans                          |      |      | $
|Interest and dividends on investment securities     |      |      |  
|Interest on Federal funds sold                      |      |      |  
|                                                    |      |      |  
|Total interest income                               |      |      |  
|                                                    |      |      |  
|Interest expense:                                   |      |     
|Interest expense on deposits                        |      |      |  
|Other interest expense                              |      |      |  
|                                                    |      |      |  
|Total interest expense                              |      |      |  
|                                                    |      |      |  
|Net interest income                                 |      |      |  
|Provision for loan losses                           |      |      |  
|                                                    |      |      |  
|Net interest income after provision for loan losses |      |      |  
|                                                    |      |      |  
|Other income:                                       |      |     
|Service charges on deposit accounts                 |      |      |  
|Residential mortgage origination fees               |      |      |  
|Miscellaneous                                       |      |      |  
|                                                    |      |      |  
|Total other income                                  |      |      |  
|                                                    |      |      |  
|Other expense:                                      |      |     
|Salaries and benefits                               |      |      |  
|Net occupancy and equipment                         |      |      |  
|Other operating                                     |      |      |  
|                                                    |      |      |  
|Total other expense                                 |      |      |  
|                                                    |      |      |  
|Net loss                                            |      |      | $
|                                                    |      |      |  
|Basic and diluted loss per share                    |      |      | $
|                                                    |      |      |  

See accompanying notes to
consolidated financial statements.

29

---

# FIRST SOUTHERN BANCORP
Consolidated Statements of Changes in Shareholders Equity
For the Years Ended December 31, 2003 and 2002

|                                  |  |  |   | Accumulated | 
|--------------------------------- |  |  | - | ----------- | 
|
|
|
|Balance, December 31, 2001        |  |  | $ | -           | 
|Redemption of stock to organizer  |  |  |   | -           | 
|Sale of common stock, net of      |  | 
|offering expenses of $70,500      |  |  |   | 9,195       | 
|Net loss                          |  |  |   | -           | 
|Change in unrealized gain/loss    |  | 
|on securities available-for-sale, |  | 
|net of tax                        |  |  |   | -           | 
|                                  |  |  |   |             | 
|Balance, December 31, 2002        |  |  |   | 9,195       | 
|Exercise of stock options         |  |  |   | 10          | 
|Net loss                          |  |  |   | -           | 
|Change in unrealized gain/loss    |  | 
|on securities available-for-sale, |  | 
|net of tax                        |  |  |   | -           | 
|                                  |  |  |   |             | 
|Balance, December 31, 2003        |  |  | $ | 9,205       | 
|                                  |  |  |   |             | 

See accompanying notes to
consolidated financial statements.

30

---

# FIRST SOUTHERN BANCORP
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2003 and 2002

|                                                    | 2003 | 2002
|--------------------------------------------------- | ---- | ----
|Net loss                                            |      |     
|Other comprehensive income (loss), net of tax:      |      |     
|Unrealized gains (losses) on investment             |      |     
|securities available-for-sale:                      |      |     
|Unrealized gains (losses) arising during the period |      |     
|Income tax (expense) benefit related to             |      |     
|investment securities available-for-sale            |      |     
|                                                    |      |     
|Other comprehensive income (loss)                   |      |     
|                                                    |      |     
|Comprehensive loss                                  |      |     
|                                                    |      |     

See accompanying notes to
consolidated financial statements.

31

---

# FIRST SOUTHERN BANCORP
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 2003 and 2002

|                                                                                  | 2003 | 2002
|--------------------------------------------------------------------------------- | ---- | ----
|Cash flows from operating activities:                                             |      |     
|Net loss                                                                          |      |     
|Adjustments to reconcile net loss to                                              |      |     
|net cash provided (used) by operating activities:                                 |      |     
|Provision for loan losses                                                         |      |     
|Depreciation, amortization and accretion                                          |      |     
|Change in:                                                                        |      |     
|Other assets                                                                      |      |     
|Other liabilities                                                                 |      |     
|                                                                                  |      |     
|Net cash provided (used) by operating activities                                  |      |     
|                                                                                  |      |     
|Cash flows from investing activities:                                             |      |     
|Proceeds from maturities and paydowns                                             |      |     
|of investment securities available-for-sale                                       |      |     
|Purchases of investment securities available-for-sale                             |      |     
|Proceeds from sale of other investments                                           |      |     
|Purchases of other investments                                                    |      |     
|Net change in loans                                                               |      |     
|Purchases of premises and equipment                                               |      |     
|                                                                                  |      |     
|Net cash used by investing activities                                             |      |     
|Cash flows from financing activities:                                             |      |     
|Net change in deposits                                                            |      |     
|Proceeds from sale of common stock                                                |      |     
|Proceeds from exercise of stock options                                           |      |     
|Repayment of organizational share of stock                                        |      |     
|Deferred offering costs                                                           |      |     
|Change in line of credit                                                          |      |     
|                                                                                  |      |     
|Net cash provided by financing activities                                         |      |     
|                                                                                  |      |     
|Net change in cash and cash equivalents                                           |      |     
|Cash and cash equivalents at beginning of the year                                |      |     
|                                                                                  |      |     
|Cash and cash equivalents at end of the year                                      |      |     
|                                                                                  |      |     
|Noncash investing and financing activities:                                       |      |     
|Change in unrealized gain/loss on securities                                      |      |     
|available-for-sale, net of tax                                                    |      |     
|Change in restricted assets and subscribers' deposits                             |      |     
|Supplemental information of amounts paid for interest, net of amounts capitalized |      |     

See accompanying notes to
consolidated financial statements.

32

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements

(1)    Summary of
Significant Accounting Policies

| | Basis of PresentationThe consolidated financial statements include the accounts of First Southern Bancorp (the
Company) and its wholly owned subsidiary, First Southern National Bank (the
Bank). All significant intercompany accounts and transactions have been
eliminated in consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company raised $9,124,970, net offering expenses of $70,500, through the sale of
919,547 shares of its $.01 par value common stock at $10.00 per share and was incorporated
for the purpose of becoming a bank holding company. The Bank commenced business on
February 5, 2002 upon receipt of its banking charter from the Office of the Comptroller of
Currency (OCC). The Bank is primarily regulated by the OCC and undergoes
periodic examinations by this regulatory agency. The Company is regulated by the Federal
Reserve Bank and also is subject to periodic examinations. The Bank provides a full range
of commercial and consumer banking services throughout Bulloch County in Georgia.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Operations
through February 5, 2002 related primarily to expenditures by the organizers for
incorporating and organizing the Company. The Company was reported on as a development
stage corporation for the period ended December 31, 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accounting principles followed by the Company and the Bank, and the methods of applying
these principles, conform with accounting principles generally accepted in the United
States of America (GAAP) and with general practices in the banking industry. In preparing
the financial statements in conformity with GAAP, management is required to make estimates
and assumptions that affect the reported amounts in the financial statements. Actual
results could differ significantly from these estimates. Material estimates common to the
banking industry that are particularly susceptible to significant change in the near term
include, but are not limited to, the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with or in lieu of foreclosure on loans,
and valuation allowances associated with the realization of deferred tax assets, which are
based on future taxable income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
and Cash EquivalentsCash equivalents include amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investment
Securities
The Company classifies its securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those securities for which
the Company has the ability and intent to hold until maturity. All securities not included
in trading or held-to-maturity are classified as available-for-sale. At December 31, 2003
and 2002, all securities are classified as available-for-sale.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Available-for-sale
securities are recorded at fair value. Held-to-maturity securities are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses, net of the related tax effect, on securities available-for-sale are
excluded from earnings and are reported as a separate component of shareholders
equity until realized. Transfers of securities between categories are recorded at fair
value at the date of transfer.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A decline in the market value of any available-for-sale or held-to-maturity security below
cost that is deemed other than temporary is charged to earnings and establishes a new cost
basis for the security.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Premiums
and discounts are amortized or accreted over the life of the related securities as
adjustments to the yield. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
InvestmentsOther
investments include equity securities with no readily determinable fair value. These
investments are carried at cost.
| | --------------------------------------------------------------------------------------------------------------------------------------------

33

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements

(1)    Summary of
Significant Accounting Policies, continued

| | Loans
and Allowance for Loan LossesInterest
on loans is calculated by using the simple interest method on daily balances of the
principal amount outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A loan is considered impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement will not be
collected. Impaired loans are measured based on the present value of expected future cash
flows discounted at the loans effective interest rate, or at the loans
observable market price, or at the fair value of the collateral of the loan if the loan is
collateral dependent. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection efforts, that
the borrowers financial condition is such that collection of interest is doubtful.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance represents an amount
which, in managements judgment, will be adequate to absorb probable losses on
existing loans that may become uncollectible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements judgment in determining the adequacy of the allowance is based on evaluations of the
collectibility of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions that may
affect the borrowers ability to pay, overall portfolio quality and review of
specific problem loans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management believes that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the
Banks allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgments different than those of management.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Premises
and EquipmentPremises and equipment are stated at cost less accumulated depreciation. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets. Costs
incurred for maintenance and repairs are expensed currently.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Depreciation
expense is computed over the following estimated useful lives:

|                          | 
|------------------------- | 
|Building and improvements | 
|Furniture and equipment   | 

| | Income
TaxesDeferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the event the future tax consequences of differences between the financial reporting bases
and the tax bases of the assets and liabilities results in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits indicated by
such asset is required. A valuation allowance is provided for the portion of the deferred
tax asset when it is more likely than not that some portion or all of the deferred tax
asset will not be realized. In assessing the realizability of the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(1)    Summary of
Significant Accounting Policies, continued

| | Net
Earnings (Loss) Per ShareEarnings
(loss) per share are based on the weighted average number of common shares outstanding
during the period while the effects of potential common shares outstanding during the
period are included in diluted earnings per share. The presentation of earnings per share
is required on the face of the statement of operations with and without the dilutive
effects of potential common stock issuances from instruments such as options, convertible
securities and warrants. Additionally, the reconciliation of the amounts used in the
computation of both earnings per share and diluted earnings per
share is required.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For 2003 and 2002, the potential effect of outstanding options and warrants would be
anti-dilutive, and therefore is not presented. Anti-dilutive potential stock issuances
totaled 282,262 at December 31, 2003 and 283,262 at December 31, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For 2003, net loss per share is based on weighted average shares outstanding of 919,847
shares. For 2002, net loss per share is calculated by dividing net loss by the number of
shares sold in the initial public offering (919,547), which are considered to be
outstanding for the entire period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-Based
CompensationAt December 31, 2003, the Company sponsors stock-based compensation plans, which are
described more fully in Note 8. The Company accounts for these plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation for the years ended
December 31, 2003 and 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | 2003 | 2002
|------------------------------------------------ | ---- | ----
|Net loss as reported                             |      |     
|Deduct: Total stock-based employee compensation  |      |     
|expense determined under fair-value based method |      |     
|for all awards                                   |      |     
|                                                 |      |     
|Pro forma net loss                               |      |     
|                                                 |      |     
|Basic and diluted loss per share:                |      |     
|As reported                                      |      |     
|                                                 |      |     
|Pro forma                                        |      |     
|                                                 |      |     

| | The
fair value of each option and warrant is estimated on the date of grant using the Minimum
Value pricing model with the following assumptions: dividend yield of 0%; risk free
interest rate of 4% and an expected life of ten years. The weighted average grant-date
fair value of warrants and options granted in 2002 was $3.19. No options or warrants were
granted in 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recent
Accounting PronouncementsAccounting
standards that have been issued or proposed by the Financial Accounting Standards Board
and other standard setting entities that do not require adoption until a future date are
not expected to have a material impact on the Companys consolidated financial
statements upon adoption.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(2)    Investment Securities

Investment securities available-for-sale at December 31, 2003 and 2002 are as follows:

|                           |  | December 31, 2003 |  
|-------------------------- |  | ----------------- | -
|
|
|
|U.S. government agencies   |  |                   | $
|Mortgage-backed securities |  |                   |  
|                           |  |                   |  
|                           |  |                   | $
|                           |  |                   |  

|                         |  | December 31, 2003 |  
|------------------------ |  | ----------------- | -
|
|
|
|U.S. government agencies |  |                   | $
|                         |  |                   |  

| | At
December 31, 2003, unrealized losses in the investment portfolio related to debt
securities. The unrealized losses on the debt securities arose due to changing interest
rates and market conditions and are considered to be temporary because of acceptable
investment grades where the repayment sources of principal and interest are largely backed
by the U.S. Government. The Company did not have any securities as of December 31, 2003
that had been in an unrealized loss position for greater than twelve months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost and estimated fair value of investment securities available-for-sale at
December 31, 2003, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |  | Estimated
|-------------------------- |  | ---------
|
|
|Due within one year        |  |          
|Due from one to five years |  |          
|Mortgage-backed securities |  |          
|                           |  |          
|                           |  |          
|                           |  |          

| | There
were no sales of securities available-for-sale during 2003 and 2002. Securities with a
carrying value of approximately $996,000 as of December 31, 2003 were pledged to secure
public deposits and for other purposes as required by law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(3)    Loans
         Major
classifications of loans at December 31, 2003 and 2002 are summarized as follows:

|                                       | 2003 | 2002
|-------------------------------------- | ---- | ----
|Commercial, financial and agricultural |      |     
|Real estate - mortgage                 |      |     
|Real estate - construction             |      |     
|Consumer                               |      |     
|                                       |      |     
|                                       |      |     
|Less:  Allowance for loan losses       |      |     
|                                       |      |     
|                                       |      |     
|                                       |      |     

| | The
Bank grants loans and extensions of credit to individuals and a variety of businesses and
corporations located in its general trade area of Bulloch County, Georgia. Although the
Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is
collateralized by improved and unimproved real estate and is dependent upon the real
estate market.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
analysis of the activity in the allowance for loan losses for the years ended December 31,
2003 and 2002 is presented below:
| | -------------------------------------------------------------------------------------------------------------------------------

|                                | 2003 | 2002
|------------------------------- | ---- | ----
|Balance at beginning of year    |      |     
|Provision charged to operations |      |     
|Loans charged off               |      |     
|Recoveries                      |      |     
|                                |      |     
|Balance at end of year          |      |     
|                                |      |     

(4)    Premises and Equipment
         Major
classifications of premises and equipment as of December 31, 2003 and 2002 are summarized
as follows:

|                               | 2003 | 2002
|------------------------------ | ---- | ----
|Land                           |      |     
|Building and improvements      |      |     
|Furniture and equipment        |      |     
|Construction in process        |      |     
|                               |      |     
|                               |      |     
|Less: Accumulated depreciation |      |     
|                               |      |     
|                               |      |     
|                               |      |     

Depreciation
expense amounted to $113,111 and $28,368 in 2003 and 2002, respectively.

37

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(5)    Deposits
         Time
deposits in excess of $100,000 totaled $8,219,513 as of December 31, 2003, and $4,697,000
as of December 31, 2002.

At
December 31, 2003, contractual maturities of time deposits are summarized as follows:

| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 

(6)    Income Taxes
         The
components of income tax (expense) benefit for the years ended December 31, 2003 and 2002,
are as follows:

|                              | 2003 | 2002
|----------------------------- | ---- | ----
|Current                       |      |     
|Deferred                      |      |     
|Change in valuation allowance |      |     
|                              |      |     
|                              |      |     
|                              |      |     

| | The
difference between income tax expense (benefit) and the amount computed by applying the
statutory federal income tax rate to loss before taxes for the years ended December 31,
2003 and 2002 is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | 2003 | 2002
|----------------------------- | ---- | ----
|Pretax loss at statutory rate |      |     
|Change in valuation allowance |      |     
|Other                         |      |     
|                              |      |     
|                              |      |     
|                              |      |     

The
following summarizes the components of deferred taxes at December 31, 2003 and 2002.

|                                                              | 2003 | 2002
|------------------------------------------------------------- | ---- | ----
|Deferred income tax assets:                                   |      |     
|Allowance for loan losses                                     |      |     
|Pre-opening expenses                                          |      |     
|Operating loss carryforwards                                  |      |     
|Unrealized losses on investment securities available-for-sale |      |     
|Other                                                         |      |     
|                                                              |      |     
|Total gross deferred income tax assets                        |      |     
|Less valuation allowance                                      |      |     
|                                                              |      |     
|Net deferred income tax assets                                |      |     
|Deferred income tax liability consisting of unrealized        |      |     
|gains on investment securities available-for-sale             |      |     
|                                                              |      |     
|Net deferred income tax asset (liability)                     |      |     
|                                                              |      |     

| | The
future tax consequences of the differences between the financial reporting and tax basis
of the Companys assets and liabilities resulted in a net deferred tax asset. A
valuation allowance was established for the net deferred tax asset, as the realization of
these deferred tax assets is dependent on future taxable income. As of December 31, 2003,
the Company has net operating loss carryforwards totaling approximately $694,000 that will
begin to expire in 2016 unless previously utilized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(7)    Commitments

| | The
Company has entered into employment agreements with its President and Chief Executive
Officer, its Chief Financial Officer and its Chief Credit Officer, providing for initial
terms of three years. The agreements provide for base salaries, incentive bonuses based on
the Companys performance, stock options, and other perquisites commensurate with
their employment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Bank is a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amounts recognized
in the consolidated balance sheets. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many 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 counterparty. The Banks loans are
primarily collateralized by residential and other real properties, automobiles, savings
deposits, accounts receivable, inventory and equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standby letters of credit are written conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. Most letters of credit extend for less
than one year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Banks exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for on-balance sheet
instruments. All standby letters of credit are secured at December 31, 2003 and 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | 2003 | 2002
|-------------------------------------------- | ---- | ----
|Financial instruments whose contract amounts |      |     
|represent credit risk:                       |      |     
|Commitments to extend credit                 |      |     
|Standby letters of credit                    |      |     
|                                             |      |     

| | The
Bank maintains relationships with correspondent banks that can provide funds to it on
short notice, if needed. Presently, the Bank has arrangements with commercial banks for
short term unsecured advances up to $2,000,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(8)    Employee and Director Benefit Plans

| | Defined Contribution Plan
| | -------------------------

| | During
2003, the Company adopted a 401(k) savings plan under which eligible employees may choose
to save up to 15 percent of salary income on a pre-tax basis, subject to certain IRS
limits. Under the plan, the Company can make additional discretionary contributions, as
determined by the Board of Directors. During 2003, there were no plan contributions
charged to operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
Option Plan and Warrants
| | ------------------------------

| | The
Company sponsors an employee stock incentive plan. The plan was adopted for the benefit of
directors, key officers and employees in order that they may purchase Company stock at a
price equal to the fair market value on the date of grant. A total of 137,770 shares were
reserved for possible issuance under the plan. The options vest over one to five-year
periods and expire after ten years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

---

# FIRST SOUTHERN BANCORPNotes to Consolidated
Financial Statements, continued

(8)    Employee and Director Benefit Plans - continued

Stock
Option Plan and Warrants, continued

| | In
connection with the Companys formation and initial offering, 188,708 warrants for
shares were issued to the organizers. The warrants were issued at the initial offering
price of $10 per share and vest evenly over a five-year period. The warrants will be
exercisable for a period of ten years following issuance, but generally no later than
three months after the holder ceases to serve as a director.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of activity in the directors warrants and stock option plans for the year
ended December 31, 2003 is presented below:
| | --------------------------------------------------------------------------------------------------------------------------------

|                               | 2003 | 2002
|------------------------------ | ---- | ----
|
|
|
|
|Outstanding, beginning of year |      |     
|Granted during the year        |      |     
|Exercised during the year      |      |     
|                               |      |     
|Outstanding, end of year       |      |     
|                               |      |     
|Exercisable, end of year       |      |     
|                               |      |     

| | The
options and warrants outstanding have a weighted average remaining contractual life of
approximately eight years as of December 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

(9)    Shareholders Equity

| | Shares
of preferred stock may be issued from time to time in one or more series as established by
resolution of the Board of Directors of the Company, up to a maximum of 10,000,000 shares.
Each resolution shall include the number of shares issued, preferences, special rights and
limitations as determined by the Board.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(10)    Related Party Transactions

| | The
Bank conducts transactions with directors and officers, including companies in which they
have a beneficial interest, in the normal course of business. It is the Banks policy
to comply with federal regulations that require that loan and deposit transactions with
directors and executive officers be made on substantially the same terms as those
prevailing at the time made for comparable loans and deposits to other persons. As of
December 31, 2003 and 2002, there were approximately $6,362,000 and $5,382,000,
respectively, of related party deposits. Following is a summary of related party loans:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | 
|---------------------------- | 
|Beginning balance            | 
|New loans/advances           | 
|Less: Repayments             | 
|                             | 
|Balance at December 31, 2003 | 
|                             | 

| | The
Bank completed construction of its main office building during 2003 under a construction
contract with one of its directors. The total amount of the contract was $1,681,000.
Management believes that this contract has been negotiated on terms competitive in its
market.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

# FIRST SOUTHERN BANCORP
Notes to Consolidated Financial Statements, continued

(11)    Miscellaneous Operating Expenses

| | Components
of other operating expenses which are greater than 1% of interest income and other
operating income are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------

|                      | 2003 | 2002
|--------------------- | ---- | ----
|Advertising           |      |     
|Audits& examinations  |      |     
|Business development  |      |     
|Mortgage expenditures |      |     
|Consulting            |      |     
|Courier               |      |     
|Data processing       |      |     
|Dues &memberships     |      |     
|Legal & professional  |      |     
|Stationery & supplies |      |     
|Telephone             |      |     
|Regulatory fees       |      |     
|Computer maintenance  |      |     

(12)    Regulatory Matters

| | The
Company and the Bank are subject to various regulatory capital requirements administered
by the federal 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 financial statements. Under certain
adequacy guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines that involve quantitative measures of the assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices must
be met. The capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Quantitative
measures established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2003 and 2002, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2003 and 2002, the most recent notification from the Federal Deposit
Insurance Corporation 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 total risk-based, Tier 1 risk-based and Tier 1 leverage 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

# FIRST SOUTHERN BANCORPNotes to Consolidated
Financial Statements, continued

(13)    Regulatory Matters, continued

The actual capital amounts (in thousands) and ratios as of December 31, 2003 and 2002 are also
presented in the table below.

|                          |  |  |   |       | To Be Well
|------------------------- |  |  | - | ----- | ----------
|
|
|
|
|Total Capital             |  |  |   |       |           
|(to Risk Weighted Assets) |  | 
|Consolidated              |  |  | $ | 8,018 |           
|Bank                      |  |  | $ | 6,037 |           
|Tier 1 Capital            |  | 
|(to Risk Weighted Assets) |  | 
|Consolidated              |  |  | $ | 7,449 |           
|Bank                      |  |  | $ | 5,468 |           
|Tier 1 Capital            |  | 
|(to Average Assets)       |  | 
|Consolidated              |  |  | $ | 7,449 |           
|Bank                      |  |  | $ | 5,468 |           
|As of December 31, 2002:  |  | 
|Total Capital             |  | 
|(to Risk Weighted Assets) |  | 
|Consolidated              |  |  | $ | 8,129 |           
|Bank                      |  |  | $ | 6,117 |           
|Tier 1 Capital            |  | 
|(to Risk Weighted Assets) |  | 
|Consolidated              |  |  | $ | 7,754 |           
|Bank                      |  |  | $ | 5,742 |           
|Tier 1 Capital            |  | 
|(to Average Assets)       |  | 
|Consolidated              |  |  | $ | 7,754 |           
|Bank                      |  |  | $ | 5,742 |           

| | Dividends
paid by the Bank are the primary source of funds available to the Company. Banking
regulations limit the amount of dividends that may be paid without prior approval of the
regulatory authorities. These restrictions are based on the level of regulatory classified
assets, the prior years net earnings, and the ratio of equity capital to total
assets. The Bank is currently not allowed to pay dividends to the Company until it becomes
cumulatively profitable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42

---

# FIRST SOUTHERN BANCORPNotes to Consolidated
Financial Statements, continued

(13)    First Southern Bancorp (Parent Company Only) Financial Information

Balance Sheets
December 31, 2003 and 2002

Assets

|                                     | 2003 | 2002
|------------------------------------ | ---- | ----
|Cash and interest-bearing deposits   |      |     
|Land                                 |      |     
|Investment in Bank                   |      |     
|                                     |      |     
|                                     |      |     
|                                     |      |     
|Liabilities and Shareholders' Equity |      |     
|                                     |      |     
|Other liabilities                    |      |     
|Shareholders' equity                 |      |     
|                                     |      |     
|                                     |      |     
|                                     |      |     

Statements of Operations
For the Years Ended December 31, 2003 and 2002

|                                     | 2003 | 2002
|------------------------------------ | ---- | ----
|Other operating expense              |      |     
|                                     |      |     
|Loss before equity in                |      |     
|undistributed loss of Bank           |      |     
|Equity in undistributed loss of Bank |      |     
|                                     |      |     
|Net loss                             |      |     
|                                     |      |     

43

---

# FIRST SOUTHERN BANCORP

# Notes to Consolidated
Financial Statements, continued

# (13) First Southern
Bancorp (Parent Company Only) Financial Information, continued

Statements of Cash Flows

For the Years Ended
December 31, 2003 and 2002

|                                                                     |  | 
|-------------------------------------------------------------------- |  | 
|Cash flows from operating activities:                                |  | 
|Net loss                                                             |  | 
|Adjustments to reconcile net loss to net cash                        |  | 
|used by operating activities:                                        |  | 
|Equity in undistributed loss of Bank                                 |  | 
|Change in other                                                      |  | 
|                                                                     |  | 
|Net cash used by operating activities                                |  | 
|                                                                     |  | 
|Cash flows from investing activities:                                |  | 
|Capital infusion into Bank                                           |  | 
|Purchase of land                                                     |  | 
|                                                                     |  | 
|Net cash used by investing activities                                |  | 
|                                                                     |  | 
|Cash flows from financing activities:                                |  | 
|Proceeds from sale of common stock                                   |  | 
|Repayment of organizational share of stock                           |  | 
|Deferred offering costs                                              |  | 
|Change in line of credit                                             |  | 
|Proceeds from exercise of stock options                              |  | 
|                                                                     |  | 
|Net cash provided by financing activities                            |  | 
|                                                                     |  | 
|Net change in cash                                                   |  | 
|Cash at beginning of year                                            |  | 
|                                                                     |  | 
|Cash at end of year                                                  |  | 
|                                                                     |  | 
|Supplemental schedule of noncash financing and investing activities: |  | 
|Change in net unrealized gain on securities available-for-sale       |  | 
|Transfer of building and equipment to Bank                           |  | 

44

---

# Item 8. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

None.

# Item 8A. Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of December 31, 2003.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

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

The
information required by this item is incorporated herein by reference from our proxy
statement for the annual meeting of shareholders to be held on May 6, 2004.

# Item 10. Executive
Compensation

The
information required by this item is incorporated herein by reference from our proxy
statement for the annual meeting of shareholders to be held on May 6, 2004.

# Item 11. Security
Ownership of Certain Beneficial Owners and Management

The following table sets forth equity
compensation plan information at December 31, 2003.

Equity Compensation

|                       |  |  | Number of securities
|---------------------- |  |  | --------------------
|
|
|
|
|
|
|Equity compensation    |  |  |                     
|plans approved by      |  | 
|security holders(1)    |  | 
|Equity compensation    |  |  |                     
|plans not approved     |  | 
|by security holders(2) |  | 
|Total                  |  |  |                     

| | (1) | The number of shares of common stock available under the First Southern Bancorp,
          Inc. 2002 Stock Incentive Plan is currently 137,932, and it will automatically
          increase each time we issue additional shares so that it continues to equal 15%
          of our total outstanding shares.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In connection with our initial public offering in 2001, we issued 190,109
          warrants to our organizing directors at an exercise price of $10.00 per share
          with a term of 10 years.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additional information required by
this item is incorporated herein by reference from our proxy statement for the annual
meeting of shareholders to be held on May 6, 2004.

46

---

# Item 12.  Certain
Relationships and Related Transactions

The
information required by this item is incorporated herein by reference from our proxy
statement for the annual meeting of shareholders to be held on May 6, 2004.

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

| | (a) | The following documents are filed as
part of this report:
| | --- | ---------------------------------------------------------

| | 3.1. | Articles of Incorporation (incorporated by reference as Exhibit 3.1 to the
          Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2. | Bylaws (incorporated by reference as Exhibit 3.2 to the Companys Form SB-2
          filed with the SEC, File No. 333-66734).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------

| | 4.1. | See Exhibits 3.1 and 3.2 for provisions in First Southern Bancorps
          Articles of Incorporation and Bylaws defining the rights of holders of the
          common stock (incorporated by reference as Exhibit 4.1 to the Companys
          Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2. | Form of certificate of common stock (incorporated by reference as Exhibit 34.2
          to the Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1. | Employment Agreement between First Southern Bancorp and F. Thomas David
          effective as of the opening date of First Southern National Bank (incorporated
          by reference as Exhibit 10.1 to the Companys Form SB-2 filed with the SEC,
          File No. 333-66734).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2. | Employment Agreement between First Southern Bancorp and Christopher T. Cliett
          effective as of June 1, 2001 (incorporated by reference as Exhibit 10.2 to the
          Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3. | Employment Agreement between First Southern Bancorp and Charles R. Fennell
          effective as of June 1, 2001 (incorporated by reference as Exhibit 10.3 to the
          Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4. | Form of Stock Warrant Agreement (incorporated by reference as Exhibit 10.4 to
          the Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5. | 2002 Stock Incentive Plan (incorporated by reference as Exhibit 4.5 to the Company's Form 8-A filed with the
         SEC on April 30, 2003, File No. 333-66734).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21.1 | Subsidiaries of the
        Company
| | ---- | -----------------------------------

| | 23.1 | Consent of Porter
Keadle Moore, LLP.
| | ---- | ------------------------------------

| | 24.1 | Power of Attorney (contained as part of the signature page hereof).
| | ---- | -------------------------------------------------------------------

| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. This exhibit is not filed for purposes
of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided
by applicable rules of the Securities and Exchange Commission.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)    
          Reports on Form 8-K

| |  | The
following reports were filed on Form 8-K during the quarter ended December 31, 2003.
| |  | ----------------------------------------------------------------------------------------

# Item 14.  Principal
Accountant Fees and Services

None.

The
information required by this item is incorporated herein by reference from our proxy
statement for the annual meeting of shareholders to be held on May 6, 2004.

47

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act), the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

| |  | FIRST SOUTHERN BANCORPBy: /s/ F. Thomas David
F. Thomas DavidPresident and Chief Executive Offier
| |  | -------------------------------------------------------------------------------------------------

Date: March 26, 2004

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints F. Thomas David and Charles R. Fennell, Jr. as the true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting
unto such attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

| | Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following in the capacities and on the dates indicated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signature | Title | Date
|--------- | ----- | ----

| |  | 
| |  | 

|/s/ Michael R. Anderson
Michael R. Anderson | Director | March 26, 2004
|------------------------------------------- | -------- | --------------

|/s/ F. Thomas David
F. Thomas David | President andChief Executive Officer | March 26, 2004
|----------------------------------- | ------------------------------------ | --------------

|/s/ Charles A. Deal
Charles A. Deal | Director | March 26, 2004
|----------------------------------- | -------- | --------------

|/s/ Charles "Bo" R. Fennell, Jr.
Charles "Bo" R. Fennell, Jr. | Principal Financial andAccounting Officer | March 26, 2004
|------------------------------------------------------------- | ----------------------------------------- | --------------

|/s/ William I. Griffis
William I. Griffis | Director | March 26, 2004
|----------------------------------------- | -------- | --------------

|/s/ Tracy D. Ham
Tracy D. Ham | Director | March 26, 2004
|----------------------------- | -------- | --------------

|/s/ James A. High
James A. High | Director | March 26, 2004
|------------------------------- | -------- | --------------

48

---

|/s/ W. Pratt Hill, III
W. Pratt Hill, III | Director | March 26, 2004
|----------------------------------------- | -------- | --------------

|/s/ Michael R. Kennedy
Michael R. Kennedy | Director | March 26, 2004
|----------------------------------------- | -------- | --------------

|/s/ R. Whitman Lord
R. Whitman Lord | Director | March 26, 2004
|----------------------------------- | -------- | --------------

|/s/ Laura T. Marsh
Laura T. Marsh | Director | March 26, 2004
|--------------------------------- | -------- | --------------

|/s/ Jeffry D. Pope
JEffrey D. Pope | Director | March 26, 2004
|---------------------------------- | -------- | --------------

|/s/ Ronnie J. Pope
Ronnie J. Pope | Director | March 26, 2004
|--------------------------------- | -------- | --------------

|/s/ Hudson J. Powell, Sr.
Hudson J. Powell, Sr. | Director | March 26, 2004
|----------------------------------------------- | -------- | --------------

|/s/ Larmar O. Reddick
Lamar O. Reddick | Director | March 26, 2004
|-------------------------------------- | -------- | --------------

|/s/ Devra P. Walker
Devra P. Walker | Director | March 26, 2004
|----------------------------------- | -------- | --------------

|/s/ L. Anthony Waters, III
L. Anthony Waters, III | Director | March 26, 2004
|------------------------------------------------- | -------- | --------------

49

---

# EXHIBIT INDEX

ExhibitNumber
              
       Description

| | 3.1. | Articles of Incorporation (incorporated by reference as Exhibit 3.1 to the
          Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2. | Bylaws (incorporated by reference as Exhibit 3.2 to the Companys Form SB-2
          filed with the SEC, File No. 333-66734).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------

| | 4.1. | See Exhibits 3.1 and 3.2 for provisions in First Southern Bancorps
          Articles of Incorporation and Bylaws defining the rights of holders of the
          common stock (incorporated by reference as Exhibit 4.1 to the Companys
          Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2. | Form of certificate of common stock (incorporated by reference as Exhibit 34.2
          to the Companys Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Employment Agreement between First Southern Bancorp and F. Thomas David effective as of the opening       date
         of First Southern National Bank (incorporated by reference as Exhibit 10.1 to the Company's Form SB-2 filed with
         the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Employment Agreement between First Southern Bancorp and Christopher T. Cliett effective as of June 1,     2001
         (incorporated by reference as Exhibit 10.2 to the Company's Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Employment Agreement between First Southern Bancorp and Charles R. Fennell effective as of June 1, 2001
         (incorporated by reference as Exhibit 10.3 to the Company's Form SB-2 filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Form of Stock Warrant Agreement (incorporated by reference as Exhibit 10.4 to the Company's Form SB-2
         filed with the SEC, File No. 333-66734).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | 2002 Stock Incentive Plan (incorporated by reference as Exhibit 4.5 to the Company's Form 8-A filed with the
         SEC on April 30, 2003, File No. 333-66734).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21.1 | Subsidiaries of the
Company
| | ---- | ---------------------------

| | 23.1 | Consent of Porter
Keadle Moore, LLP.
| | ---- | ------------------------------------

| | 24.1 | Power of Attorney (contained as part of the signature page hereof).
| | ---- | -------------------------------------------------------------------

| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. This exhibit is not filed for purposes
of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided
by applicable rules of the Securities and Exchange Commission.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50