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 September 30, 2003.

[ ]  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 November 6, 2003: 4,179,435

<PAGE>

                                    CONTENTS

PART I.   FINANCIAL INFORMATION                                             PAGE
          ---------------------                                             ----

Item 1.   Financial Statements

          Consolidated Statements of Financial Condition as of
          September 30, 2003 (unaudited) and December 31, 2002                1

          Consolidated Statements of Operations for the Three and Nine
          Months Ended September 30, 2003 and 2002 (unaudited)                2

          Consolidated Statements of Stockholders' Equity for the Nine
          Months Ended September 30, 2003 (unaudited)                         3

          Consolidated Statements of Cash Flows for the Nine Months
          Ended September 30, 2003 and 2002 (unaudited)                       4

          Notes to Consolidated Financial Statements (unaudited)              5

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                               8

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

<PAGE>

ITEM 1.   FINANCIAL STATEMENTS

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30              DECEMBER 31
                                                                             2003                     2002
                                                                        --------------           --------------
               ASSETS                                                    (UNAUDITED)
<S>                                                                     <C>                      <C>
Cash and due from banks                                                 $   30,725,717           $   30,540,790
Interest-bearing deposits in financial institutions                          9,747,532                3,931,369
Investment securities - available for sale                                  50,759,096               55,786,842
Mortgage-backed securities - available for sale                             12,716,950               23,526,435
Loans and leases receivable, net:
  Held for sale                                                             12,144,445               38,664,967
  Held for investment                                                      511,471,736              452,248,942
Premises and equipment, net                                                  7,891,765                7,825,003
Deferred income taxes                                                          632,596                       --
Real estate owned                                                               89,194                  401,632
Federal Home Loan Bank of Atlanta stock, at cost
     which approximates market                                               2,127,200                2,402,500
Accrued interest receivable                                                  3,210,021                3,403,195
Goodwill                                                                     4,218,575                4,218,576
Mortgage servicing rights                                                    1,975,951                1,642,172
Prepaid expenses and other assets                                            4,726,535                2,544,807
Note receivable                                                              1,276,000                1,336,194
                                                                        --------------           --------------

     Total assets                                                       $  653,713,313           $  628,473,424
                                                                        ==============           ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
  Demand                                                                $  218,119,132           $  199,615,945
  Savings                                                                   19,902,132               18,950,380
  Large denomination certificates of deposit                               105,928,722               80,021,790
  Other time                                                               231,632,854              227,739,049
                                                                        --------------           --------------
     Total deposits                                                        575,582,840              526,327,164
Borrowed money                                                               5,774,575               38,194,727
Trust preferred securities                                                  10,000,000                       --
Other liabilities                                                            9,992,055               13,851,721
                                                                        --------------           --------------
     Total liabilities                                                     601,349,470              578,373,612

Common stock, $.01 par value, 8,000,000 shares authorized,
  6,545,848 shares issued                                                       65,458                   65,458
Additional paid-in capital                                                  48,297,608               48,466,569
Retained earnings, substantially restricted                                 41,298,370               35,086,795
Treasury stock at cost, 2,395,818 and 2,341,936 shares                     (39,999,852)             (37,317,469)
Accumulated other comprehensive income, net                                  2,702,259                3,798,459
                                                                        --------------           --------------
     Total stockholders' equity                                             52,363,843               50,099,812
                                                                        --------------           --------------

     Total liabilities and stockholders' equity                         $  653,713,313           $  628,473,424
                                                                        ==============           ==============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       1
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                         SEPTEMBER 30                    SEPTEMBER 30
                                                                 ============================    ============================
                                                                     2003            2002            2003            2002
                                                                 ============================    ============================
<S>                                                              <C>             <C>             <C>             <C>
Interest income:
  Interest and fees on loans                                     $  8,145,992    $  7,712,229    $ 24,104,360    $ 22,853,529
  Interest and dividends on investments and deposits                1,070,908       1,514,140       3,503,417       4,605,337
                                                                 ------------    ------------    ------------    ------------
          Total interest income                                     9,216,900       9,226,369      27,607,777      27,458,866
                                                                 ------------    ------------    ------------    ------------

Interest expense:
  Interest on deposits                                              2,396,706       3,030,039       7,749,619       9,562,124
  Interest on borrowings                                               24,918          12,919          97,764          39,860
  Interest trust preferred securities                                   5,680               0           5,680               0
                                                                 ------------    ------------    ------------    ------------
          Total interest expense                                    2,427,304       3,042,958       7,853,063       9,601,984
                                                                 ------------    ------------    ------------    ------------

Net interest income before provision for possible loan losses       6,789,596       6,183,411      19,754,714      17,856,882
Provision for  possible loan losses                                   395,000         430,000         850,919       1,072,000
                                                                 ------------    ------------    ------------    ------------
          Net  interest income                                      6,394,596       5,753,411      18,903,795      16,784,882
                                                                 ------------    ------------    ------------    ------------
Noninterest income:
  Loan fees and service charges                                     1,549,982       1,212,966       4,426,508       3,314,124
  Loan servicing fees                                                 198,024         182,816         493,111         541,092
  Gain on sale of real estate, net                                     75,082             346         117,322          75,295
  Gain on sale of mortgage loans                                      800,816         472,781       2,600,907       1,168,568
  Gain on sale of mortgage-backed securities                          122,800          30,177         291,738          82,843
  Other  income                                                       208,099         222,347         631,431         654,297
                                                                 ------------    ------------    ------------    ------------
          Total noninterest income                                  2,954,803       2,121,433       8,561,017       5,836,219
                                                                 ------------    ------------    ------------    ------------

Noninterest expenses:
  Compensation and fringe benefits                                  2,663,719       2,389,078       7,941,199       7,022,606
  Federal insurance premiums                                           63,447          21,009         106,577          63,245
  Premises and equipment                                              392,216         348,265       1,132,527         960,717
  Advertising                                                          69,718          47,956         164,710         163,911
  Payroll and other taxes                                             238,508         214,541         720,746         647,338
  Data processing                                                     480,678         460,385       1,429,410       1,330,022
  Amortization of mortgage servicing rights                            64,768          39,011         174,177         107,653
  Other                                                               624,100         564,361       1,852,877       1,522,961
                                                                 ------------    ------------    ------------    ------------
          Total noninterest expenses                                4,597,154       4,084,606      13,522,223      11,818,453
                                                                 ------------    ------------    ------------    ------------

Income before income taxes                                          4,752,245       3,790,238      13,942,589      10,802,648

Income taxes                                                        1,786,081       1,335,735       5,246,243       3,816,508
                                                                 ------------    ------------    ------------    ------------

NET INCOME                                                       $  2,966,164    $  2,454,503    $  8,696,346    $  6,986,140
                                                                 ============    ============    ============    ============

Per share data:
Basic earnings per share                                         $       0.72    $       0.56    $       2.10    $       1.59
Diluted earnings per share                                       $       0.68    $       0.53    $       1.98    $       1.50
Dividends per share                                              $       0.20    $       0.17    $       0.60    $       0.51
Weighted average shares Basic                                       4,138,741       4,355,880       4,144,779       4,403,670
Weighted average shares Diluted                                     4,392,976       4,647,378       4,396,192       4,654,174
</TABLE>

See Notes to Consolidated Financial Statements.

                                       2
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(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, 2002          $     65,458     $ 48,466,569     $ 35,086,795    $(37,317,469)    $  3,798,459    $ 50,099,812

Net income                                                              8,696,346                                        8,696,346

Other comprehensive income, net
  of taxes                                                                                              (1,096,200)     (1,096,200)

Exercise of stock options                               (168,961)                          781,269                         612,308

Acquisition of treasury shares                                                          (3,463,652)                     (3,463,652)

Dividends ($.60 per share)                                             (2,484,771)                                      (2,484,771)
                                   ------------     ------------     ------------    -------------    ------------    ------------

Balance September 30, 2003         $     65,458     $ 48,297,608     $ 41,298,370     $(39,999,852)   $  2,702,259    $ 52,363,843
                                   ============     ============     ============    =============    ============    ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                         September 30
                                                                               ---------------------------------
                                                                                         2003               2002
                                                                               ---------------------------------
<S>                                                                            <C>                <C>
Operating activities:
     Net Income                                                                $    8,696,346     $    6,986,140
     Adjustments to reconcile net income to net cash provided
       in operating activities:
           Provision for loan losses                                                  850,919          1,072,000
           Depreciation                                                               527,287            464,899
           Amortization of discounts on securities, net                              (126,024)          (139,896)
           Gain on disposal of premises and equipment and
             real estate owned                                                       (113,391)          (157,403)
           Gain on loans held for sale and mortgage-backed securities              (2,892,645)        (1,251,410)
           Originations of loans held for sale, net                              (108,730,666)       (53,547,272)
           Proceeds from sale of loans held for sale                              128,900,000         56,521,075
           Other operating activities                                              (2,322,332)         2,616,751
                                                                               --------------     --------------
               Net cash provided in operating activities                           24,789,494         12,564,884
                                                                               --------------     --------------
Investing activities:
     Proceeds from maturities of investments securities available for sale          4,000,000                 --
     Proceeds from principal repayments and sales of
       mortgage-backed securities available for sale                               19,439,024         11,322,869
     Originations of loans held for investment, net of principal repayments       (60,383,622)       (52,559,978)
     Proceeds from disposal of premises and equipment and
       real estate owned                                                              723,598          1,126,313
     Redemption of FHLB stock                                                         275,300                 --
     Purchases of premises and equipment                                             (581,909)          (492,143)
     Repayment of note receivable                                                      60,194             20,890
                                                                               --------------     --------------
               Net cash used in investing activities                              (36,467,415)       (40,582,049)
                                                                               --------------     --------------
Financing activities:
     Net increase in deposits                                                      49,255,676         48,777,773
     Proceeds from FHLB borrowings                                                168,900,000         19,500,000
     Repayments of FHLB borrowings                                               (202,900,000)       (20,500,000)
     Issuance of trust preferred securities                                        10,000,000                 --
     Purchase of treasury shares                                                   (7,280,660)        (5,265,380)
     Cash paid for fractional shares                                                       --             (5,812)
     Cash dividends paid                                                           (2,484,771)        (2,232,705)
     Proceeds from exercise of stock options                                          608,919            228,116
     Net change in repurchase agreements                                            1,579,847           (258,461)
                                                                               --------------     --------------
               Net cash provided by financing activities                           17,679,011         40,243,531
                                                                               --------------     --------------

Increase in cash and cash equivalents                                               6,001,090         12,226,366

Cash and cash equivalents, beginning of period                                     34,472,159         21,683,082
                                                                               --------------     --------------

Cash and cash equivalents, end of period                                       $   40,473,249     $   33,909,448
                                                                               ==============     ==============

Supplemental disclosures:
     Real estate acquired in settlement of loans                               $      309,909     $      519,184
     Exchange of loans for mortgage-backed securities                          $    8,952,095     $           --
     Dividends declared, not paid                                              $      830,006     $      731,872
</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  three and nine  month
periods ended September 30, 2003 are not  necessarily  indicative of the results
of operations that may be expected for the year ended December 31, 2003.

NOTE 3. STOCK  SPLIT.  On March 28,  2002 the Company  declared a  three-for-two
stock  split,  in the form of a 50% stock  dividend,  payable  April 19, 2002 to
stockholders of record as of April 8, 2002. Stockholders received one additional
share of common  stock for every two shares held on the record  date.  All prior
period share and per share data has been adjusted to reflect the stock split.

NOTE 4. 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.  SFAS No. 142  requires the Company to  discontinue  the  amortization  of
goodwill associated with acquisitions accounted for under the purchase method of
accounting.  SFAS  No.  147  requires  the  Company  to  cease  amortization  of
unidentifiable intangible assets associated with certain branch acquisitions. As
a result of applying the  provisions of SFAS No.'s 142 and 147,  goodwill is not
amortized, but reviewed for potential impairment on an annual basis. The Company
has performed its annual  impairment  test and has determined  there has been no
impairment of goodwill.

NOTE 5. DIVIDENDS  DECLARED.  On September 18, 2003, the Company declared a cash
dividend  of $0.20 per share,  payable on October 24,  2003 to  stockholders  of
record as of October 3, 2003. This dividend payment represents a payout ratio of
27.8% of the basic earnings per share for the quarter ended  September 30, 2003,
and is the Company's twenty-sixth consecutive quarterly cash dividend.

NOTE 6. EARNINGS PER SHARE.  Basic and diluted  earnings per share for the three
and nine month  periods ended  September 30, 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 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

                                       5
<PAGE>

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 three and nine month periods ended September 30, 2003,  4,500 options
were  granted  under the Plan,  respectively.  The  weighted  average  remaining
contractual life of currently  outstanding  options under the Plan is 60 months.
At September 30, 2003,  585,530 options were outstanding and options for 492,592
shares of common stock were reserved for future issuance for the Plan(s).  As of
September 30, 2003, 102,900 options had been exercised under the Director Plan.

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 decreased to the pro forma amounts indicated below.

Three Months Ended September 30, 2003                As Reported      Pro Forma
-------------------------------------                -----------      ---------
Net income attributable to common shareholders       $2,966,164      $2,935,393
Stock based compensation                             $        0      $   46,623
Net income per share - basic                         $      .72      $      .71
Net income per share - diluted                       $      .68      $      .67

Nine Months Ended September 30, 2003                 As Reported      Pro Forma
------------------------------------                 -----------      ---------
Net income attributable to common shareholders       $8,696,346      $8,604,032
Stock based compensation                             $        0      $  139,869
Net income per share - basic                         $     2.10      $     2.08
Net income per share - diluted                       $     1.98      $     1.96

NOTE 8. 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.
Information  concerning the Company's other  comprehensive  income for the three
and nine month periods ended September 30, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>
                                            Three Months Ended                Nine Months Ended
                                              September 30,                     September 30,
                                          2003             2002             2003             2002
                                          ----             ----             ----             ----
<S>                                   <C>              <C>              <C>              <C>
Net income                            $  2,966,164     $  2,454,503     $  8,696,346     $  6,986,140
Reclassification of (gains) losses
  recognized in net income                (122,800)         (30,176)        (291,738)         (82,842)
Gains (losses) unrealized,
  net of income taxes                     (538,336)         803,901         (804,462)       1,296,700
                                      ------------     ------------     ------------     ------------
Other comprehensive income (loss)         (661,136)         773,725       (1,096,200)       1,213,858
                                      ------------     ------------     ------------     ------------
Comprehensive income                  $  2,305,028     $  3,228,228     $  7,600,146     $  8,199,998
                                      ============     ============     ============     ============
</TABLE>

                                       6
<PAGE>

NOTE 9. RECLASSIFICATIONS. Certain amounts reported in the three and nine months
ended September 30, 2002 have been  reclassified to conform to the  presentation
for the three and nine months ended September 30, 2003. 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 10.  TRUST  PREFERRED  SECURITIES.  On  September  26,  2003,  the  Company
completed the private  placement in a pooled  offering of  $10,000,000  of trust
preferred  securities,  issued by its  Delaware  statutory  trust,  First  South
Preferred  Trust I. The trust  preferred  securities  bear interest at a rate of
2.95% over three-month LIBOR, payable quarterly.  The trust preferred securities
have  a 30  year  maturity  and  are  redeemable  after  5  years  with  certain
exceptions.  For regulatory purposes, the $10.0 million total of trust preferred
securities  qualifies as Tier 1 capital in accordance with regulatory  reporting
requirements.  The Company  intends to use the proceeds to support future growth
and for general corporate purposes.

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.

NOTE 12. SIGNIFICANT  ACTIVITIES AND SUBSEQUENT EVENTS. On October 29, 2003, the
Bank signed a Purchase and Assumption  Agreement (the  "Agreement") with Central
Carolina Bank ("CCB"),  a Division of National Bank of Commerce,  to acquire two
of CCB's branch  offices  located in  Greenville,  North  Carolina and New Bern,
North  Carolina,  subject to regulatory  approval and certain other  conditions.
Under terms of the  Agreement,  the Bank will assume the deposits of the two CCB
offices  for a  premium  of  approximately  1.5% of the  assumed  deposits,  and
purchase loans, fixed assets and certain other assets associated with the branch
offices.  At September 30, 2003,  the deposits of these branch  offices  totaled
approximately  $17.0 million.  Both branch offices will become branch offices of
the Bank,  and the  transaction is expected to be completed in the first quarter
of 2004.

                                       7
<PAGE>

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

The Company has engaged 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 Bank's results of operations.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

Total  assets  increased  to $653.7  million at  September  30, 2003 from $628.5
million at December 31, 2002, reflecting a 5.4% annualized internal growth rate.
Earning  assets  increased to $599.0  million at September  30, 2003 from $576.6
million at December 31, 2002,  reflecting  growth of the commercial and consumer
loan portfolio,  as further discussed below.  Earning assets were 91.6% of total
assets at September 30, 2003 compared to 91.8% at December 31, 2002.

Interest-bearing  overnight deposits in financial institutions were $9.7 million
at September 30, 2003, compared to $3.9 million at December 31, 2002.  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 $63.5 million
at  September  30, 2002 and $79.3  million at December  31,  2002.  The Bank has
implemented strategies to sell certain securities during favorable interest rate
windows,  and securitize  certain  mortgage loans  previously held for sale into
mortgage-backed  securities,  to maintain its  regulatory  liquidity at required
levels.  The Bank sold $7.1 million and $10.1 million of  securities  during the
three and nine months ended September 30, 2003,  compared to no sales during the
three months and $1.5 million  sold during the nine months ended  September  30,
2002.  The Bank  securitized  no mortgage loans during the three months and $9.0
million into  mortgage-backed  securities during the nine months ended September
30,  2003,  compared  to no  mortgage  loans  securitized  into  mortgage-backed
securities during the three and nine months ended September 30, 2002.

Loans held for sale  declined to $12.1  million at September 30, 2003 from $38.7
million at December 31, 2002.  The Bank sold $49.9 million and $128.9 million of
loans  during the three and nine months  ended  September  30, 2003  compared to
$15.3  million and $56.4  million  sold  during the three and nine months  ended
September 30, 2002, taking advantage of refinancing volumes,  current prices and
protecting itself from the risk of rising interest rates.

Loans and leases held for  investment  increased to $511.5  million at September
30, 2003 from $452.2 million at December 31, 2002, reflecting a 17.5% annualized
growth rate during the nine month period.  To support the risk  associated  with
its commercial loan portfolio,  the Bank maintained  reserves for potential loan
losses of $7.5  million at  September  30,  2003,  compared  to $7.0  million at
December  31,  2002.  The  ratio of  reserves  for loan  losses  to total  loans
outstanding,  net of loans in process and deferred loan fees,  was 1.4%, at both
September 30, 2003 and December 31, 2002.

Deposits  increased to $575.6  million at September 30, 2003 from $526.3 million
at December 31, 2002.  Checking accounts  increased at an annualized growth rate
of 12.4% to $218.1 million at September 30, 2003 from $199.6 million at December
31,  2002,  resulting  from the Bank's  efforts to attract  more lower cost core
checking accounts. Time deposits increased at an annualized growth rate of 12.9%
to $337.6  million at  September  30, 2003 from $307.8  million at December  31,
2002.

                                       8
<PAGE>

The Bank had no  outstanding  FHLB advances at September  30, 2003,  compared to
$34.0 million at December 31, 2002. A portion of the above  referenced loan sale
proceeds were applied to the repayment of FHLB advances.  Borrowings in the form
of  repurchase  agreements  were $5.5  million at  September  30,  2003 and $4.2
million at December  31, 2002.  These  borrowings  represent  funds held in cash
management accounts for commercial banking customers.

On September 26, 2003, the Company  completed the private  placement in a pooled
offering  of  $10.0  million  of  trust  preferred  securities.  For  regulatory
purposes,  the $10.0 million total of trust  preferred  securities  qualifies as
Tier 1 capital in accordance with regulatory reporting requirements. The Company
intends to use the proceeds to support  future growth and for general  corporate
purposes.  See Note 10 of  "Notes  to  Consolidated  Financial  Statements"  for
additional information.

Stockholders'  equity was $52.4 million at September 30, 2003, compared to $50.1
million at December 31, 2002.  See  "Consolidated  Statements  of  Stockholders'
Equity" for  additional  information.  The Company's  equity to assets ratio was
8.0% at both  September  30,  2003 and  December  31,  2002.  Accumulated  other
comprehensive  income  declined to $2.7 million at September  30, 2003 from $3.8
million at December 31, 2002,  reflecting the impact of current market rates and
the securities sales as previously discussed.

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 $61.7 million at September 30, 2003, compared to
$50.0 million at December 31, 2002,  reflecting the infusion of the net proceeds
from the trust  preferred  securities  discussed  above.  The Bank's  regulatory
capital is substantially in excess of all regulatory capital  requirements.  See
"Liquidity and Capital Resources" below for additional information.

During the quarter ended September 30, 2003, the Company purchased 100 shares of
its common stock through a private  purchase  transaction.  Purchased shares are
being held as treasury  stock,  at cost. At September 30, 2003,  treasury shares
held were  2,395,818  totaling  $40.0  million,  compared  to  2,341,936  shares
totaling  $37.3  million at December 31, 2002.  During the three and nine months
ended September 30, 2003, 16,600 and 47,100 shares, respectively, were issued as
a result of the exercise of stock options,  compared to 11,700 and 18,075 shares
issued during the three and nine months ended September 30, 2002.

On September 18, 2003,  the Company  declared a quarterly cash dividend of $0.20
per share,  payable  October 24, 2003 to stockholders of record as of October 3,
2003.  This  dividend  payment  represents  a payout ratio of 27.8% of the basic
earnings  for  the  quarter  ended  September  30,  2003,  and is the  Company's
twenty-sixth consecutive quarterly cash dividend.

COMPARISON OF OPERATING RESULTS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002

GENERAL.  Net income for the three and nine months ended  September 30, 2003 was
$3.0 million and $8.7 million, compared to $2.5 million and $7.0 million for the
three and nine months ended  September  30, 2002.  Basic  earnings per share was
$0.72 and $2.10 per share  for the three and nine  months  ended  September  30,
2003,  compared to $0.56 and $1.59 per share for the three and nine months ended
September 30, 2002, adjusted for the stock split. Diluted earnings per share was
$0.68 and $1.98 per share  for the three and nine  months  ended  September  30,
2003,  compared to $0.53 and $1.50 per share for the three and nine months ended
September 30, 2002, adjusted for the stock split.

                                       9
<PAGE>

INTEREST  INCOME.  Interest  income was $9.2  million and $27.6  million for the
three and nine months ended  September  30,  2003,  compared to $9.2 million and
$27.5  million  for  the  three  and  nine  months  ended  September  30,  2002.
Maintaining  consistent  interest income is due to the increase in the volume of
average  interest  earning  assets,  although  a  decline  in  average  yield on
interest-earning  assets  occurred  between  the  respective  periods.   Average
interest-earning assets were $601.9 million and $590.2 million for the three and
nine months  ended  September  30, 2003,  compared to $543.0  million and $526.5
million for the three and nine months ended  September 30, 2002,  reflecting the
growth loans and leases held for sale as discussed  above.  The yield on average
interest-earning  assets was 6.1% and 6.2% for the three and nine  months  ended
September  30,  2003,  compared  to 6.8% and 7.0% for the three and nine  months
ended September 30, 2002.

INTEREST  EXPENSE.  Interest expense on deposits and borrowings was $2.4 million
and $7.9  million  for the three  and nine  months  ended  September  30,  2003,
compared to $3.0  million and $9.6  million for the three and nine months  ended
September 30, 2002,  reflecting  the decline in interest rates and the change in
the deposit mix as discussed above.  Average deposits and borrowings were $591.2
million and $579.7  million for the three and nine months  ended  September  30,
2003,  compared  to $520.4  million  and $502.9  million  for the three and nine
months ended  September  30, 2002.  The effective  cost of average  deposits and
borrowings  was 1.6% and 1.8% for the three and nine months ended  September 30,
2003,  compared to 2.3% and 2.6% for the three and nine months  ended  September
30, 2002.

NET INTEREST INCOME.  Net interest income was $6.8 million and $19.8 million for
the three and nine months ended September 30, 2003, compared to $6.2 million and
$17.9  million for the three and nine  months  ended  September  30,  2002.  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% and 4.4% for both the three and nine month periods ended September 30, 2003
and September 30, 2002. The net yield on  interest-earning  assets (net interest
income divided by average  interest-earning  assets) was 4.5% for both the three
and nine months  ended  September  30,  2003,  compared to 4.6% and 4.5% for the
three and nine months ended September 30, 2002.

PROVISION FOR LOAN LOSSES. The Bank recorded approximately $395,000 and $851,000
of provisions  for loan losses during the three and nine months ended  September
30, 2003,  compared to $430,000 and $1.1 million  recorded in the three and nine
months ended September 30, 2002.  These provisions were necessary to support the
risk  associated  with the growth in the Bank's loan  portfolio.  Provisions are
charged to current operations and the Bank believes the resulting  allowance for
loan  losses is  adequate  to absorb  probable  losses on loans  that may become
uncollectible.  Additions to the allowance 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.  The Bank  believes the current  level of its reserves for
loan losses is adequate to provide for probable  future losses,  however,  there
are no assurances that future losses, if any, will not exceed estimated amounts.

NONINTEREST INCOME. Noninterest income was $3.0 million and $8.6 million for the
three and nine months ended  September 30, 2003,  compared $2.1 million and $5.8
million for the three and nine months  ended  September  30,  2002.  Noninterest
income consists of fees and service charges earned on loans,  service charges on
deposit  accounts,  gains  from  sales  of  loans  and  securities,   and  other
miscellaneous  income.  Fees and  service  charges  were $1.7  million  and $4.9
million for the three and nine months ended September 30, 2003, compared to $1.4
million and $3.9 million for the three and

                                       10
<PAGE>

nine months ended  September 30, 2002. The increase in fees and service  charges
during the  current  periods is  attributable  to a greater  volume of loans and
checking  deposits as discussed above. In addition,  the Bank recorded  $924,000
and $2.9  million of gains from sales of loans and  securities  during the three
and nine months ended September 30, 2003,  compared to $503,000 and $1.3 million
during the three and nine months ended September 30, 2002.

NONINTEREST  EXPENSE.  Noninterest  expenses were $4.6 million and $13.5 million
for the three and nine months ended September 30, 2003, compared to $4.1 million
and $11.8 million for the three and nine months ended  September  30, 2002.  The
largest component of these expenses,  compensation and fringe benefits, was $2.7
million and $7.9 million for the three and nine months ended September 30, 2003,
compared to $2.4  million and $7.0  million for the three and nine months  ended
September 30, 2002. The Bank's fulltime  equivalent  employees increased by 8.4%
to 244 at September 30, 2003 from 225 at September  30, 2002.  The growth is due
to  additional  personnel  resulting  from opening two new  full-service  branch
offices,  and administrative staff required to support the 8.8% growth in assets
between the periods.

Data processing expense has 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. 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.

INCOME TAXES. Income tax expense was $1.8 million and $5.2 million for the three
and nine months  ended  September  30,  2003,  compared to $1.3 million and $3.8
million for the three and nine months ended  September  30, 2002.  The change in
the amounts of income tax  provisions  reflects the changes in pretax income and
the estimated income tax rates in effect during the respective periods.

LIQUIDITY AND CAPITAL RESOURCES

As a state  chartered  commercial  bank,  the Bank must meet  certain  liquidity
guidelines established by the State of North Carolina Office of the Commissioner
of Banks (the "Commissioner").  The Bank's liquidity ratio at September 30, 2003
exceeded the requirements under such guidelines.  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. At September 30,
2003,   the  Bank  had  cash,   deposits   in  banks,   investment   securities,
mortgage-backed  securities,  FHLB stock and loans held for sale totaling $118.2
million,  or 20.3% of deposits and borrowings,  compared to $154.9  million,  or
27.4% of deposits and borrowings at December 31, 2002.

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 FHLB 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 Bank also attempts to
manage its deposit pricing in order to maintain a desired deposit mix.

                                       11
<PAGE>

The Company has  completed the private  placement in a pooled  offering of $10.0
million  of trust  preferred  securities.  For  regulatory  purposes,  the $10.0
million of trust preferred  securities qualifies as Tier 1 capital in accordance
with regulatory reporting requirements.

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 September 30, 2003 and December 31, 2002.

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. As a result,  interest rates
have greater impact on the Company's  performance than do the effects of 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 is reflected in the cost and prices the Company 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.

     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.

                                       12
<PAGE>

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  to 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.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003 the Financial  Accounting  Standards  Board (the "FASB")  issued
FASB  Interpretation  No. 46 ("FIN 46"),  "Consolidation  of  Variable  Interest
Entities (an  interpretation of ARB No. 51)." FIN 46 addresses the consolidation
by business  enterprises of certain variable interest entities.  Management does
not anticipate  the  implementation  of FIN 46 to have a material  impact on the
Company's consolidated financial position or consolidated results of operations.

In April 2003, the FASB issued Statement of Financial  Accounting  Standards No.
149,  "Amendment  of  Statement  133  on  Derivative   Instruments  and  Hedging
Activities".  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
(collectively referred to as derivatives) and for hedging activities.  Statement
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 Company is presently evaluating the effect
of this pronouncement.

                                       13
<PAGE>

In May 2003,  the FASB issued  Statement of Financial  Accounting  Standards No.
150, "Accounting for Certain Financial  Instruments with Characteristics of both
Liabilities and Equity".  Statement 150 establishes standards for classification
and measurement of certain financial  instruments with  characteristics  of both
liabilities and equity. It requires the classification of a financial instrument
that is within  its scope as a  liability  (or an asset in some  circumstances).
Many of those  instruments  were  previously  classified as equity.  Some of the
provisions  of  Statement  150 are  consistent  with the current  definition  of
liabilities   in  FASB  Concepts   Statement  No.  6,   "Elements  of  Financial
Statements".  The remaining  provisions of Statement 150 are consistent with the
FASB's proposal to revise that definition to encompass certain  obligations that
a  reporting  entity  can or must  settle  by  issuing  its own  equity  shares,
depending on the nature of the relationship  established  between the holder and
the issuer.  While the FASB plans to revise that definition through an amendment
to Concepts Statement 6, it decided to defer issuing that amendment until it has
concluded its  deliberations on the next phase of this project.  That next phase
will deal with certain compound financial instruments including puttable shares,
convertible  bonds, and dual-indexed  financial  instruments.  This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning  after  June 15,  2003,  except  for  mandatory  redeemable  financial
instruments  of nonpublic  entities.  It is to be  implemented  by reporting the
cumulative  effect  of  a  change  in  an  accounting  principle  for  financial
instruments created before the issuance date of the Statement and still existing
at  the  beginning  of  the  interim  period  of  adoption.  Restatement  is not
permitted.  Management does not anticipate the  implementation of this statement
to have a material impact on the Company's  consolidated  financial  position or
consolidated results of operations.

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 June 30, 2003. The Company does not believe that
any material  adverse  changes in market risk exposures  occurred since June 30,
2003.

The current period earnings growth reflects the Company's  success of 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

                                       14
<PAGE>

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.

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 exhibits are filed herewith:

     Exhibit
     Number    Title
     ------    -----
      31       Certification  Pursuant to Section 302 of the  Sarbanes-Oxley Act
               of 2002

                                       15
<PAGE>

      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 July 18,  2003 under Item
          7.,  Financial   Statements,   Pro  Forma  Financial  Information  and
          Exhibits,  and under Item 9., Regulation FD Disclosure,  reporting the
          Company  issued a press release  announcing  its  unaudited  financial
          results for the three and nine months ended September 30, 2003.

                                   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: November 12, 2003

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