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 June 30, 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
   -----           -----

      Indicate by check mark  whether  registrant  is an  accelerated  filer (as
defined by Rule 12b-2 of the Exchange Act).

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

      Number  of  shares  of common  stock  outstanding  as of  August 4,  2004:
6,222,216

<PAGE>

<TABLE>
<CAPTION>
                                    CONTENTS

PART I.  FINANCIAL INFORMATION                                                                   PAGE

<S>         <C>                                                                                  <C>
Item 1.   Financial Statements

            Consolidated Statements of Financial Condition as of June 30, 2004
             (unaudited) and December 31, 2003                                                     1

            Consolidated Statements of Operations for the Three and Six Months Ended
            June 30, 2004 and 2003 (unaudited)                                                     2

            Consolidated Statement of Stockholders' Equity for the Six Months Ended
            June 30, 2004 (unaudited)                                                              3

            Consolidated Statements of Cash Flows for the Six Months Ended
            June 30, 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                            13

Item 4.     Controls and Procedures                                                               13

PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings                                                                     14

Item 2.     Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      14

Item 3.     Defaults Upon Senior Securities                                                       14

Item 4.     Submission of Matters to a Vote of Security Holders                                   14

Item 5.     Other Information                                                                     15

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

Signatures                                                                                        15

Exhibits                                                                                          16

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

First South Bancorp, Inc.
Consolidated Statements of Financial Condition

                                                                  June 30         December 31
                                                                   2004             2003
                                                               -------------    -------------
                        Assets                                  (unaudited)


<S>                                                            <C>              <C>
Cash and due from banks                                        $  36,233,293    $  34,299,553
Interest-bearing deposits in financial institutions                1,387,137          625,051
Investment securities - available for sale                        41,817,673       50,071,520
Mortgage-backed securities - available for sale                    7,725,088       11,715,052
Mortgage-backed securities - held for investment                   2,841,484               --
Loans and leases receivable, net:
  Held for sale                                                    7,224,474       10,924,148
  Held for investment                                            595,513,670      542,275,778
Premises and equipment, net                                        7,912,115        7,922,588
Real estate owned                                                    204,207          130,798
Federal Home Loan Bank of Atlanta
 stock, at cost which approximates market                          2,000,000        2,127,200
Accrued interest receivable                                        3,164,590        3,073,093
Goodwill                                                           4,218,576        4,218,576
Mortgage servicing rights                                          1,792,082        1,886,522
Identifiable intangible assets                                       306,540               --
Prepaid expenses and other assets                                  6,230,973        5,313,528
Note receivable                                                    1,205,230        1,252,703
                                                               -------------    -------------

          Total assets                                         $ 719,777,132    $ 675,836,110
                                                               =============    =============

Liabilities and Stockholders' Equity

 Deposits:
  Demand                                                       $ 238,432,694    $ 227,863,599
  Savings                                                         20,990,661       20,292,472
  Large denomination certificates of deposit                     106,974,644      107,354,231
  Other time                                                     230,186,484      227,662,871
                                                               -------------    -------------
          Total deposits                                         596,584,483      583,173,173
Borrowed money                                                    43,309,385       19,338,059
Junior subordinated debentures                                    10,000,000       10,000,000
Deferred income taxes                                                654,860        1,114,567
Other liabilities                                                 13,508,409        7,046,758
                                                               -------------    -------------
          Total liabilities                                      664,057,137      620,672,557

  Common stock, $.01 par value, 25,000,000 and 8,000,000
    shares authorized, respectively; 6,222,216 and 4,190,335
    shares issued and outstanding, respectively                       62,222           41,903
  Additional paid-in capital                                      38,006,340       49,020,632
  Retained earnings, substantially restricted                     46,697,864       43,171,318
  Treasury stock at cost                                         (30,258,077)     (39,326,931)
  Accumulated other comprehensive income, net                      1,211,646        2,256,631
                                                               -------------    -------------
           Total stockholders' equity                             55,719,995       55,163,553
                                                               -------------    -------------


           Total liabilities and stockholders' equity          $ 719,777,132    $ 675,836,110
                                                               =============    =============

</TABLE>

See Notes to Consolidated Financial Statements.


                                       1
<PAGE>

<TABLE>
<CAPTION>

First South Bancorp, Inc.
Consolidated Statements of Operations
(unaudited)
                                                          Three Months Ended             Six Months Ended
                                                                June 30                     June 30
                                                       -------------------------    -------------------------
                                                          2004          2003           2004          2003
                                                       -----------   -----------    -----------   -----------
<S>                                                    <C>           <C>            <C>           <C>
Interest income:
  Interest and fees on loans                           $ 8,915,319   $ 8,045,728    $17,301,440   $15,958,368
  Interest and dividends on investments and deposits       894,675     1,203,817      1,869,599     2,432,509
                                                       -----------   -----------    -----------   -----------
           Total interest income                         9,809,994     9,249,545     19,171,039    18,390,877

Interest expense:
  Interest on deposits                                   2,081,401     2,648,485      4,202,136     5,352,914
  Interest on borrowings                                   103,712        35,310        142,534        72,846
  Interest on junior subordinated notes                    103,756            --        207,900            --
                                                       -----------   -----------    -----------   -----------
           Total interest expense                        2,288,869     2,683,795      4,552,570     5,425,760


Net interest income before provision for loan losses     7,521,125     6,565,750     14,618,469    12,965,117
Provision for loan losses                                  400,000       122,000        400,000       455,918
                                                       -----------   -----------    -----------   -----------
           Net  interest income                          7,121,125     6,443,750     14,218,469    12,509,199
                                                       -----------   -----------    -----------   -----------

Non-interest income:
  Loan fees and service charges                          1,733,426     1,533,383      3,246,849     2,876,527
  Loan servicing fees                                      178,979       156,470        358,332       295,087
  Gain (loss) on sale of real estate, net                   14,986        (6,388)        16,486        42,240
  Gain on sale of mortgage loans                            98,381       783,394        245,220     1,800,091
  Gain on sale of mortgage-backed securities                42,928            --         88,844       168,938
  Other  income                                            219,182       219,589        488,509       423,331
                                                       -----------   -----------    -----------   -----------
           Total non-interest income                     2,287,882     2,686,448      4,444,240     5,606,214
                                                       -----------   -----------    -----------   -----------

Non-interest expense:
  Compensation and fringe benefits                       2,856,106     2,632,700      5,832,255     5,277,480
  Federal insurance premiums                                21,936        21,092         43,592        43,130
  Premises and equipment                                   405,601       377,753        807,881       740,311
  Advertising                                               44,095        46,964         82,801        95,492
  Payroll and other taxes                                  257,802       243,259        532,957       482,238
  Data processing                                          504,098       484,888      1,034,059       948,732
  Amortization of intangible assets                         77,088        57,215        142,839       109,409
  Other                                                    624,368       641,795      1,180,038     1,228,277
                                                       -----------   -----------    -----------   -----------
           Total non-interest expense                    4,791,094     4,505,666      9,656,422     8,925,069
                                                       -----------   -----------    -----------   -----------

Income before income taxes                               4,617,913     4,624,532      9,006,287     9,190,344

Income taxes                                             1,713,792     1,737,255      3,326,392     3,460,162
                                                       -----------   -----------    -----------   -----------

Net income                                             $ 2,904,121   $ 2,887,277    $ 5,679,895   $ 5,730,182
                                                       ===========   ===========    ===========   ===========


Per share data: (*)
Basic earnings per share                               $      0.47   $      0.47    $      0.91   $      0.92
Diluted earnings per share                             $      0.44   $      0.44    $      0.87   $      0.87
Dividends per share                                    $      0.17   $      0.13    $      0.34   $      0.27
Weighted average shares Basic                            6,241,314     6,200,401      6,261,764     6,221,802
Weighted average shares Diluted                          6,579,166     6,570,394      6,545,347     6,602,520

</TABLE>

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

See Notes to Consolidated Financial Statements.


                                       2
<PAGE>

<TABLE>
<CAPTION>

First South Bancorp, Inc.
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2004
(unaudited)


                                                              Retained                      Accumulated
                                              Additional      Earnings,                        Other
                                  Common       Paid-in        Substantially   Treasury      Comprehensive
                                  Stock        Capital        Restricted       Stock         Income, 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                                                      5,679,895                                     5,679,895

Three-for-two stock split,
  including fractional shares *      20,828     (10,832,989)     (20,828)     10,832,989                              0


Other comprehensive loss,
 net of taxes                                                                                 (1,044,985)    (1,044,985)

Exercise of stock options               263       (181,303)                      445,869                        264,829

Acquisition of treasury shares         (772)                                  (2,210,004)                    (2,210,776)

Dividends ($ .34 per share)                                    (2,132,521)                                   (2,132,521)
                               ------------   ------------   ------------   ------------    ------------   ------------

Balance, June 30, 2004         $     62,222   $ 38,006,340   $ 46,697,864   $(30,258,077)   $  1,211,646   $ 55,719,995
                               ------------   ------------   ------------   ------------    ------------   ------------

</TABLE>

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


See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

<TABLE>
<CAPTION>

First South Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
                                                                                         Six Months Ended
                                                                                              June 30
                                                                                 ------------------------------
                                                                                     2004             2003
                                                                                 -------------    -------------

Operating activities
<S>                                                                              <C>              <C>
     Net Income                                                                  $   5,679,895    $   5,730,182
     Adjustments to reconcile net income to net cash provided
        in operating activities:
           Provision for loan losses                                                   400,000          455,918
           Depreciation                                                                357,162          339,359
           Impairment of servicing asset                                                98,403          414,668
           Impairment of real estate owned                                                  --           80,000
           Amortization of discounts on securities, net                                (64,224)         (88,889)
           Gain on disposal of premises and equipment and real estate owned            (16,486)         (41,509)
           Gain on sales of loans held for sale and mortgage-backed securities        (334,064)      (1,969,029)
           Originations of loans held for sale, net                                (19,034,114)     (76,092,963)
           Proceeds from sale of loans held for sale                                20,137,524       78,980,794
           Other operating activities                                                5,168,502       (4,062,450)
                                                                                 -------------    -------------
               Net cash provided in operating activities                            12,392,598        3,746,081
                                                                                 -------------    -------------
Investing activities:
     Proceeds from maturities of investment securities available for sale            7,000,000        2,000,000
     Proceeds from principal repayments and sales of
        mortgage-backed securities available for sale                                3,892,187       10,068,728
     Originations of loans held for investment, net of principal repayments        (51,528,056)     (48,074,719)
     Proceeds from disposal of premises and equipment and real estate owned             38,647          444,148
     Redemption of FHLB stock                                                          127,200          275,300
     Purchases of premises and equipment                                              (276,053)         (68,254)
     Repayment of note receivable                                                       47,473           37,187
     Acquisition of two Central Carolina Bank branches                              15,817,778               --
                                                                                 -------------    -------------
               Net cash used in investing activities                               (24,880,824)     (35,317,610)
                                                                                 -------------    -------------
Financing activities:
     Net increase (decrease) in deposits                                            (4,934,963)      54,496,352
     Proceeds from FHLB borrowings                                                 154,300,000      115,400,000
     Repayments of FHLB borrowings                                                (130,800,000)    (134,400,000)
     Purchase of treasury shares                                                    (2,210,890)      (3,460,263)
     Proceeds from exercise of stock options                                           264,829          406,087
     Cash dividends paid                                                            (1,906,250)      (1,541,612)
     Net change in repurchase agreements                                               471,326           16,437
                                                                                 -------------    -------------
               Net cash provided by financing activities                            15,184,052       30,917,001
                                                                                 -------------    -------------

Increase (decrease) in cash and cash equivalents                                     2,695,826         (654,528)

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

Cash and cash equivalents, end of period                                         $  37,620,430    $  33,817,631
                                                                                 =============    =============


Supplemental disclosures:
     Real estate acquired in settlement of loans                                 $      91,206    $     309,909
     Exchange of loans for mortgage-backed securities-held for investment$           2,841,484    $   8,952,095
     Dividends declared, not paid                                                $   1,057,777    $     826,706

</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 Company's  common stock is traded on The Nasdaq  National  Market
under the symbol "FSBK".

Note 2. Basis of Presentation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America 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 accounting principles generally accepted the United States
of America 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 six month  periods ended June 30, 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. 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 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. Earnings Per Share.  Basic and diluted  earnings per share for the three
and six month periods ended June 30, 2004 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. 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 June 30,
2004, no options were granted  under the Plan.  The weighted  average  remaining
contractual life of currently  outstanding  options under the Plan is 52 months.
At June 30, 2004,  825,582  options were  outstanding  and 703,268  options were
reserved for future issuance, adjusted for the stock split. In addition, 223,683
options had been exercised under the Plan, adjusted for the stock split.


                                       5
<PAGE>

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 June 30, 2004                                     As Reported     Pro Forma
--------------------------------                                     -----------     ---------
<S>                                                                   <C>           <C>
Net income attributable to common shareholders                        $2,904,121    $2,884,298
Stock based compensation                                              $        0    $   30,035
Net income per share - basic                                          $      .47    $      .46
Net income per share - diluted                                        $      .44    $      .44


Six Months Ended June 30, 2004                                       As Reported     Pro Forma
------------------------------                                       -----------     ---------
Net income attributable to common shareholders                        $5,679,895    $5,640,249
Stock based compensation                                              $        0    $   60,070
Net income per share - basic                                          $      .91    $      .90
Net income per share - diluted                                        $      .87    $      .86


Three Months Ended June 30, 2003                                     As Reported     Pro Forma
--------------------------------                                     -----------     ---------
Net income attributable to common shareholders                        $2,887,277    $2,857,096
Stock based compensation                                              $        0    $   45,728
Net income per share - basic                                          $      .47    $      .46
Net income per share - diluted                                        $      .44    $      .43

Six Months Ended June 30, 2003                                       As Reported     Pro Forma
------------------------------                                       -----------     ---------
Net income attributable to common shareholders                        $5,730,182    $5,669,821
Stock based compensation                                              $        0    $   91,456
Net income per share - basic                                          $      .92    $      .91
Net income per share - diluted                                        $      .87    $      .86

</TABLE>

Note 7. 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 three and six month periods
ended June 30, 2004 and 2003 is as follows:

<TABLE>
<CAPTION>

                                     Three Months Ended June 30,         Six Months Ended June 30,
                                        2004             2003             2004              2003
                                    ------------      -----------      -----------      -----------

<S>                                  <C>              <C>              <C>              <C>
Net income                           $ 2,904,121      $ 2,887,277      $ 5,679,895      $ 5,730,182
Reclassification of gain on
  sale of securities                     (42,928)               0          (88,844)        (168,938)
Losses unrealized, net
  of income taxes                       (859,901)        (126,511)        (956,101)        (226,126)
                                    ------------      -----------      -----------      -----------
Other comprehensive income (loss)       (902,829)        (126,511)      (1,044,985)        (435,064)
                                    ------------      -----------      -----------      -----------
Comprehensive income                $  2,001,292      $ 2,760,766      $ 4,634,910      $ 5,295,118
                                    ============      ===========      ===========      ===========

</TABLE>


                                       6
<PAGE>

Note  8.  Reclassifications.   Certain  amounts  reported  in  the  Consolidated
Statements of Financial Condition as of December 31, 2003 have been reclassified
to  conform  to the  presentation  for the period  ended  June 30,  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.  Acquisitions.  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.  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) (in thousands):

         Loans receivable                       $2,212
         Premises and equipment                     75
         Identifiable intangible assets            314
         Other assets                               46
         Deposits                              (18,373)
                                               -------
         Net cash received                     $15,818
                                               =======

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 June 30, 2004 and December 31, 2003

Total assets increased to $719.8 million at June 30, 2004 from $675.8 million at
December 31, 2003,  reflecting a 13.0% annualized  internal growth rate. Earning
assets  increased  to $658.5  million at June 30,  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 91.5% of total assets
at June 30, 2004 compared to 91.4% at December 31, 2003.

Interest-bearing  overnight deposits in financial institutions were $1.4 million
at June 30, 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 $49.5 million
at June  30,  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 sufficient liquidity levels. The
Bank sold $916,000 and $2.5 million of securities  available for sale during the
three and six months ended June 30, 2004,  compared to no security  sales during
the three months ended June 30, 2003 and $3.0 million sold during the six months
ended June 30, 2003.  The Bank  securitized  $2.8 million of mortgage loans into
mortgage-backed  securities  held for  investment  during both the three and six
months  ended  June 30,  2004,  compared  to $5.3  million  and $9.0  million of
mortgage loans securitized into mortgage-backed  securities held for sale during
the  three  and six  months  ended  June 30,  2003.  The  total  mortgage-backed
securities  portfolio  was $10.6  million at June 30,  2004,  compared  to $11.7
million at December 31, 2003.


                                       7
<PAGE>

Loans held for sale declined to $7.2 million at June 30, 2004 from $10.9 million
at December 31, 2003.  The sale of loans held for sale declined to $10.5 million
and $20.1 million during the three and six months ended June 30, 2004,  compared
to $39.6  million and $79.0  million  sold during the three and six months ended
June 30, 2003, reflecting a slow down in origination and refinancing volumes due
to a recent  nominal  rise in  interest  rates.  Net loans and  leases  held for
investment  increased to $595.5  million at June 30, 2004 from $542.3 million at
December 31,  2003,  reflecting  a 19.6%  annualized  net growth rate during the
period.  This  growth  reflects  the Bank's  emphasis  on  structuring  its loan
portfolio as a commercial banking entity.

Deposits  increased  to $596.6  million at June 30, 2004 from $583.2  million at
December 31, 2003,  primarily  reflecting the acquisition of two branch offices.
Checking accounts increased at an annualized growth of 9.3% to $238.4 million at
June 30,  2004 from $227.9  million at December  31,  2003,  resulting  from the
Bank's  efforts to attract  more lower  costing  core  checking  accounts.  Time
deposits  increased  to $337.2  million at June 30, 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 $49.5 million at June 30, 2004,
compared  to $26.0  million at  December  31,  2003.  Borrowings  in the form of
repurchase  agreements  were $3.8  million  at June 30,  2004  compared  to $3.3
million at December  31, 2003.  These  borrowings  represent  funds held in cash
management accounts for commercial banking customers.

Stockholders'  equity was $55.7  million  at June 30,  2004,  compared  to $55.2
million at December 31, 2003.  See  "Consolidated  Statements  of  Stockholders'
Equity" for additional  information.  At June 30, 2004, the Company's  equity to
assets  ratio  was  7.7%,  compared  to 8.2% at  December  31,  2003,  primarily
reflecting the growth in earning assets as previously discussed.

Accumulated other comprehensive income declined to $1.2 million at June 30, 2004
from $2.3 million at December 31, 2003,  reflecting the impact of the securities
sales and the recent nominal rise in interest  rates,  as previously  discussed.
See  "Note  8.  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 $64.3 million at June 30, 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  year and prior  period
share and per share data has been adjusted to reflect the stock split.

On June 24, 2004,  the Company also declared a cash dividend of $0.17 per share,
payable July 23, 2004 to stockholders of record as of July 5, 2004, adjusted for
the stock split. This dividend payment represents a payout ratio of 36.2% of the
basic  earnings  per share  for the  quarter  ended  June 30,  2004,  and is the
Company's twenty-ninth consecutive quarterly cash dividend.

During the three and six months ended June 30, 2004, the Company acquired 72,643
and 77,179  shares of its common  stock,  respectively,  through open market and
private purchases  pursuant to a stock repurchase plan previously adopted by the
board of directors.  Shares  acquired via the stock  repurchase plan are held as
treasury stock,  at cost. At June 30, 2004,  treasury shares held were 1,777,784
totaling $30.3 million,  compared to 2,355,513  shares totaling $39.3 million at
December 31,  2003.  During the quarter  ended June 30,  2004,  the Company used
628,610  shares of  treasury  shares to issue  common  stock for the stock split
previously  discussed.  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 three and six months ended June 30, 2004,  23,143
and 27,769  shares,  respectively,  were  issued as a result of the  exercise of
stock options, compared to 14,350 and 30,500 shares, respectively, issued during
the three and six months ended June 30, 2003.


                                       8
<PAGE>

Comparison  of Operating  Results - Three and Six Months Ended June 30, 2004 and
2003

General.  Net income for each of the three and six month  periods ended June 30,
2004 and 2003 was $2.9 million and $5.7 million,  respectively.  Basic  earnings
per share was $0.47 and $0.91 per share for the three and six months  ended June
30,  2004,  compared  to $0.47 and $0.92 per share for the three and six  months
ended June 30, 2003,  adjusted for the stock split.  Diluted  earnings per share
was $0.44 and $0.87,  respectively,  for each of the three and six month periods
ended June 30, 2004 and 2003, adjusted for the stock split.

Core earnings during the three and six months ended June 30, 2004 were supported
by  significant  growth in net interest  income,  reflecting  growth in both the
commercial  and consumer  loan  portfolio  and in lower  costing  core  checking
accounts.  During  the three and six  months  ended  June 30,  2004 the  Company
experienced  much less dependence on gains from mortgage loan sales, as compared
to the three and six  months  ended  June 30,  2003,  which was an  advantageous
period for selling  loans due to increased  origination  and  refinance  volumes
caused primarily by declining interest rates.

Interest  Income.  Interest  income was $9.8  million and $19.2  million for the
three and six months  ended June 30,  2004,  compared to $9.2  million and $18.4
million for the three and six months ended June 30, 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 $655.5  million and
$641.2  million for the three and six months  ended June 30,  2004,  compared to
$595.8  million and $586.0  million for the three and six months  ended June 30,
2003,  reflecting  the  growth  in  loans  and  leases  held for  investment  as
previously discussed.  The yield on average interest-earning assets was 6.0% for
both the three and six months ended June 30, 2004, compared to 6.2% and 6.3% for
the three and six months ended June 30, 2003,  primarily  impacted by an overall
decrease in interest rates between the respective periods.

Interest  Expense.  Interest expense on deposits and borrowings was $2.3 million
and $4.6 million for the three and six months  ended June 30, 2004,  compared to
$2.7  million and $5.4 million for the three and six months ended June 30, 2003,
reflecting  the  impact of  changing  interest  rates and the change in the core
deposit mix as previously discussed. Average deposits and borrowings were $637.9
million  and $629.6  million for the three and six months  ended June 30,  2004,
compared to $585.0 million and $576.1 million for the three and six months ended
June 30, 2003.  The effective  cost of average  deposits and borrowings was 1.4%
and 1.5% for the three and six months ended June 30, 2004,  compared to 1.8% and
1.9% for the three and six months ended June 30, 2003.

Net Interest Income.  Net interest income was $7.5 million and $14.6 million for
the three and six months ended June 30, 2004, compared to $6.6 million and $13.0
million for the three and six months  ended June 30,  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 4.6% and 4.5% for the
three and six months  ended June 30,  2004,  compared to 4.4% for both the three
and six months ended June 30,  2003.  The net yield on  interest-earning  assets
(net interest  income divided by average  interest-earning  assets) was 4.6% for
both the three and six months ended June 30, 2004, compared to 4.4% for both the
three and six months ended June 30, 2003.


                                       9
<PAGE>

Provision  for Loan Losses.  The Bank recorded  $400,000 of provisions  for loan
losses  for both the three and six  months  ended  June 30,  2004,  compared  to
$122,000 and $456,000  recorded in the three and six months ended June 30, 2003.
Provisions  were necessary to support  inherent  losses and 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  maintained
reserves  for loan  losses of $7.9  million at June 30,  2004,  compared to $7.6
million at December  31,  2003.  The ratio of reserves  for loan losses to loans
outstanding,  net of loans in process and deferred  loan fees,  was 1.3% at June
30, 2004 compared to 1.4% at December 31, 2003.  Non-performing assets increased
to $3.2  million at June 30, 2004 from $2.8  million at December  31,  2003,  as
total loans and leases increased significantly between the respective periods as
previously  discussed.  Based  on the  credit  quality  of the  loan  and  lease
portfolio,  the Bank  believes the current level of its reserves for loan losses
is adequate.  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 declined to $2.3 million and $4.4 million
for the three and six months  ended June 30,  2004,  from $2.7  million and $5.6
million for the three and six months  ended June 30,  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.  Fees and service  charges  increased to $1.9 million and
$3.6 million for the three and six months ended June 30, 2004, from $1.7 million
and $3.2 million for the three and six months ended June 30, 2003.  The increase
in fees and service  charges  during the current  periods is  attributable  to a
greater  volume of loans and  checking  deposits  as  previously  discussed.  In
addition,  the Bank  recorded  $98,000 and $245,000 of gains from sales of loans
during the three and six months  ended June 30,  2004,  compared to $783,000 and
$1.8 million during the three and six months ended June 30, 2003, reflecting the
slow down in origination and refinancing volumes.

Noninterest Expense. Noninterest expenses were $4.8 million and $9.7 million for
the three and six months ended June 30, 2004,  compared to $4.5 million and $8.9
million for the three and six months ended June 30, 2003. The largest  component
of these expenses,  compensation and fringe benefits,  was $2.9 million and $5.8
million  for the three and six months  ended  June 30,  2004,  compared  to $2.6
million  and $5.3  million  for the three and six months  ended  June 30,  2003.
Fulltime equivalent employees increased to 250 at June 30, 2004 from 236 at June
30, 2003. This growth is due to additional  personnel resulting from opening two
new de novo full-service branch offices,  the acquisition of two branch offices,
and  administrative  staff  required to support the greater  volume of loans and
checking deposits as previously  discussed.  In addition,  during the six months
ended June 30, 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. 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 $1.7 million and $3.3 million for the three
and six months  ended June 30,  2004,  compared to $1.7 million and $3.5 million
for the three and six months ended June 30, 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.

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, as
actual results may differ materially from management's expectations.

Liquidity  and  Capital  Resources.  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 must
maintain certain regulatory liquidity  requirements of liquid assets to deposits
and  short-term  borrowings.  At June 30, 2004,  the Bank had cash,  deposits in
banks, investment securities,  mortgage-backed  securities, FHLB stock and loans
held for sale totaling $99.1 million, compared to $109.8 million at December 31,
2003, representing 15.5% and 18.2% of deposits and short-term borrowings for the
respective periods.

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.  In addition,  the Bank
manages its deposit pricing in order to maintain a desired deposit mix.

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 North Carolina Office of the
Commissioner  of Banks  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 regulatory capital requirements at June 30, 2004 and December 31, 2003.


                                       11
<PAGE>

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.

      Loans  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 adjustments to 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.


                                       12
<PAGE>

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, 2004. The Company does not believe that
any material  adverse  changes in market risk exposures  occurred since June 30,
2004.

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.


                                       13
<PAGE>

PART II.  OTHER INFORMATION

Item l.  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,  Use of Proceeds and Issuer  Purchases of Equity
Securities

The following table sets forth information  regarding the Company's  repurchases
of its Common Stock during the quarter ended June 30, 2004.

<TABLE>
<CAPTION>

                                                                              Total Number
                                                                                of Shares
                                                                                Purchased         Maximum
                                                                               as Part of    Number of Shares
                                                 Total                          Publicly      that May Yet Be
                                               Number of       Average          Announced     Purchased Under
                                                Shares       Price Paid         Plans or       the Plans or
                   Period                      Purchased      per Share       Programs (1)     Programs (1)
                   ------                      ---------      ---------       ------------     ------------

             <S>                               <C>            <C>               <C>              <C>
              April 2004
              Beginning date: April 1           24,504         $35.86            24,504          120,960
              Ending date: April 30

              May 2004
              Beginning date: May 1             29,356         $24.35            29,356           91,604
              Ending date: May 31

              June 2004
              Beginning date: June 1            18,783         $24.14            18,783           72,821
              Ending date: June 30
</TABLE>

              --------------------
              (1) Shares were purchased pursuant to a stock repurchase program
                  announced on January 8, 2004. This repurchase program will
                  expire on January 8, 2005. Subsequent to announcing the stock
                  repurchase program, on April 23, 2004 the Company paid a
                  three-for-two stock split. The maximum number of shares that
                  may yet be purchased under the plans or programs has been
                  adjusted for the effect of the three-for-two stock split.

Item 3.  Defaults Upon Senior Securities

Not applicable

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

At the Company's Annual Meeting of Stockholders held on May 20, 2004, the
following matters were submitted to a vote of stockholders with the following
results:

A. The election of two directors:

            Name                            For                  Withheld
            Three-year terms:            ---------               --------
            Linley H. Gibbs, Jr.         3,561,310                17,504
            Thomas A. Vann               3,523,732                55,082




                                       14
<PAGE>

      B. An amendment to the Company's Articles of Incorporation to increase the
         number of authorized shares of common stock from 8,000,000 to
         25,000,000:

                                           For          Against     Abstain
                                         ---------      -------     -------
         Number of eligible votes cast   3,456,989      116,182      5,643

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
     -------             -----
      31.1               Rule 13a-14(a) Certification of Chief Executive Officer
      31.2               Rule 13a-14(a) Certification of Chief Financial Officer
      32                 Section 1350 Certification

b) Reports on Form 8-K:

A Form 8-K was filed on April 15, 2004 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 ended March 31, 2004.

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

         FIRST SOUTH BANCORP, INC.


         /s/ William L. Wall                      /s/ Kristie W. Hawkins
         -----------------------------            ----------------------
         William L. Wall                          Kristie W. Hawkins
         Executive Vice President                 Controller
         Chief Financial Officer                  Treasurer
         (Principal Financial Officer)            (Principal Accounting Officer)

         Date:    August 5, 2004                  Date:    August 5, 2004



                                       15