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

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2001.

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

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

Commission File Number: 0-22219

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


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

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


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]     No [ ]

     Number  of  shares  of  common  stock  outstanding  as of April  30,  2001:
3,066,281

<PAGE>

                                    CONTENTS

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

Item 1.   Financial Statements

          Consolidated Statements of Financial Condition as of
          March 31, 2001 (unaudited) and September 30, 2000                    1

          Consolidated Statements of Operations for the Three and
          Six Months Ended March 31, 2001 and 2000 (unaudited)                 2

          Consolidated Statements of Stockholders' Equity for
          the Six Months Ended March 31, 2001 (unaudited)                      3

          Consolidated Statements of Cash Flows for the Six
          Months Ended March 31, 2001 and 2000 (unaudited)                     4

          Notes to Consolidated Financial Statements (unaudited)               5

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

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

Item 1.   Legal Proceedings                                                   12

Item 2.   Changes in Securities                                               12

Item 3.   Defaults Upon Senior Securities                                     12

Item 4.   Submission of Matters to a Vote of Security Holders                 12

Item 5.   Other Information                                                   12

Item 6.   Exhibits and Reports on Form 8-K                                    13

SIGNATURES                                                                    13

<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                      MARCH 31       SEPTEMBER 30
                                                                          2001               2000
                                                                --------------     --------------
ASSETS                                                             (UNAUDITED)
<S>                                                             <C>                <C>
Cash and due from banks                                         $   14,005,165     $   13,124,356
Interest-bearing deposits in financial institutions                 22,663,885          1,617,084
Investment securities - available for sale                          53,093,684         45,186,391
Mortgage-backed securities - available for sale                     69,861,510        108,518,700
Loans receivable, net:
  Held for sale                                                     23,078,975         32,443,106
  Held for investment                                              345,935,392        333,766,510
Premises and equipment, net                                          6,943,035          7,022,819
Deferred income taxes                                                  539,267          2,882,886
Real estate owned                                                      180,435            220,004
Federal Home Loan Bank of Atlanta stock, at cost
     which approximates market                                       2,712,500          2,651,300
Accrued interest receivable                                          3,656,195          3,784,177
Intangible assets                                                    5,246,335          5,044,421
Other assets                                                         2,465,454          2,060,842
Note receivable                                                      1,383,825          1,396,051
                                                                --------------     --------------

          Total assets                                          $  551,765,657     $  559,718,647
                                                                ==============     ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

 Deposits:
  Demand                                                        $  129,263,633     $  110,592,166
  Savings                                                           20,909,786         22,069,124
  Large denomination certificates of deposit                        61,029,889         56,336,303
  Other time                                                       272,444,059        282,944,074
                                                                --------------     --------------
          Total deposits                                           483,647,367        471,941,667
Borrowed money                                                       6,117,577         30,387,551
Other liabilities                                                   14,098,788         12,554,694
                                                                --------------     --------------
          Total liabilities                                        503,863,732        514,883,912

  Common stock, $.01 par value, 8,000,000 shares authorized,
    4,364,044 shares issued and outstanding                             43,640             43,640
  Additional paid in capital                                        44,582,229         44,583,318
  Retained earnings, substantially restricted                       28,140,285         26,327,863
  Treasury stock at cost, 1,302,703 and 1,203,569 shares           (25,345,647)       (23,039,101)
  Unearned ESOP shares, 177,161 and 181,858                         (1,771,603)        (1,818,578)
  Accumulated other comprehensive income (loss), net                 2,253,021         (1,262,407)
                                                                --------------     --------------
           Total stockholders' equity                               47,901,925         44,834,735
                                                                --------------     --------------

           Total liabilities and stockholders' equity           $  551,765,657     $  559,718,647
                                                                ==============     ==============
</TABLE>

See Notes to Consolidated Financial Statements.

                                        1
<PAGE>

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

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                   MARCH 31                       MARCH 31
                                                        ----------------------------    ----------------------------
                                                            2001            2000            2001            2000
                                                        ------------    ------------    ------------    ------------
Interest income:
<S>                                                     <C>             <C>             <C>             <C>
  Interest and fees on loans                            $  8,452,176    $  7,333,781    $ 16,942,300    $ 12,927,833
  Interest and dividends on investments and deposits       2,410,689       1,844,446       5,191,558       3,055,670
                                                        ------------    ------------    ------------    ------------
           Total interest income                          10,862,865       9,178,227      22,133,858      15,983,503
                                                        ------------    ------------    ------------    ------------

Interest expense:
  Interest on deposits                                     5,604,696       4,430,471      11,360,360       7,424,204
  Interest on borrowings                                     362,461         249,940         949,572         426,697
                                                        ------------    ------------    ------------    ------------
           Total interest expense                          5,967,157       4,680,411      12,309,932       7,850,901
                                                        ------------    ------------    ------------    ------------

Net interest income before provision for possible
  loan losses                                              4,895,708       4,497,816       9,823,926       8,132,602
Provision for  possible loan losses                          540,000         200,000         780,000         427,000
                                                        ------------    ------------    ------------    ------------
           Net  interest income                            4,355,708       4,297,816       9,043,926       7,705,602
                                                        ------------    ------------    ------------    ------------

Other income:
  Loan fees and service charges                              751,902         357,952       1,502,576         663,643
  Loan servicing fees                                        195,883         179,192         397,131         346,332
  Gain on sale of real estate, net                            22,816          13,383          29,493         105,358
  Gain on sale of mortgage loans and mortgage-
      backed securities                                      771,166              --         935,020              --
  Other  income                                              112,041         264,622         288,520         314,761
                                                        ------------    ------------    ------------    ------------
           Total other income                              1,853,808         815,149       3,152,740       1,430,094
                                                        ------------    ------------    ------------    ------------

General and administrative expenses:
  Compensation and fringe benefits                         2,371,004       2,253,538       4,596,530       4,046,729
  Federal insurance premiums                                  23,022          17,734          46,487          49,959
  Premises and equipment                                     251,396         376,443         482,230         586,809
  Advertising                                                 34,915          65,713          83,615          94,960
  Payroll and other taxes                                    197,637         189,831         374,790         299,983
  Data processing expense                                    354,115         218,922         735,909         411,195
  Amortization of intangible assets                          144,223          60,778         280,917          65,155
  Other                                                      522,055         448,131         998,999         719,297
                                                        ------------    ------------    ------------    ------------
           Total general and administrative expenses       3,898,367       3,631,090       7,599,477       6,274,087
                                                        ------------    ------------    ------------    ------------

Income before income taxes                                 2,311,149       1,481,875       4,597,189       2,861,609

Income taxes                                                 946,137         627,919       1,887,528       1,196,987
                                                        ------------    ------------    ------------    ------------

NET INCOME                                              $  1,365,012    $    853,956    $  2,709,661    $  1,664,622
                                                        ------------    ------------    ------------    ------------

Basic earnings per share                                $       0.47    $       0.27    $       0.93    $       0.52
                                                        ------------    ------------    ------------    ------------

Diluted earnings per share                              $       0.46    $       0.27    $       0.91    $       0.52
                                                        ------------    ------------    ------------    ------------

Dividends per share                                     $       0.18    $       0.10    $       0.31    $       0.20
                                                        ------------    ------------    ------------    ------------

Average number of common shares outstanding Basic          2,899,889       3,195,141       2,925,909       3,229,019
Average number of common shares outstanding Diluted        2,972,269       3,195,141       2,993,395       3,229,019
</TABLE>

See Notes to Consolidated Financial Statements.

                                        2
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2001
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                             Retained                                       Other
                                             Additional      Earnings,                      Unearned    Comprehensive
                                  Common      Paid-in      Substantially    Treasury          ESOP      Income (Loss),
                                   Stock      Capital       Restricted        Stock          Shares          Net           Total
                                 --------   ------------   ------------   ------------    -----------    -----------   ------------
<S>                              <C>        <C>            <C>            <C>             <C>            <C>           <C>
Balance September 30, 2000       $ 43,640   $ 44,583,318   $ 26,327,863   $(23,039,101)   $(1,818,578)   $(1,262,407)  $ 44,834,735

Net income                                                    2,709,661                                                   2,709,661

Other comprehensive income, net
  of taxes                                                                                                 3,515,428      3,515,428

Exercise of stock options                         (1,089)                       19,339                                       18,250

Acquisition of treasury shares                                              (2,325,885)                                  (2,325,885)

Dividends ($.18 per share)                                     (897,239)                                                   (897,239)

Release of ESOP shares                                                                         46,975                        46,975
                                 --------   ------------   ------------   ------------    -----------    -----------   ------------

Balance March 31, 2001           $ 43,640   $ 44,582,229   $ 28,140,285   $(25,345,647)   $(1,771,603)   $ 2,253,021   $ 47,901,925
                                 --------   ------------   ------------   ------------    -----------    -----------   ------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        Six Months Ended
                                                                                            March 31
                                                                               ---------------------------------
                                                                                    2001               2000
                                                                               --------------     --------------

Operating activities:
<S>                                                                            <C>                <C>
     Net Income                                                                $    2,709,661     $    1,664,622
     Adjustments to reconcile net income to net cash provided (used)
        in operating activities:
           Provision for loan losses                                                  780,000            427,000
           Depreciation                                                               228,434            192,818
           ESOP compensation                                                           46,975             45,043
           MRP compensation                                                                --            671,478
           Accretion of discounts on securities                                       (91,374)            (4,345)
           Gain on disposal of premises and equipment and
              real estate acquired in settlement of loans                             (37,859)          (102,594)
           Gain on sale of mortgage loans and mortgage-backed securities             (935,020)                --
           Originations of loans held for sale, net                               (17,932,467)       (35,651,028)
           Proceeds from sale of loans held for sale                               17,957,455                 --
           Other operating activities                                               1,065,550          3,718,143
                                                                               --------------     --------------
              Net cash provided (used) in operating activities                      3,791,355        (29,038,863)
Investing activities:
     Proceeds from maturities of securities available for sale                             --          3,000,000
     Purchases of investment securities                                            (4,918,750)       (14,733,594)
     Proceeds from principal repayments and sales of
        mortgage-backed securities available for sale                              51,893,231          2,782,924
     Originations of loans held for investment, net of principal repayments       (13,139,795)        15,774,637
     Proceeds from disposal of premises and equipment and
        real estate acquired in settlement of loans                                   259,976            675,191
     Purchase FHLB stock                                                              (61,200)           (43,600)
     Purchases of premises and equipment                                             (140,285)          (422,600)
     Repayment of note receivable                                                      12,226                 --
     Net cash to purchase Green Street Financial Corp.                                     --        (26,530,907)
     Acquisition of Triangle branches                                                      --        113,398,422
                                                                               --------------     --------------
              Net cash provided in investing activities                            33,905,403         93,900,473
Financing activities:
     Net increase (decrease) in deposit accounts                                   11,705,700        (14,268,623)
     Proceeds from FHLB borrowings                                                 72,200,000         82,700,000
     Repayments of FHLB borrowings                                                (96,200,000)       (82,700,000)
     Purchase of treasury shares                                                   (2,325,885)        (3,000,902)
     Cash dividends paid                                                             (897,239)          (641,591)
     Proceeds from exercise of stock options                                           18,250                 --
     Net change in repurchase agreements                                             (269,974)           886,161
                                                                               --------------     --------------
              Net cash used by financing activities                               (15,769,148)       (17,024,955)
                                                                               --------------     --------------

Increase in cash and cash equivalents                                              21,927,610         47,836,655

Cash and cash equivalents, beginning of period                                     14,741,440          9,409,932
                                                                               --------------     --------------

Cash and cash equivalents, end of period                                       $   36,669,050     $   57,246,587
                                                                               ==============     ==============

Supplemental disclosures:
     Real estate acquired in settlement of loans                               $      190,913     $       87,552
     Exchange of loans for mortgage-backed securities                          $   10,200,223     $   56,511,323
</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 eastern 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 (except for the
Statement of Financial  Condition at September 30, 2000,  which is audited) have
been prepared in accordance with generally  accepted  accounting  principles for
interim  financial  information  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 six month periods ended March 31, 2001 are not necessarily  indicative
of the results of operations  that may be expected for the year ended  September
30, 2001.

NOTE 3.   EARNINGS PER SHARE

Basic and diluted  earnings per share for the three and six month  periods ended
March 31, 2001 and 2000 are based on  weighted  average  shares of common  stock
outstanding,  excluding  ESOP and deferred stock award plan shares not committed
to be released or vested, and treasury shares.

                                    Three Months Ended       Six Months Ended
                                         March 31,               March 31,
                                     2001        2000        2001        2000
                                  ---------   ---------   ---------   ---------
Weighted average shares-Basic     2,899,889   3,195,141   2,925,909   3,229,019
Weighted average shares-Diluted   2,972,269   3,195,141   2,993,395   3,229,019

Earnings per share have been calculated in accordance with Statement of Position
93-6,  "Employers'  Accounting for Employee Stock Ownership Plans" and Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".

NOTE 4.   DIVIDENDS DECLARED

On March 15, 2001, the Board of Directors  declared a cash dividend of $0.18 per
share to  stockholders  of record as of April 3, 2001 and  payable  on April 20,
2001.  This  dividend  payment  represents  a payout ratio of 38.3% of the basic
earnings for the quarter ended March 31, 2001,  and is the  Company's  sixteenth
consecutive quarterly cash dividend.

                                       5
<PAGE>

NOTE 5.   COMPREHENSIVE INCOME.

The Company has adopted  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 six-month periods ended March 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                          Three Months Ended                 Six Months Ended
                                               March 31,                         March 31,
                                         2001             2000             2001             2000
                                     ------------     ------------     ------------     ------------
<S>                                  <C>              <C>              <C>              <C>
Net income                           $  1,365,012     $    853,956     $  2,709,661     $  1,664,622
Reclassification of gains
  recognized in net income                (73,940)               0          (73,940)               0
Gains (losses) unrealized,
  net of income taxes                   1,298,840       (1,160,459)       3,589,368       (1,638,572)
                                     ------------     ------------     ------------     ------------
Other comprehensive income (loss)       1,224,900       (1,160,549)       3,515,428       (1,638,572)
                                     ------------     ------------     ------------     ------------
Comprehensive income (loss)          $  2,589,912     $   (306,503)    $  6,225,089     $     26,050
                                     ============     ============     ============     ============
</TABLE>

NOTE 6.   SIGNIFICANT ACTIVITIES

On November 30, 1999, the Company  consummated  the  acquisition of Green Street
Financial Corp ("Green Street").  Summary financial  information  related to the
Green Street  acquisition is as follows  (unaudited):  assets - $162.2  million,
loans  receivable - $125.4 million,  deposits - $101.7  million,  and goodwill -
$288,000.

On February 18, 2000,  the Company  completed  the purchase of six Triangle Bank
("Triangle")  branch  offices.  Summary  financial  information  related  to the
Triangle branches purchase is as follows (unaudited): deposits - $147.5 million,
cash and  other  assets - $113.4  million,  loans  receivable  - $26.3  million,
deposit premium - $5.0 million, and premises and equipment - $2.8 million.

NOTE 7.   FORWARD LOOKING STATEMENTS

This Form  10-Q  contains  certain  forward  looking  statements  consisting  of
estimates  with respect to the financial  condition,  results of operations  and
other  business of the Company that are subject to various  factors  which could
cause actual results to differ  materially  from those  estimates.  Factors that
could  influence  the  estimates  include  changes in general  and local  market
conditions,  legislative and regulatory conditions, and an adverse interest rate
environment.

                                       6
<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 MARCH 31, 2001 AND SEPTEMBER 30, 2000

Total assets were $551.8 million at March 31, 2001 compared to $559.7 million at
September 30, 2000.  Earning assets declined to $517.3 million at March 31, 2001
from $524.2 million at September 30, 2000,  reflecting sales of certain mortgage
loans  and  mortgage-backed  securities,  as  discussed  below.  Earning  assets
amounted to 93.8% of total assets at March 31, 2001 and at September 30, 2000.

Interest-bearing overnight deposits in financial institutions were $22.7 million
at March 31, 2001,  compared to $1.6 million at September  30, 2000,  reflecting
the  reinvestment  of  a  portion  of  the  mortgage  loan  and  mortgage-backed
securities   sales  proceeds.   Overnight  funds  are  available  to  fund  loan
originations,  liquidity management activities and daily operations of the Bank.
The  Bank  has  implemented  various  investment   strategies  to  sell  certain
securities  during favorable  interest rate windows,  to maintain its regulatory
liquidity at required levels,  and the  securitization of certain mortgage loans
previously  held for sale into  mortgage-backed  securities.  The quarter  ended
March 31, 2001 was an extremely advantageous time due to falling interest rates.
During  the  quarter  ended  March 31,  2001,  the Bank sold  $46.6  million  of
mortgage-backed  securities,  contributing to current period earnings.  The Bank
had no mortgage-backed securities sales during the quarter ended March 31, 2000.
In addition, during the quarter ended March 31, 2001, the bank securitized $10.2
of loans held for sale into  mortgage-backed  securities.  As a net result,  the
mortgage-backed  securities  portfolio  declined  to $69.9  million at March 31,
2001,  from  $108.5  million at  September  30,  2000.  As a result of the above
referenced securitizations and loan sales, offset by internal growth, loans held
for sale  declined  to $23.1  million at March 31,  2001 from  $32.4  million at
September 30, 2000. During the quarter ended March 31, 2001, the Bank sold $17.9
million of mortgage loans, taking advantage of falling interest rates,  compared
to no loan  sales  during  the  quarter  ended  March 31,  2000.  Loans held for
investment  increased to $345.9 million at March 31, 2001 from $333.8 million at
September 30, 2000. To support the risk associated with the continuing growth of
its commercial and consumer loan portfolio,  the Bank increased its reserves for
potential  loan losses to $5.8  million at March 31,  2001 from $5.2  million at
September 30, 2000. The ratio of reserves for loan losses to loans  outstanding,
net of loans in process and deferred loan fees, was 1.5% and 1.4%, respectively,
at March 31, 2001 and September 30, 2000.

Total deposits and borrowings  declined to $489.8 million at March 31, 2001 from
$502.3  million at September 30, 2000.  Deposits  increased to $483.6 million at
March 31, 2001 from $471.9 million at September 30, 2000,  reflecting the Bank's
efforts  to  attract  lower  costing  funds  during  a  falling   interest  rate
environment. During the quarter ended March 31, 2001 the Bank used proceeds from
the  mortgage  loan and  mortgage-backed  securities  sales to repay  the  $24.0
million of FHLB advances held at September 30, 2000. Borrowings,  in the form of
repurchase  agreements,  amounted  to $6.1  million  at March 31,  2001 and $6.4
million at  September  30,  2000,  representing  funds  held in cash  management
accounts for commercial banking customers.

                                       7
<PAGE>

Stockholders'  equity was $47.9  million at March 31,  2001,  compared  to $44.8
million at September 30, 2000.  See  "Consolidated  Statements of  Stockholders'
Equity" for additional  information.  At March 31, 2001, the Company's equity to
assets  ratio was 8.7%,  compared  to 8.0% at  September  30,  2000,  reflecting
current  period  earnings and an increase in  unrealized  gains on available for
sale  securities  due to the recent decline in market rates.  Accumulated  other
comprehensive   income  increased  to  $2.3  million  at  March  31,  2001  from
accumulated other comprehensive loss of $1.3 million at September 30, 2000.

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 $47.7 million at March 31, 2001, substantially in
excess of all  regulatory  capital  requirements.  See  "Liquidity  and  Capital
Resources" below for additional information.

During the quarter ended March 31, 2001, the Company  purchased 37,743 shares of
its  common  stock   through  open  market  and  private   purchases,   totaling
approximately $905,000, pursuant to a stock repurchase plan adopted by the board
of directors.  These shares are being held as treasury  stock, at cost. At March
31, 2001,  treasury  shares were 1,302,703  totaling $25.3 million,  compared to
1,203,569 shares totaling $23.0 million at September 30, 2000.

On March 15, 2001 the Board of  Directors  of the  Company  declared a quarterly
cash  dividend of $0.18 per share,  payable  April 20, 2001 to  stockholders  of
record as of April 3, 2001.  This  dividend  payment  represents a 38.5% payment
rate increase over the previous  quarterly  dividend  payment,  and a cumulative
80.0%  payment rate  increase  over the dividend  payment for the quarter  ended
March 31, 2000. This dividend payment also represents a payout ratio of 38.3% of
the basic  earnings  for the quarter  ended March 31, 2001 and is the  Company's
sixteenth consecutive quarterly cash dividend.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE AND SIX MONTHS  ENDED MARCH 31,
2001 AND 2000

GENERAL.  Net income for the three and six months  ended March 31, 2001 was $1.4
million and $2.7  million,  compared to $854,000  and $1.7 million for the three
and six months ended March 31, 2000.  Basic earnings per share for the three and
six months  ended  March 31,  2001 was $0.47 and $0.93 per share,  respectively,
compared  to $0.27 and $0.52 per share for the three and six months  ended March
31,  2000.  Diluted  earnings per share for the three and six months ended March
31,  2001 was $0.46 and $0.91 per  share,  respectively,  compared  to $0.27 and
$0.52 per share for the three and six months ended March 31, 2000. The Company's
outstanding stock options and deferred stock awards plan shares diluted earnings
per share for the March 31, 2000 periods less than one cent per share.

INTEREST  INCOME.  Interest income  increased to $10.9 million and $22.1 million
for the three and six months ended March 31,  2001,  from $9.2 million and $16.0
million for the three and six months  ended  March 31,  2000.  This  increase is
primarily  attributable  to the  growth of  earning  assets  resulting  from the
completion of the prior year acquisitions.  See Note 6 - Significant  Activities
above for additional  information.  Average  interest-earning assets were $521.2
million and $523.5  million,  respectively,  for the three and six months  ended
March 31, 2001,  compared to $454.6 million and $388.6 million for the three and
six months ended March 31, 2000.  The yield on average  interest-earning  assets
was 8.3% and 8.5% for the three and six months ended March 31, 2001, compared to
8.1% and 8.2% for the three and six months ended March 31, 2000.

                                       8
<PAGE>

INTEREST EXPENSE.  Interest expense on deposits and borrowings increased to $6.0
million  and $12.3  million for the three and six months  ended March 31,  2001,
from $4.7  million and $7.9 million for the three and six months ended March 31,
2000,  also  reflecting  the  prior  year  acquisitions.  Average  deposits  and
borrowings  increased to $494.4 million and $497.8 million for the three and six
months  ended March 31,  2001,  from $425.1  million and $350.6  million for the
three and six  months  ended  March 31,  2000.  The  effective  cost of  average
deposits and borrowings was 4.8% and 4.9%,  respectively,  for the three and six
months  ended  March 31,  2001,  compared to 4.4% and 4.5% for the three and six
months ended March 31, 2000.

NET  INTEREST  INCOME.  Net interest  income  increased to $4.9 million and $9.8
million for the three and six months ended March 31, 2001, from $4.5 million and
$8.1  million  for the three and six months  ended  March 31,  2000.  The Bank's
interest  rate spread (the  difference  between the  effective  yield on average
earning assets and the effective cost of average  deposits and  borrowings)  was
3.5%,  respectively,  for both the three and six months  ended  March 31,  2001,
compared  to 3.7% and 3.8%,  respectively,  for the three and six  months  ended
March 31, 2000.  The Bank's net yield on  interest-earning  assets (net interest
income divided by average interest assets) was 3.8%, respectively,  for both the
three  and  six  months  ended  March  31,  2001,  compared  to 4.0%  and  4.2%,
respectively, for the three and six months ended March 31, 2000.

PROVISION FOR LOAN LOSSES. During the three and six months ended March 31, 2001,
the  Bank  recorded  provisions  for  loan  losses  of  $540,000  and  $780,000,
respectively,  compared to $200,000 and $427,000, respectively, during the three
months and six months ended March 31, 2000.  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 probable future losses, if any, will not exceed estimated
amounts.

NONINTEREST INCOME. Noninterest income was $1.9 million and $3.2 million for the
three and six months  ended March 31, 2001,  compared  $815,000 and $1.4 million
for the three and six months ended March 31, 2000.  Noninterest  income consists
of fees and  service  charges  earned  on  loans,  service  charges  on  deposit
accounts,  gains from sales of loans and  mortgage-backed  securities  and other
miscellaneous  income.  The  increase in fees and  services  charges  during the
current  periods  is  attributable  to a greater  volume  of loans and  deposits
resulting  from the prior period  acquisitions.  In addition,  the Bank recorded
$771,000 and  $935,000,  respectively,  of gains from the  previously  discussed
sales of loans and  mortgage-backed  securities  during the three and six months
ended March 31,  2001,  compared to no gains from sales during the three and six
months ended March 31, 2000.

NONINTEREST EXPENSE. Noninterest expenses were $3.8 million and $7.6 million for
the three and six months ended March 31, 2001, compared to $3.6 million and $6.3
million for the three and six months ended March 31, 2000. The largest component
of these expenses,  compensation and fringe benefits,  was $2.4 million and $4.6
million  for the three and six months  ended  March 31,  2001,  compared to $2.3
million and $4.0 million for the three and six months ended March 31, 2000. This
increase is primarily  attributable  to an increase in personnel  resulting from
the acquisitions.

                                       9
<PAGE>

Data processing expense has grown  proportionately with the growth in the number
of customer accounts and transaction  activity,  also primarily  attributable to
the growth in assets  and  deposits  from the  aforementioned  acquisitions.  In
addition,  the increase in amortization of intangible assets is directly related
to the intangible assets associated with the acquisitions.  See Note 6 above for
additional  information.  Other  noninterest  expenses  including  premises  and
equipment,  repairs, printing,  advertising, and office supplies have also grown
proportionately from period to period with the growth in assets and deposits.

INCOME TAXES. Income tax expense was $946,000 and $1.9 million for the three and
six months ended March 31,  2001,  compared to $628,000 and $1.2 million for the
three and six months ended March 31, 2000.  The changes 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
requirements   established  by  the  State  of  North  Carolina  Office  of  the
Commissioner of Banks (the "Commissioner").  The Bank's liquidity ratio at March
31, 2001,  as calculated  under such  requirements,  exceeded the  requirements.
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 March 31, 2001, the Bank had cash, deposits in banks, investment
securities,  mortgage-backed  securities,  FHLB  stock and  loans  held for sale
totaling $185.4 million, or 33.6% of total assets, compared to $203.5 million at
September 30, 2000 or 36.4% of total assets.

The Bank  believes  it can meet future  liquidity  needs with  existing  funding
sources. The Bank's primary source of funds are deposits,  payments on loans and
mortgage-backed  securities,  maturities of investment securities,  earnings and
funds provided from operations, the ability to borrow from the Federal Home Loan
Bank of Atlanta and the  availability  of loans held for sale.  While  scheduled
repayments of loans and  mortgage-backed  securities are relatively  predictable
sources of funds,  deposit flows and general  market  interest  rates,  economic
conditions  and  competition   substantially  influence  loan  prepayments.   In
addition, the Bank attempts to manage 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  Commissioner  requires the
Bank at all times to  maintain a capital  surplus of not less than 50% of common
capital stock.  The Bank was in compliance with all capital  requirements of the
FDIC and the Commissioner at March 31, 2001 and September 30, 2000.

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

                                       10
<PAGE>

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  upon the
Company is reflected in the cost and prices it pays for goods and services.

SEGMENT INFORMATION

The Company  adopted SFAS No. 131,  "Disclosure  About Segments of an Enterprise
and Related  Information",  on October 1, 1998.  SFAS No. 131 specifies  revised
guidelines for determining an entity's operating segments and the type and level
of financial  information to be disclosed.  The adoption of SFAS No. 131 did not
have a material effect on the Company's financial statements,  as management has
determined that the Bank operates in only one business segment.

NEW ACCOUNTING PRONOUNCEMENTS

The Company  adopted the provisions of SFAS No. 133,  "Accounting for Derivative
Instruments  and  Hedging  Activities",  as amended,  effective  with the fiscal
quarter  beginning  July 1,  2000.  SFAS  No.  133  establishes  accounting  and
reporting standards for derivative  instruments and for hedging  activities.  It
requires that  derivatives  be recognized as either assets or liabilities in the
statement of financial  position and be measured at fair value.  The  accounting
for changes in fair value of a  derivative  depends on the  intended  use of the
derivative  and  whether  or not  the  derivative  is  designated  as a  hedging
instrument.  SFAS  No.  133 has  not  had a  material  impact  on the  Company's
financial statements.

In December 1999, the  Securities and Exchange  Commission  ("SEC") issues Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".  SAB
101  summarizes  certain of the SEC's  views in applying  accounting  principles
generally  accepted in the United  States of America to revenue  recognition  in
financial statements. The SEC has indicated that they intend to issue additional
written  guidance  to  further  supplement  SAB 101.  Based on the SEC's  latest
timeline for  implementing SAB 101, the Company would be required to comply with
the guidelines in the fourth quarter of fiscal 2001.  Adoption of SAB 101 is not
expected  to have any  material  impact  on the  recognition,  presentation  and
disclosure of revenue.

In  March  2000  the  Financial   Accounting  Standards  Board  ("FASB")  issued
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation  -  an  Interpretation  of  APB  Opinion  No.  25",  providing  new
accounting  rules  for  stock-based  compensation  under  APB  Opinion  No.  25,
"Accounting  for  Stock  Issued  to  Employees".  FIN 44 does  not  change  FASB
Statement No. 123, " Accounting for Stock-Based Compensation". The new rules are
significant  and could result in compensation  expense in several  situations in
which no  expense  is  typically  recorded  under  current  practice.  FIN 44 is
generally  effective for transactions  occurring after July 1, 2000, however the
accounting must be applied  prospectively  to certain  transactions  consummated
after  December  15,  1998.  The Company does not expect that FIN 44 will have a
material effect on its financial condition or results of operations.

In September  2000, the FASB issued SFAS No. 140,  "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,  a Replacement
of SFAS No. 125". It revises the standards for  accounting  for  securitizations
and other  transfers of financial  assets and  collateral  and requires  certain
disclosures, but it carries over most of the provisions of SFAS 125 without

                                       11
<PAGE>

reconsideration.  SFAS 140  requires  a debtor to  reclassify  financial  assets
pledged as  collateral  and report these assets  separately  in the statement of
financial  position.  It also requires a secured party to disclose  information,
including fair value,  about collateral that it has accepted and is permitted by
contract or custom to sell or repledge.  SFAS 140 includes  specific  disclosure
requirements  for entities with  securitized  financial assets and entities that
securitize  assets.  SFAS  140 is  effective  for  transfers  and  servicing  of
financial assets and  extinguishments  of liabilities  occurring after March 31,
2001, and is effective for  recognition and  reclassification  of collateral and
for  disclosures  relating to  securitization  transactions  and  collateral for
fiscal years ending  after  December 15, 2000.  The Company does not expect that
SFAS 140 will have a material  effect on its  financial  condition or results of
operations.

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

Not applicable

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 February 15, 2001, the
following  matter was  submitted to a vote of  stockholders  with the  following
results:

     A.   The election of directors:

          Name                               For              Withheld
          ----                            ---------           --------
          Three-year terms:
          Linley H. Gibbs, Jr.            2,749,721             5,144
          Thomas A. Vann                  2,743,521            11,344

ITEM 5.   OTHER INFORMATION

Not applicable

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     A.   Exhibits - None
     B.   Reports on Form 8-K - None

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<PAGE>

                                   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.


Date:    May 8, 2001                    /s/ William L. Wall
                                        -------------------------
                                        William L. Wall
                                        Executive Vice President
                                        Chief Financial Officer
                                        (Principal Financial Officer)



Date:    May 8, 2001                    /s/ Kristie W. Hawkins
                                        --------------------------
                                        Kristie W. Hawkins
                                        Controller
                                        Treasurer
                                        (Principal Accounting Officer)

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