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

                                    FORM 10-Q

(Mark One)

  X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 ---                   SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004.

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 ---                   SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to          .
                               --------    ---------

Commission File Number: 0-22219

                            FIRST SOUTH BANCORP, INC.
                            -------------------------
             (Exact name of registrant as specified in its charter)

         VIRGINIA                                          56-1999749
  -----------------------                              -----------------
  (State or other jurisdiction of                        (IRS Employer
  incorporation or organization)                       Identification No.)

             1311 CAROLINA AVENUE, WASHINGTON, NORTH CAROLINA 27889
             ------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (252) 946-4178
                                 --------------
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X           No
   -------          ------

  Number of shares of common stock outstanding as of April 30, 2004: 6,247,211

<PAGE>

                                    CONTENTS

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION                                                                PAGE
          ---------------------
<S>       <C>                                                                                 <C>
Item 1.   Financial Statements

          Consolidated Statements of Financial Condition as of March 31, 2004
          (unaudited) and December 31, 2003                                                     1

          Consolidated Statements of Operations for the Three Months Ended
          March 31, 2004 and 2003 (unaudited)                                                   2

          Consolidated Statements of Stockholders' Equity for the Three Months Ended
          March 31, 2004 (unaudited)                                                            3

          Consolidated Statements of Cash Flows for the Three Months Ended
          March 31, 2004 and 2003 (unaudited)                                                   4

          Notes to Consolidated Financial Statements (unaudited)                                5

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                                                 7

Item 3.   Quantitative and Qualitative Disclosures About Market Risk                           14

Item 4.   Controls and Procedures                                                              14

PART II.  OTHER INFORMATION
          -----------------

Item 1.   Legal Proceedings                                                                    15

Item 2.   Changes in Securities and Use of Proceeds                                            15

Item 3.   Defaults Upon Senior Securities                                                      15

Item 4.   Submission of Matters to a Vote of Security Holders                                  15

Item 5.   Other Information                                                                    15

Item 6.   Exhibits and Reports on Form 8-K                                                     15

Signatures                                                                                     16

Exhibits                                                                                       17
</TABLE>

<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                    MARCH 31      DECEMBER 31
                                                                        2004             2003
                                                               -------------    -------------
                                     Assets                      (UNAUDITED)

<S>                                                            <C>              <C>
Cash and due from banks                                        $  27,504,275    $  34,299,553
Interest-bearing deposits in financial institutions               17,096,618          625,051
Investment securities - available for sale                        49,815,383       50,071,520
Mortgage-backed securities - available for sale                    9,644,690       11,715,052
Loans and leases receivable, net:
  Held for sale                                                    9,669,456       10,924,148
  Held for investment                                            569,705,021      542,275,778
Premises and equipment, net                                        7,997,857        7,922,588
Real estate owned                                                    125,001          130,798
Federal Home Loan Bank of Atlanta stock, at cost
     which approximates market                                     1,992,500        2,127,200
Accrued interest receivable                                        3,172,880        3,073,093
Goodwill                                                           4,218,575        4,218,576
Mortgage servicing rights                                          1,847,347        1,886,522
Identifiable intangible assets                                       314,488               --
Prepaid expenses and other assets                                  5,534,053        5,313,528
Note receivable                                                    1,229,115        1,252,703
                                                               -------------    -------------

          Total assets                                         $ 709,867,259    $ 675,836,110
                                                               =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

 Deposits:
  Demand                                                       $ 233,944,125    $ 227,863,599
  Savings                                                         21,235,744       20,292,472
  Large denomination certificates of deposit                     110,800,036      107,354,231
  Other time                                                     235,838,021      227,662,871
                                                               -------------    -------------
          Total deposits                                         601,817,926      583,173,173
Borrowed money                                                    30,940,814       19,338,059
Junior subordinated debentures                                    10,000,000       10,000,000
Deferred income taxes                                              1,027,439        1,114,567
Other liabilities                                                  9,459,317        7,046,758
                                                               -------------    -------------
          Total liabilities                                      653,245,496      620,672,557

  Common stock, $.01 par value, 8,000,000 shares authorized,
    6,283,183* and 4,190,335 shares issued and outstanding            62,832 *         41,903
  Additional paid-in capital                                      49,024,504       49,020,632
  Retained earnings, substantially restricted                      44,857,966 *    43,171,318
  Treasury stock at cost                                         (39,438,014)     (39,326,931)
  Accumulated other comprehensive income, net                      2,114,475        2,256,631
                                                               -------------    -------------
           Total stockholders' equity                             56,621,763       55,163,553
                                                               -------------    -------------

           Total liabilities and stockholders' equity          $ 709,867,259    $ 675,836,110
                                                               =============    =============
</TABLE>

*Adjusted for April 23, 2004 three-for-two stock split.

See Notes to Consolidated Financial Statements.

                                       1
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                        MARCH 31
                                                                -----------------------
                                                                   2004         2003
                                                                ----------   ----------

<S>                                                             <C>          <C>
Interest income:
  Interest and fees on loans                                    $8,386,121   $7,912,639
  Interest and dividends on investments and deposits               974,924    1,228,693
                                                                ----------   ----------
           Total interest income                                 9,361,045    9,141,332

Interest expense:
  Interest on deposits                                           2,120,735    2,704,429
  Interest on borrowings                                            38,821       37,536
  Interest on junior subordinated notes                            104,145           --
                                                                ----------   ----------
           Total interest expense                                2,263,701    2,741,965

Net interest income before provision for possible loan losses    7,097,344    6,399,367
Provision for  possible loan losses                                     --      333,919
                                                                ----------   ----------
           Net  interest income                                  7,097,344    6,065,448
                                                                ----------   ----------

Non-interest income:
  Loan fees and service charges                                  1,513,423    1,343,143
  Loan servicing fees                                              179,353      138,616
  Gain on sale of real estate, net                                   1,501       48,629
  Gain on sale of mortgage loans                                   146,838    1,016,698
  Gain on sale of mortgage-backed securities                        45,916      168,938
  Other  income                                                    269,326      203,992
                                                                ----------   ----------
           Total non-interest income                             2,156,357    2,920,016
                                                                ----------   ----------

Non-interest expense:
  Compensation and fringe benefits                               2,976,149    2,644,781
  Federal insurance premiums                                        21,655       22,038
  Premises and equipment                                           402,280      362,808
  Advertising                                                       38,706       48,527
  Payroll and other taxes                                          275,155      238,978
  Data processing                                                  529,960      463,845
  Amortization of mortgage servicing rights                         65,751       52,194
  Other                                                            555,671      586,481
                                                                ----------   ----------
           Total non-interest expense                            4,865,327    4,419,652
                                                                ----------   ----------

Income before income taxes                                       4,388,374    4,565,812

Income taxes                                                     1,612,600    1,722,907
                                                                ----------   ----------

NET INCOME                                                      $2,775,774   $2,842,905
                                                                ==========   ==========

Per share data: (*)
Basic earnings per share                                        $     0.44   $     0.46
Diluted earnings per share                                      $     0.42   $     0.43
Dividends per share                                             $     0.17   $     0.13
Weighted average shares Basic                                    6,281,980    6,242,537
Weighted average shares Diluted                                  6,625,951    6,634,978
</TABLE>

(*) Adjusted for April 23, 2004 three-for-two stock split.

See Notes to Consolidated Financial Statements.

                                       2
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                                      Retained                           Other
                                                    Additional        Earnings,                      Comprehensive
                                        Common       Paid-in        Substantially     Treasury       Income (Loss),
                                        Stock        Capital         Restricted         Stock              Net           Total
                                    -----------   --------------   --------------   --------------   --------------   -----------
<S>                                 <C>           <C>              <C>              <C>              <C>              <C>
Balance, December 31, 2003          $    41,903   $   49,020,632   $   43,171,318   $  (39,326,931)  $    2,256,631   $55,163,553

Net income                                                              2,775,774                                       2,775,774

Three-for-two stock split paid in
  form of a 50% stock dividend *         20,942                           (20,942)                                              0

Other comprehensive income, net
  of taxes                                                                                                 (142,156)     (142,156)

Exercise of stock options                    32            3,872                            52,731                         56,635

Acquisition of treasury shares              (45)                                          (163,814)                      (163,859)

Dividends ($ .17 per share)*                                           (1,068,184)                                     (1,068,184)
                                    -----------   --------------   --------------   --------------   --------------   -----------

Balance, March 31, 2004             $    62,832   $   49,024,504   $   44,857,966   $  (39,438,014)  $    2,114,475   $56,621,763
                                    -----------   --------------   --------------   --------------   --------------   -----------
</TABLE>

*Adjusted for April 23, 2004 three-for-two stock split.

See Notes to Consolidated Financial Statements.

                                       3
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                              March 31
                                                                                     ----------------------------
                                                                                         2004            2003
                                                                                     ------------    ------------

<S>                                                                                  <C>             <C>
Operating activities
      Net Income                                                                     $  2,775,774    $  2,842,905
      Adjustments to reconcile net income to net cash provided
           in operating activities:
               Provision for loan losses                                                       --         333,919
               Depreciation                                                               173,443         168,868
               Impairment of servicing asset                                               42,338         135,336
               Impairment of real estate owned                                                 --          15,000
               Amortization of discounts on securities, net                               (34,573)        (46,632)
               Gain on disposal of premises and equipment and real estate owned            (1,501)        (48,629)
               Gain on sales of loans held for sale and mortgage-backed securities       (192,754)     (1,185,636)
               Originations of loans held for sale, net                                (8,240,038)    (32,382,838)
               Proceeds from sale of loans held for sale                                9,641,568      39,368,328
               Other operating activities                                               1,796,933      (4,645,655)
                                                                                     ------------    ------------
                    Net cash provided in operating activities                           5,961,190       4,554,966
                                                                                     ------------    ------------
Investing activities:
      Proceeds from principal repayments and sales of
           mortgage-backed securities available for sale                                2,177,704       6,982,359
      Originations of loans held for investment, net of principal repayments          (25,228,201)    (21,445,578)
      Proceeds from disposal of premises and equipment and real estate owned               11,662         338,250
      Redemption of FHLB stock                                                            134,700              --
      Purchases of premises and equipment                                                (178,076)        (33,930)
      Repayment of note receivable                                                         23,588          14,465
      Acquisition of two Central Carolina Bank branches                                15,622,724              --
                                                                                     ------------    ------------
                    Net cash used in investing activities                              (7,435,899)    (14,144,434)
                                                                                     ------------    ------------
Financing activities:
      Net increase in deposits                                                            298,480      35,518,274
      Proceeds from FHLB borrowings                                                    71,000,000      58,400,000
      Repayments of FHLB borrowings                                                   (60,000,000)    (85,400,000)
      Purchase of treasury shares                                                        (163,874)     (2,427,993)
      Proceeds from exercise of stock options                                              56,650         223,116
      Cash dividends paid                                                                (838,067)       (712,992)
      Net change in repurchase agreements                                                 602,755        (177,101)
                                                                                     ------------    ------------
                    Net cash provided by financing activities                          10,955,944       5,423,304
                                                                                     ------------    ------------

Increase (decrease) in cash and cash equivalents                                        9,481,235      (4,166,164)

Cash and cash equivalents, beginning of period                                         34,924,604      34,472,159
                                                                                     ------------    ------------

Cash and cash equivalents, end of period                                             $ 44,405,839    $ 30,305,995
                                                                                     ============    ============

Supplemental disclosures:
      Real estate acquired in settlement of loans                                    $         --    $     18,784
      Exchange of loans for mortgage-backed securities                               $         --    $  3,644,085
      Dividends declared, not paid                                                   $  1,074,799    $    830,120
</TABLE>

See Notes to Consolidated Financial Statements.

                                       4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. NATURE OF BUSINESS. First South Bancorp, Inc. (the "Company") was formed
for the  purpose of issuing  common  stock and owning 100% of the stock of First
South Bank (the  "Bank") and  operating  through the Bank a  commercial  banking
business.  The Bank has one  significant  operating  segment,  the  providing of
general commercial banking services to its markets located in the state of North
Carolina.  The common  stock of the  Company  is traded on the  Nasdaq  National
Market System under the symbol "FSBK".

NOTE 2. BASIS OF PRESENTATION. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally  accepted  accounting
principles  and  with  the   instructions   to  Form  10-Q  of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
In the opinion of management,  all adjustments necessary for a fair presentation
of the financial  position and results of operations  for the periods  presented
have been included, none of which were other than normal recurring accruals. The
financial  statements of the Company are presented on a consolidated  basis with
those of the Bank.  The results of  operations  for the quarter  ended March 31,
2004 are not  necessarily  indicative of the results of  operations  that may be
expected for the year ended December 31, 2004.

NOTE 3. STOCK  SPLIT.  On March 18,  2004 the Company  declared a  three-for-two
stock  split,  in the form of a 50% stock  dividend,  payable  April 23, 2004 to
stockholders of record as of April 2, 2004. Stockholders received one additional
share of common stock for every two shares held on the record date.  All current
and prior period share and per share data has been adjusted to reflect the stock
split.

NOTE 4.  DIVIDENDS  DECLARED.  On March 18,  2004,  the Company  declared a cash
dividend of $0.17 per share, payable April 23, 2004 to stockholders of record as
of April 2, 2004, adjusted for the stock split. This dividend payment represents
a payout ratio of 38.6% of the basic  earnings  per share for the quarter  ended
March 31, 2004, and is the Company's  twenty-eighth  consecutive  quarterly cash
dividend.

NOTE 5. EARNINGS PER SHARE. Basic and diluted earnings per share for the quarter
ended  March 31, 2004 and 2003 are based on  weighted  average  shares of common
stock outstanding, excluding treasury shares. Diluted earnings per share include
the potentially dilutive effects of the Company's stock option plan.

NOTE 6. GOODWILL.  The Company  applies the provisions of Statement of Financial
Accounting  Standards  No. 142 (SFAS No. 142),  "Goodwill  and Other  Intangible
Assets", and Statement of Financial Accounting Standards No. 147 (SFAS No. 147),
"Acquisition  of Certain  Financial  Institutions",  effective  as of January 1,
2002. As a result of applying the provisions of SFAS No.'s 142 and 147, goodwill
is not amortized,  but is reviewed for potential  impairment on an annual basis.
The Company has performed its annual  impairment  test and has  determined  that
there has been no impairment of goodwill.

NOTE 7. STOCK  OPTIONS.  The  Company's  1997  Stock  Option  Plan (the  "Plan")
provides for the issuance of options to purchase shares of the Company's  common
stock to selected key employees  and Directors of the Company and the Bank.  The
options have an original  term of ten years with an exercise  price equal to the
market price of the common  stock on the date of grant,  as defined by the Plan.
Vesting is determined  on the date of grant.  During the quarter ended March 31,
2004, 750

                                       5
<PAGE>

options were granted under the Plan,  adjusted for the stock split. The weighted
average remaining  contractual life of currently  outstanding  options under the
Plan is 57 months.  At March 31,  2004,  847,980  options were  outstanding  and
704,013 options were reserved for future issuance, adjusted for the stock split.
In addition, 219,540 options had been exercised under the Plan, adjusted for the
stock split.

The  Company  accounts  for the  Plan  under  the  provision  of SFAS  No.  123,
"Accounting  for Stock Based  Compensation".  As  permitted by SFAS No. 123, the
Company has chosen to apply APB Opinion No. 25,  "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans. Accordingly,
no  compensation  cost had been  recognized for options granted under the plans.
Had compensation  cost for the Company's plans been determined based on the fair
value at the grant dates for awards under the plans  consistent  with the method
of SFAS No. 123, the Company's net income and net income per share - basic would
have been adjusted to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
Three Months Ended March 30, 2004                             As Reported       Pro Forma
---------------------------------                             -----------      -----------
<S>                                                           <C>              <C>
Net income attributable to common shareholders                $ 2,775,774      $ 2,753,811

Stock based compensation                                      $         0      $    33,184

Net income per share - basic*                                 $       .44      $       .44

Net income per share - diluted*                               $       .42      $       .42
</TABLE>
*Adjusted for April 23, 2004 three-for-two stock split

NOTE 8.  RECLASSIFICATIONS.  Certain amounts reported in Consolidated Statements
of Financial Condition as of December 31, 2003 have been reclassified to conform
with  the   presentation   for  the  period   ended   March  31,   2004.   These
reclassifications  had no effect on net income or  shareholders'  equity for the
periods   presented,   nor  did  they  materially  impact  trends  in  financial
information.

NOTE 9. COMPREHENSIVE INCOME. The Company applies the provisions of Statement of
Financial  Accounting  Standards  No.  130,  "Reporting  Comprehensive  Income".
Comprehensive  income includes net income and all other changes to the Company's
equity,   with  the  exception  of  transactions   with   shareholders   ("other
comprehensive  income").  The Company's  only  component of other  comprehensive
income relates to unrealized  gains and losses on available for sale securities.
Unrealized  gains and  losses on  available  for sale  securities  is  primarily
impacted by purchases and sales of available for sale  securities and changes in
interest rates between the respective reporting periods.  Information concerning
the Company's  other  comprehensive  income for the quarter ended March 31, 2004
and 2003 is as follows:

                                                Quarter Ended
                                                  March 31,
                                             2004           2003
                                             ----           ----

Net income                               $ 2,775,774    $ 2,842,905
Reclassification of gain on
  sale of mortgage-backed securities         (45,916)      (168,938)
Losses unrealized, net of income taxes       (96,240)      (139,615)
                                         -----------    -----------
Other comprehensive loss                    (142,156)      (308,553)
                                         -----------    -----------
Comprehensive income                     $ 2,633,618    $ 2,534,352
                                         ===========    ===========

NOTE 10.  SIGNIFICANT  ACTIVITIES.  On February 20, 2004, the Bank completed its
acquisition of two of Central  Carolina Bank's ("CCB") branch offices located in
Greenville and New Bern, North Carolina.

                                       6
<PAGE>

Pursuant  to a Purchase  and  Assumption  Agreement  ("Agreement")  executed  on
October 29, 2003,  the Bank assumed the deposits of these  offices for a premium
of approximately 1.5% of the assumed deposits, and purchased loans, fixed assets
and certain other assets  associated with the branch offices.  Summary financial
information  related to the branch purchase  transaction as of February 20, 2004
is as follows  (unaudited):  deposits - $18.4  million,  cash and other assets -
$15.8 million, loans receivable - $2.2 million, identifiable intangible assets -
$314,000, and premises and equipment - $75,000.

NOTE 11. FORWARD LOOKING  STATEMENTS.  The Private Securities  Litigation Reform
Act of 1995  states  that the  disclosure  of  forward  looking  information  is
desirable  for  investors  and  encourages  such  disclosure by providing a safe
harbor for forward looking statements by corporate  management.  This Form 10-Q,
including  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations, contains forward looking statements that involve risk and
uncertainty.  In order to comply with the terms of the safe harbor,  the Company
notes that a variety of risks and  uncertainties  could cause its actual results
and  experience  to differ  materially  from the  anticipated  results  or other
expectations  expressed in the Company's forward looking  statements.  There are
risks  and   uncertainties   that  may  affect  the   operations,   performance,
development,  growth  projections  and results of the Company's  business.  They
include,  but are not limited to,  economic  growth,  interest  rate  movements,
timely  development  of  technology  enhancements  for  products,  services  and
operating  systems,  the impact of competitive  products,  services and pricing,
customer requirements,  regulatory changes and similar matters.  Readers of this
report are cautioned not to place undue reliance on forward  looking  statements
that are subject to influence by these risk  factors and  unanticipated  events.
Accordingly,   actual   results   may  differ   materially   from   management's
expectations.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company  engages in no activity other than holding the stock of the Bank and
operating  through  the  Bank a  commercial  banking  business,  therefore,  the
discussion below focuses primarily on the results of operations of the Bank.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND DECEMBER 31, 2003

Total assets  increased to $709.9  million at March 31, 2004 from $675.8 million
at December 31, 2003.  Earning  assets  increased to $657.9 million at March 31,
2004  from  $617.7  million  at  December  31,  2003,  reflecting  growth of the
commercial and consumer loan  portfolio,  as further  discussed  below.  Earning
assets were 92.7% and 91.4% of total  assets at March 31, 2004 and  December 31,
2003, respectively.

Interest-bearing overnight deposits in financial institutions were $17.1 million
at March 31, 2004,  compared to $625,000 at December 31, 2003.  Overnight  funds
are available to fund loan  originations,  liquidity  management  activities and
daily operations of the Bank.

Investment and mortgage-backed  securities available for sale were $59.5 million
at March  31,  2004  and  $61.8  million  at  December  31,  2003.  The Bank has
implemented strategies to sell certain securities during favorable interest rate
windows,   and   securitize   certain   mortgage   loans   held  for  sale  into
mortgage-backed  securities  in order to maintain  its  regulatory  liquidity at
required levels.

                                       7
<PAGE>

During  the  quarter  ended  March  31,  2004,  the Bank sold  $2.2  million  of
mortgage-backed   securities,   compared  to  $3.0  million  of  mortgage-backed
securities sales during the quarter ended March 31, 2003. No mortgage loans were
securitized into  mortgage-backed  securities during the quarter ended March 31,
2004,  compared to $3.6 million  securitized  during the quarter ended March 31,
2003. The mortgage-backed securities portfolio declined to $9.6 million at March
31, 2004, compared to $11.7 million at December 31, 2003.

Loans  held for sale  declined  to $9.7  million  at March 31,  2004 from  $10.9
million at December 31, 2003.  During the quarter  ended March 31, 2004 the Bank
sold $9.6 million of mortgage  loans,  compared to $39.4 million of sales during
the  quarter  ended  March 31,  2003.  Net  originations  of loans held for sale
declined  to $8.2  million  during the  quarter  ended March 31, 2004 from $32.4
million  during the quarter  ended  March 31,  2003,  reflecting  a slow down in
origination  and  refinancing  volumes due to a recent  nominal rise in interest
rates.

Loans and leases held for  investment  increased to $569.7  million at March 31,
2004 from $542.3  million at December  31, 2003,  reflecting a 20.2%  annualized
growth rate during the current quarter. This growth reflects the Bank's emphasis
placed on structuring itself as a commercial banking entity.

Deposits  increased to $601.8  million at March 31, 2004 from $583.2  million at
December 31, 2003,  primarily  reflecting  the CCB branch  offices  acquisition.
Checking  accounts  increased  to $233.9  million at March 31,  2004 from $227.9
million at December 31, 2003, and represent 38.9% of total deposits at March 31,
2004,  resulting  from the Bank's  efforts to attract  more lower  costing  core
checking accounts,  while time deposits increased to $346.6 million at March 31,
2004 from $335.0 million at December 31, 2003.

FHLB advances and junior  subordinated  debentures,  used primarily to fund loan
originations  and general  banking  operations,  were $37.0 million at March 31,
2004, compared to $26.0 million at December 31, 2003. Borrowings, in the form of
repurchase  agreements,  were $3.9  million at March 31,  2004  compared to $3.3
million  at  December  31,  2003.  These  borrowings  represent  funds  in  cash
management accounts for commercial banking customers.

Stockholders'  equity was $56.6  million at March 31,  2004,  compared  to $55.2
million at December 31, 2003.  See  "Consolidated  Statements  of  Stockholders'
Equity" for additional  information.  At March 31, 2004, the Company's equity to
assets  ratio  was  8.0%,  compared  to 8.2% at  December  31,  2003,  primarily
reflecting the growth in earning assets as previously discussed.

Accumulated  other  comprehensive  income  declined to $2.1 million at March 31,
2004 from $2.3  million  at  December  31,  2003,  reflecting  the impact of the
mortgage-backed securities sale and the recent nominal rise in interest rates as
previously   discussed.   See  "Note  9.  Comprehensive  Income"  of  "Notes  to
Consolidated Financial Statements (Unaudited)" above for additional information.

As a North  Carolina  chartered  commercial  bank,  the Bank must  meet  various
capital standards required by federal and state banking regulatory agencies. The
Bank's stand-alone capital was $65.5 million at March 31, 2004, substantially in
excess of all  regulatory  capital  requirements.  See  "Liquidity  and  Capital
Resources" below for additional information.

On March 18, 2004 the Company declared a three-for-two  stock split, in the form
of a 50% stock dividend,  payable April 23, 2004 to stockholders of record as of
April 2, 2004.  Stockholders  received one additional  share of common stock for
every two shares held on the record date. All current and prior period share and
per share data has been adjusted to reflect the stock split.

                                       8
<PAGE>

On March 18, 2004, the Company also declared a cash dividend of $0.17 per share,
payable April 23, 2004 to stockholders  of record as of April 2, 2004,  adjusted
for the stock split. This dividend payment represents a payout ratio of 38.6% of
the basic  earnings per share for the quarter  ended March 31, 2004,  and is the
Company's twenty-eighth consecutive quarterly cash dividend.

During the quarter ended March 31, 2004,  the Company  acquired  4,536 shares of
its common stock totaling  $164,000  through open market and private  purchases,
pursuant to a stock  repurchase  plan adopted by the board of directors.  Shares
acquired via the stock  repurchase  plan are held as treasury stock, at cost. At
March 31, 2004,  treasury  shares held were  2,356,894  totaling  $39.4 million,
compared to 2,355,513  shares  totaling  $39.3 million at December 31, 2003. The
Company  believes the repurchase of its  outstanding  common stock will decrease
the potential  dilutive  effect caused by the exercise of stock options.  During
the quarter  ended March 31,  2004,  4,732 shares were issued as a result of the
exercise of stock options compared to and 24,225 shares during the quarter ended
March 31, 2003, adjusted for the stock split.

COMPARISON OF OPERATING RESULTS FOR THE QUARTER ENDED MARCH 31, 2004 AND 2003

GENERAL.  Net income for each of the quarters ended March 31, 2004 and March 31,
2003 was $2.8 million,  respectively.  Basic  earnings per share for the quarter
ended  March 31,  2004 was $0.44,  compared  to $0.46 per share for the  quarter
ended March 31, 2003,  adjusted for the stock split.  Diluted earnings per share
for the quarter ended March 31, 2004 was $0.42 per share,  compared to $0.43 per
share for the quarter March 31, 2003, adjusted for the stock split.

INTEREST  INCOME.  Interest  income was $9.4 million for the quarter ended March
31, 2004,  compared to $9.1 million for the quarter  ended March 31, 2003.  This
increase is due to the increase in the volume of average interest-earning assets
between the  respective  periods.  Average  interest-earning  assets were $624.4
million for the quarter ended March 31, 2004, compared to $575.3 million for the
quarter ended March 31, 2003, reflecting the growth of loans and leases held for
investment as discussed above. The yield on average  interest-earning assets was
6.0% for the quarter  ended March 31, 2004,  compared to 6.4% for quarter  ended
March 31,  2003,  primarily  impacted by an overall  decrease in interest  rates
between the respective periods.

INTEREST EXPENSE.  Interest expense on deposits and borrowings  declined to $2.3
million for the quarter ended March 31, 2004,  from $2.7 million for the quarter
ended March 31, 2003,  reflecting the impact of changing  interest rates and the
change  in the  deposit  mix  as  previously  discussed.  Average  deposits  and
borrowings were $612.6 million for the quarter ended March 31, 2004, compared to
$566.3  million for the quarter  ended March 31,  2003.  The  effective  cost of
average  deposits and  borrowings was 1.5% for the quarter ended March 31, 2004,
compared to 1.9% for the quarter ended March 31, 2003,  primarily impacted by an
overall  decrease  in interest  rates  between  the  respective  periods and the
increase in lower costing core checking accounts previously discussed.

NET  INTEREST  INCOME.  Net  interest  income  increased to $7.1 million for the
quarter  ended March 31, 2004 from $6.4 million for the quarter  ended March 31,
2003. The interest rate spread (the  difference  between the effective  yield on
average  earning  assets  and  the  effective  cost  of  average   deposits  and
borrowings) was 4.5% for the quarter ended March 31, 2004,  compared to 4.4% for
the quarter ended March 31, 2003. The net yield on interest-earning  assets (net
interest  income  divided by average  interest-earning  assets) was 4.6% for the
quarter  ended March 31, 2004,  compared to 4.5% for the quarter ended March 31,
2003.

                                       9
<PAGE>

PROVISION  FOR LOAN LOSSES.  During the quarter  ended March 31, 2004,  the Bank
recorded no provisions for loan losses compared to $334,000  recorded during the
quarter  ended March 31, 2003.  Provisions  are  necessary  to support  inherent
losses and the risk  associated  with the growth in the Bank's  loan  portfolio.
Provisions are charged to current operations and the Bank believes the resulting
reserve for loan losses is adequate to absorb  probable losses on loans that may
become  uncollectible.  Additions  to the reserve for loan losses are based on a
review and classification of the loan portfolio and other factors,  such as past
collection  experience,  changes in the nature and volume of the loan portfolio,
risk  characteristics  of  individual  loans or  groups  of  similar  loans  and
underlying  collateral,  overall  portfolio  quality and current and prospective
economic conditions.

To support the risk associated  with its loan  portfolio,  the Bank had reserves
for  potential  loan losses of $7.6  million at March 31, 2004 and  December 31,
2003,  respectively.  The ratio of reserves for loan losses to loans outstanding
was 1.3% at March 31, 2004 and 1.4% at December 31, 2003.  Non-performing assets
declined  to $2.6  million at March 31, 2004 from $2.8  million at December  31,
2003,  although the total loans and leases increased  significantly  between the
respective periods as previously  discussed.  Based on the improvement in credit
quality,  the Bank believes the current level of its reserves for loan losses is
adequate and no additional provision was required during the quarter ended March
31, 2004. However,  there are no assurances that probable future losses, if any,
will not exceed  estimated  amounts of the current  level of  reserves  for loan
losses.

NONINTEREST  INCOME.  Noninterest  income was $2.2 million for the quarter ended
March 31, 2004,  compared to $2.9 million for the quarter  ended March 31, 2003.
Noninterest income consists of fees and service charges earned on loans, service
charges on  deposit  accounts,  gains  from  sales of loans and  mortgage-backed
securities  and other  miscellaneous  income.  The  increase in fees and service
charges to $1.7  million for the quarter  ended March 31, 2004 from $1.5 million
for the quarter ended March 31, 2003 is attributable to the increased  volume of
loans and checking  account  deposits  previously  discussed.  The Bank recorded
$46,000 of gains from the sale of mortgage-backed  securities during the quarter
ended March 31, 2004,  compared to $169,000  during the quarter  ended March 31,
2003.  Gains from the sales of  mortgage  loans  declined  to  $147,000  for the
quarter  ended March 31, 2004 from $1.0 million for the quarter  ended March 31,
2003.  The  quarter  ended  March 31,  2003 was a more  advantageous  period for
selling mortgage loans due to increased origination and refinance volumes caused
primarily by declining interest rates.

NONINTEREST EXPENSE.  Noninterest expense was $4.9 million for the quarter ended
March 31, 2004,  compared to $4.4 million for the quarter  ended March 31, 2003.
The largest component of these expenses,  compensation and fringe benefits,  was
$3.0 million for the quarter ended March 31, 2004,  compared to $2.6 million for
the quarter ended March 31, 2003.  Full-time  equivalent  employees increased to
252 at March  31,  2004  from 238 at  March  31,  2003.  This  growth  is due to
additional personnel resulting from opening two new full-service branch offices,
the acquisition of the two CCB branch offices, and administrative staff required
to support the 12.0% growth in assets between the periods.  In addition,  during
the quarter ended March 31, 2004 the Bank  recorded an expense of  approximately
$229,000 to eliminate a defined benefit pension plan unfunded liability.

Premises and equipment and data processing  expenses have grown  proportionately
with the growth in the number of customer  accounts  and  transaction  activity,
primarily  attributable to both internal growth and the new offices opened since
March 31, 2003. Other  noninterest  expenses  including  premises and equipment,
repairs,   printing,   advertising,   and  office   supplies   have  also  grown
proportionately  with the growth in earning  assets,  deposits and branch office
locations.

                                       10
<PAGE>

INCOME  TAXES.  Income tax expense was $1.6 million for the quarter  ended March
31,  2004,  compared to $1.7 million for the quarter  ended March 31, 2003.  The
changes in the  amounts of income tax  provisions  reflect the changes in pretax
income  and the  estimated  income  tax rates in effect  during  the  respective
periods.

LIQUIDITY AND CAPITAL RESOURCES

The Bank must meet a 15%  regulatory  liquidity  requirement of liquid assets to
deposits  and  short-term  borrowings.  At March  31,  2004,  the Bank had cash,
deposits in banks, investment securities, mortgage-backed securities, FHLB stock
and loans held for sale totaling $115.7  million,  compared to $109.8 million at
December  31,  2003,  representing  18.3% and 18.2% of deposits  and  short-term
borrowings at March 31,2004 and December 31,2003, respectively.

Liquidity generally refers to the Bank's ability to generate adequate amounts of
funds to meet its cash needs.  Adequate  liquidity  guarantees  that  sufficient
funds are available to meet deposit  withdrawals,  fund future loan commitments,
maintain adequate reserve  requirements,  pay operating expenses,  provide funds
for  debt  service,  pay  dividends  to  stockholders,  and meet  other  general
commitments.  The Bank believes it can meet future liquidity needs with existing
funding  sources.  The Bank's primary source of funds are deposits,  payments on
loans and  mortgage-backed  securities,  maturities  of  investment  securities,
earnings  and funds  provided  from  operations,  the ability to borrow from the
Federal Home Loan Bank of Atlanta and the  availability  of loans held for sale.
While  scheduled   repayments  of  loans  and  mortgage-backed   securities  are
relatively  predictable  sources  of funds,  deposit  flows and  general  market
interest rates, economic conditions and competition substantially influence loan
prepayments.

The FDIC requires the Bank to meet a minimum  leverage  capital  requirement  of
Tier I capital (consisting of retained earnings and common stockholder's equity,
less any  intangible  assets) to assets ratio of 4%. The FDIC also  requires the
Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which at
least 4% must be in the form of Tier I capital.  The  Commissioner  requires the
Bank at all times to  maintain a capital  surplus of not less than 50% of common
capital stock.  The Bank was in compliance with all capital  requirements of the
FDIC and the Commissioner at March 31, 2004 and December 31, 2003.

IMPACT OF INFLATION AND CHANGING PRICES. The consolidated  financial  statements
of the  Company  have  been  prepared  in  accordance  with  generally  accepted
accounting  principles,  which require the measurement of financial position and
operating results in terms of historical dollars without  considering the change
in relative  purchasing  power of money over time and due to  inflation.  Unlike
most industrial companies,  nearly all assets and liabilities of the Company are
monetary,  causing  interest  rates  to have  greater  impact  on the  Company's
performance than general levels of inflation.  Interest rates do not necessarily
move in the same  direction  or to the same  extent  as the  price of goods  and
services.  The impact of inflation upon the Company is reflected in the cost and
prices it pays for goods and services.

CRITICAL ACCOUNTING  POLICIES.  The Company has identified the policies below as
critical to its  business  operations  and the  understanding  of its results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed  throughout  Management's  Discussion
and  Analysis  of  Financial  Condition  and  Results of  Operations  where such
policies affect reported and expected financial results.

                                       11
<PAGE>

         USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make  estimates and  assumptions.  Estimates  affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses  during the  reporting  period.  Actual  results  could
differ from those estimates.

         LOAN  IMPAIRMENT  AND ALLOWANCE  FOR LOAN LOSSES.  A loan is considered
impaired,  based on current  information and events,  if it is probable that the
Bank will be unable to collect the  scheduled  payments of principal or interest
when  due   according  to  the   contractual   terms  of  the  loan   agreement.
Uncollateralized loans are measured for impairment based on the present value of
expected future cash flows discounted at the historical effective interest rate,
while all  collateral-dependent  loans are measured for impairment  based on the
fair value of the collateral.

The Bank uses several factors in determining if a loan is impaired. The internal
asset  classification  procedures include a thorough review of significant loans
and lending  relationships  and include the  accumulation  of related data. This
data includes loan payment  status,  borrowers'  financial  data and  borrowers'
operating factors such as cash flows, operating income or loss, etc.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy  of the  allowance  is based on the Bank's  past loan loss  experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the  borrower's  ability  to  repay,  the  estimated  value  of  any  underlying
collateral,  and current economic conditions.  While management believes that it
has established the allowance in accordance with accounting principles generally
accepted in the United States of America and has taken into account the views of
its regulators and the current economic  environment,  there can be no assurance
that in the future  the Bank's  regulators  or risks in its  portfolio  will not
require further increases in the allowance.

         INCOME TAXES.  Deferred tax asset and liability balances are determined
by application of temporary differences of the tax rate expected to be in effect
when  taxes  will  become  payable  or  receivable.  Temporary  differences  are
differences  between the tax basis of assets and  liabilities and their reported
amounts in the  financial  statements  that will result in taxable or deductible
amounts in future years.  The effect on deferred  taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.

         OFF-BALANCE SHEET RISK. The Company 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 and to reduce its own exposure to fluctuations
in interest rates.  These financial  instruments  include  commitments to extend
credit and involve,  to varying  degrees,  elements of credit and interest  rate
risk in excess of the amount recognized in the balance sheet.

The  Company's  exposure to credit loss in the event of  non-performance  by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making  commitments  and  conditional  obligations as it
does for on-balance sheet instruments.

                                       12
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

In April 2003,  the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging  Activities"  ("SFAS No. 149").  FASB Statements No. 133
"Accounting  for Derivative  Instruments  and Hedging  Activities"  and No. 138,
"Accounting for Certain Derivative  Instruments and Certain Hedging Activities",
establish   accounting  and  reporting  standards  for  derivative   instruments
including  derivatives  embedded in other contracts and for hedging  activities.
SFAS No. 149 amends  Statement  133 for certain  decisions  made by the Board as
part of the  Derivatives  Implementation  Group (DIG)  process.  This  Statement
contains  amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting  Measurements",  and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities", No. 91 "Accounting
for Nonrefundable  Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases",  No. 95, "Statement of Cash Flows", and No.
126,  "Exemption from Certain Required  Disclosures about Financial  Instruments
for Certain  Nonpublic  Entities".  The provisions of SFAS No. 149 are effective
for contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have any material impact on the Company's  financial  statements
or results of operations.

In May 2003,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standards  No.  150  "Accounting  for  Certain  Financial
Instruments  with  Characteristics  of both  Liabilities  and Equity" ("SFAS No.
150"). SFAS No. 150 establishes  standards for classification and measurement in
the  statement  of  financial  position of certain  financial  instruments  with
characteristics of both liabilities and equity. It requires  classification of a
financial  instrument  that is within its scope as a  liability  (or an asset in
some circumstances)  because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial  instruments entered into or
modified  after May 31,  2003,  and  otherwise  effective  on July 1, 2003.  The
adoption  of SFAS No.  150 did not have any  material  impact  on the  Company's
financial statements or results of operations.

In January  2003,  the Financial  Accounting  Standards  Board issued  Financial
Accounting  Series  FASB  Interpretation  No.  46,  "Consolidation  of  Variable
Interest Entities,  an Interpretation of ARB No. 51" ("FIN No. 46"). The primary
objective of the Interpretation is to provide guidance on the identification of,
and financial  reporting  for,  entities over which control is achieved  through
means other than voting  rights;  such  entities are known as  variable-interest
entities (VIEs). FIN No. 46 has far-reaching  effects and applies immediately to
new entities  created  after  January 31,  2003,  as well as applies to existing
entities  in which an  enterprise  obtains an  interest  after  that  date.  The
provisions of FIN No. 46 are effective at the end of the first interim or annual
period ending after December 15, 2003, to variable-interest entities in which an
enterprise  holds a variable  interest that it acquired before February 1, 2003.
FIN No. 46 is the guidance that determines (1) whether consolidation is required
under the "controlling financial interest" model of Accounting Research Bulletin
No. 51, "Consolidated  Financial  statements",  or other existing  authoritative
guidance, or, alternatively,  (2) whether the variable-interest  model under FIN
No. 46 should be used to account for existing and new entities.  The adoption of
FIN  No.  46 did  not  have  any  material  impact  on the  Company's  financial
statements or results of operations.

In December  2003,  the FASB  reissued  FIN 46 with  certain  modifications  and
clarifications.  Application  of this  guidance was  effective  for interests in
certain  VIEs  commonly  referred to as  special-purpose  entities  (SPEs) as of
December 31, 2003.  Application  for all other types of entities is required for
periods ending after March 15, 2004, unless previously applied.

                                       13
<PAGE>

During the fourth quarter of 2003, the Company applied the provisions of FIN 46R
to a wholly owned  subsidiary  trust that issued trust  preferred  securities to
third-party   investors.   The   application   of  FIN  46R   resulted   in  the
deconsolidation of the wholly owned subsidiary trust. The assets and liabilities
of the subsidiary trust that was  deconsolidated  totaled $10.2 million and $9.9
million, respectively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the possible  chance of loss from  unfavorable  changes in market
prices and rates.  These changes may result in a reduction of current and future
period net interest income, which is the favorable spread earned from the excess
of  interest  income  on  interest-earning   assets  over  interest  expense  on
interest-bearing liabilities.

The Company considers interest rate risk to be its most significant market risk,
which could  potentially  have the greatest  impact on operating  earnings.  The
structure  of  the  Company's  loan  and  deposit  portfolios  is  such  that  a
significant  decline in interest rates may have a negative  impact on net market
values and net interest income. The Company monitors whether material changes in
market risk have occurred  since December 31, 2003. The Company does not believe
that any material  adverse  changes in market risk exposures have occurred since
December 31, 2003.

The current period earnings growth reflects the Company's  success in increasing
its net interest income during an environment of declining  interest rates.  The
Company has made significant  progress in restructuring  its loan portfolio,  in
attracting  lower costing core checking  accounts and repricing  higher  costing
certificates  of deposit at lower  rates,  collectively  allowing the Company to
maintain more consistent net interest income.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period  covered by this report,  management  of the Company
carried out an evaluation,  under the supervision and with the  participation of
the Company's  principal  executive officer and principal  financial officer, of
the effectiveness of the Company's disclosure controls and procedures.  Based on
this  evaluation,  the  Company's  principal  executive  officer  and  principal
financial  officer  concluded  that  the  Company's   disclosure   controls  and
procedures are effective in ensuring that  information  required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. It should be noted that the design of the Company's  disclosure  controls
and procedures is based in part upon certain  reasonable  assumptions  about the
likelihood of future events,  and there can be no reasonable  assurance that any
design of  disclosure  controls and  procedures  will  succeed in achieving  its
stated goals under all potential  future  conditions,  regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's  disclosure  controls and procedures are, in fact,  effective at a
reasonable assurance level.

In addition,  there have been no changes in the Company's  internal control over
financial  reporting  (to the extent  that  elements of  internal  control  over
financial  reporting are subsumed  within  disclosure  controls and  procedures)
identified in connection  with the evaluation  described in the above  paragraph
that occurred  during the Company's  last fiscal  quarter,  that has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

                                       14
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is currently  not engaged in any material  legal  proceedings.  From
time to  time,  the Bank is a party to legal  proceedings  within  the  ordinary
course of business wherein it enforces its security interest in loans, and other
matters of similar nature.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5.  OTHER INFORMATION

Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

     The following exhibit is filed herewith:

Exhibit
Number   Title
-----    -----

 31      Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 32      Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002

b) Reports on Form 8-K:

A Form 8-K was filed on January 8, 2004 under Item 5. Other  Events and Required
FD Disclosure, and Item 7. Financial Statements, Pro Forma Financial Information
and  Exhibits,  reporting  the Company had  completed a previously  announced 5%
stock  repurchase  program  and had  adopted  a new  program  to  repurchase  an
additional  100,000 shares of common stock,  representing 2.4% of its issued and
outstanding shares.

A Form 8-K was filed on January 15, 2004 under Item 7. Financial Statements, Pro
Forma Financial Information and Exhibits,  and Item 9. Regulation FD Disclosure,
reporting the Company announced its unaudited  financial results for the quarter
ended December 31, 2003 and the year ended December 31, 2003.

                                       15
<PAGE>

A Form 8-K/A was filed on January 20, 2004,  as Amendment  No. 1 to the Form 8-K
filed on January 15, 2004 to correctly file the Form 8-K under Item 7. Financial
statements,  Pro Forma Financial Information and Exhibits,  and Item 12. Results
of Operations  and  Financial  Condition,  reporting  the Company  announced its
unaudited  financial  results for the quarter and year ended  December 31, 2003,
rather than under Items 7 and 9 as previously reported on the Form 8-K.

A Form 8-K was filed on January 8, 2004 under Item 5. Other  Events and Required
FD Disclosure, and Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits,  reporting the Bank had  completed the  acquisition  of two branch
offices from  Central  Carolina  Bank, a Division of National  Bank of Commerce,
located in New Bern, North Carolina and Greenville, North Carolina.

A Form 8-K was filed on March 24, 2004 under Item 5. Other  Events and  Required
FD Disclosure, and Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits,  reporting a 3-for-2 common stock split in the form of a 50% stock
dividend, payable on April 23, 2004.

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly caused this  Quarterly  Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.

                            FIRST SOUTH BANCORP, INC.

                            /s/ William L. Wall
                            -------------------
                            William L. Wall
                            Executive Vice President
                            Chief Financial Officer
                            (Principal Financial Officer)

                            /s/ Kristie W. Hawkins
                            ----------------------
                            Kristie W. Hawkins
                            Controller
                            Treasurer
                            (Principal Accounting Officer)

Date:    May 7, 2004

                                       16