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, 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 July 25, 2001: 3,026,782

<PAGE>

                                    CONTENTS

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

Item 1.   Financial Statements

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

          Consolidated Statements of Operations for the Three and
          Nine Months Ended June 30, 2001 and 2000 (unaudited)                 2

          Consolidated Statements of Stockholders' Equity for the
          Nine Months Ended June 30, 2001 (unaudited)                          3

          Consolidated Statements of Cash Flows for the Nine
          Months Ended June 30, 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                                    12

SIGNATURES                                                                    13

<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                       JUNE 30       SEPTEMBER 30
                                                                          2001               2000
                                                                          ----               ----
ASSETS                                                             (UNAUDITED)
<S>                                                             <C>                <C>
Cash and due from banks                                         $   17,189,325     $   13,124,356
Interest-bearing deposits in financial institutions                 14,274,164          1,617,084
Investment securities - available for sale                          52,552,743         45,186,391
Mortgage-backed securities - available for sale                     60,807,590        108,518,700
Loans receivable, net:
  Held for sale                                                     16,459,718         32,443,106
  Held for investment                                              349,940,751        333,766,510
Premises and equipment, net                                          7,029,093          7,022,819
Deferred income taxes                                                1,024,652          2,882,886
Real estate owned                                                      688,625            220,004
Federal Home Loan Bank of Atlanta stock, at cost
     which approximates market                                       2,712,500          2,651,300
Accrued interest receivable                                          3,534,310          3,784,177
Intangible assets                                                    5,262,902          5,044,421
Other assets                                                         2,259,976          2,060,842
Note receivable                                                      1,377,492          1,396,051
                                                                --------------     --------------

          Total assets                                          $  535,113,841     $  559,718,647
                                                                ==============     ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

 Deposits:
  Demand                                                        $  136,770,672     $  110,592,166
  Savings                                                           20,094,458         22,069,124
  Large denomination certificates of deposit                        58,258,781         56,336,303
  Other time                                                       252,496,392        282,944,074
                                                                --------------     --------------
          Total deposits                                           467,620,303        471,941,667
Borrowed money                                                       4,593,715         30,387,551
Other liabilities                                                   14,640,767         12,554,694
                                                                --------------     --------------
          Total liabilities                                        486,854,785        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                                        44,565,377         44,583,318
  Retained earnings, substantially restricted                       29,203,687         26,327,863
  Treasury stock at cost, 1,299,288 and 1,203,569 shares           (25,338,878)       (23,039,101)
  Unearned ESOP shares, 173,972 and 181,858                         (1,739,714)        (1,818,578)
  Accumulated other comprehensive income (loss), net                 1,524,944         (1,262,407)
                                                                --------------     --------------
          Total stockholders' equity                                48,259,056         44,834,735
                                                                --------------     --------------


          Total liabilities and stockholders' equity            $  535,113,841     $  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              NINE MONTHS ENDED
                                                                   JUNE 30                        JUNE 30
                                                        ------------    ------------    ------------    ------------
                                                            2001            2000            2001            2000
                                                        ------------    ------------    ------------    ------------
Interest income:
<S>                                                     <C>             <C>             <C>             <C>
  Interest and fees on loans                            $  8,000,946    $  7,471,944    $ 24,943,245    $ 20,399,777
  Interest and dividends on investments and deposits       2,230,161       2,626,731       7,421,720       5,682,401
                                                        ------------    ------------    ------------    ------------
           Total interest income                          10,231,107      10,098,675      32,364,965      26,082,178
                                                        ------------    ------------    ------------    ------------
Interest expense:
  Interest on deposits                                     5,259,811       5,195,299      16,620,171      12,619,502
  Interest on borrowings                                      37,910          45,615         987,482         472,313
                                                        ------------    ------------    ------------    ------------
           Total interest expense                          5,297,721       5,240,914      17,607,653      13,091,815
                                                        ------------    ------------    ------------    ------------
Net interest income before provision for possible
  loan losses                                              4,933,386       4,857,761      14,757,312      12,990,363
Provision for  possible loan losses                                0         250,000         780,000         677,000
                                                        ------------    ------------    ------------    ------------
           Net  interest income                            4,933,386       4,607,761      13,977,312      12,313,363
                                                        ------------    ------------    ------------    ------------
Other income:
  Loan fees and service charges                              932,193         603,717       2,434,769       1,267,359
  Loan servicing fees                                        172,985         209,978         570,117         556,311
  Gain on sale of real estate, net                                --              --          29,493         105,358
  Gain on sale of mortgage loans and mortgage-
      backed securities                                      390,893              17       1,325,913              17
  Other  income                                              193,530         239,071         482,049         553,817
                                                        ------------    ------------    ------------    ------------
           Total other income                              1,689,601       1,052,783       4,842,341       2,482,862
                                                        ------------    ------------    ------------    ------------
General and administrative expenses:
  Compensation and fringe benefits                         2,424,492       2,352,401       7,021,021       6,399,130
  Federal insurance premiums                                  21,908          21,502          68,395          71,461
  Premises and equipment                                     230,347         394,050         712,577         980,859
  Advertising                                                 49,313          49,817         132,928         144,777
  Payroll and other taxes                                    177,267         227,745         552,057         527,728
  Data processing expense                                    367,913         388,273       1,103,823         799,469
  Amortization of intangible assets                          142,643         141,234         423,561         206,389
  Other                                                      535,006         483,351       1,534,005       1,202,632
                                                        ------------    ------------    ------------    ------------
           Total general and administrative expenses       3,948,889       4,058,373      11,548,367      10,332,445
                                                        ------------    ------------    ------------    ------------

Income before income taxes                                 2,674,098       1,602,171       7,271,286       4,463,780

Income taxes                                               1,090,354         699,322       2,977,882       1,896,309
                                                        ------------    ------------    ------------    ------------

NET INCOME                                              $  1,583,744    $    902,849    $  4,293,404    $  2,567,471
                                                        ------------    ------------    ------------    ------------

Basic earnings per share                                $       0.55    $       0.30    $       1.47    $       0.81
                                                        ------------    ------------    ------------    ------------

Diluted earnings per share                              $       0.53    $       0.30    $       1.44    $       0.81
                                                        ------------    ------------    ------------    ------------

Dividends per share                                     $       0.18    $       0.13    $       0.49    $       0.33
                                                        ------------    ------------    ------------    ------------

Average number of common shares outstanding Basic          2,888,640       3,035,340       2,913,550       3,164,459
Average number of common shares outstanding Diluted        2,975,876       3,056,067       2,986,878       3,165,716
</TABLE>

See Notes to Consolidated Financial Statements.

                                        2
<PAGE>

FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 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                                                    4,293,404                                                   4,293,404

Other comprehensive income, net
  of taxes                                                                                                 2,787,351      2,787,351

Exercise of stock options                        (17,941)                      285,305                                      267,364

Acquisition of treasury shares                                              (2,585,082)                                  (2,585,082)

Dividends ($.18 per share)                                   (1,417,580)                                                 (1,417,580)

Release of ESOP shares                                                                         78,864                        78,864
                                    -------   -----------   -----------   ------------    -----------    -----------    -----------

Balance June 30, 2001               $43,640   $44,565,377   $29,203,687   $(25,338,878)   $(1,739,714)   $ 1,524,944    $48,259,056
                                    -------   -----------   -----------   ------------    -----------    -----------    -----------
</TABLE>

See Notes to Consolidated Financial Statements.

                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                           June 30
                                                                               ---------------------------------
                                                                                    2001               2000
                                                                               ---------------------------------
Operating activities:
<S>                                                                            <C>                <C>
     Net Income                                                                $    4,293,404     $    2,567,471
     Adjustments to reconcile net income to net cash provided (used)
        in operating activities:
           Provision for loan losses                                                  780,000            677,000
           Depreciation                                                               365,880            299,534
           ESOP compensation                                                           78,864             67,230
           MRP compensation                                                                --            725,692
           Accretion of discounts on securities                                      (138,007)           (31,062)
           Gain on disposal of premises and equipment and
              real estate acquired in settlement of loans                             (39,130)          (102,594)
           Gain on sale of mortgage loans and mortgage-backed securities           (1,325,913)               (17)
           Originations of loans held for sale, net                               (25,867,368)       (39,665,989)
           Proceeds from sale of loans held for sale                               30,693,229                 --
           Other operating activities                                               1,918,325          2,863,598
                                                                               --------------     --------------
              Net cash provided (used) in operating activities                     10,759,284        (32,599,137)
Investing activities:
     Proceeds from maturities of securities available for sale                             --          3,000,000
     Purchases of investment securities                                            (4,918,750)       (31,471,312)
     Proceeds from principal repayments and sales of
        mortgage-backed securities available for sale                              62,530,540          5,093,249
     Originations of loans held for investment, net of principal repayments       (17,653,345)        (4,857,211)
     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                                             (362,517)          (657,220)
     Repayment of note receivable                                                      18,559                 --
     Net cash to purchase Green Street Financial Corp.                                     --        (26,530,907)
     Acquisition of Triangle branches                                                      --        113,398,422
                                                                               --------------     --------------
              Net cash provided in investing activities                            39,813,263         58,606,612
Financing activities:
     Net decrease in deposit accounts                                              (4,321,364)       (12,634,644)
     Proceeds from FHLB borrowings                                                 72,200,000         87,700,000
     Repayments of FHLB borrowings                                                (96,200,000)       (82,700,000)
     Purchase of treasury shares                                                   (2,585,082)        (6,465,633)
     Cash dividends paid                                                           (1,417,580)        (1,031,716)
     Proceeds from exercise of stock options                                          267,364                 --
     Net change in repurchase agreements                                           (1,793,836)          (227,536)
                                                                               --------------     --------------
              Net cash used by financing activities                               (33,850,498)       (15,359,529)
                                                                               --------------     --------------

Increase in cash and cash equivalents                                              16,722,049         10,647,946

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

Cash and cash equivalents, end of period                                       $   31,463,489     $   20,057,878
                                                                               ==============     ==============

Supplemental disclosures:
     Real estate acquired in settlement of loans                               $      699,104     $      328,291
     Exchange of loans for mortgage-backed securities                          $   12,298,148     $   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
audited  Statement  of  Financial  Condition  at  September  30, 2000) 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 nine  month
periods  ended June 30, 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 nine month periods ended
June 30,  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.

<TABLE>
<CAPTION>
                                     Three Months Ended         Nine Months Ended
                                          June 30,                  June 30,
                                      2001         2000         2001         2000
                                      ----         ----         ----         ----
<S>                                <C>          <C>          <C>          <C>
Weighted average shares-Basic      2,888,640    3,035,340    2,913,550    3,164,459
Weighted average shares-Diluted    2,975,876    3,056,067    2,986,878    3,165,716
</TABLE>

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 June 21, 2001,  the Board of Directors  declared a cash dividend of $0.18 per
share to stockholders of record as of July 5, 2001 and payable on July 20, 2001.
This dividend  payment  represents a payout ratio of 32.7% of the basic earnings
for  the  quarter  ended  June  30,  2001,  and  is  the  Company's  seventeenth
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 nine month periods ended June 30, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                           Three Months Ended               Nine Months Ended
                                                June 30,                         June 30,
                                         2001             2000            2001             2000
                                     ------------     ------------    ------------     ------------
<S>                                  <C>              <C>             <C>              <C>
Net income                           $  1,583,744     $    902,849    $  4,293,404     $  2,567,471
Reclassification of gains
  recognized in net income               (111,352)               0        (185,292)               0
Gains (losses) unrealized,
  net of income taxes                    (616,725)         261,355       2,972,643       (1,377,217)
                                     ------------     ------------    ------------     ------------
Other comprehensive income (loss)        (728,077)         261,355       2,787,351       (1,377,217)
                                     ------------     ------------    ------------     ------------
Comprehensive income                 $    855,667     $  1,164,204    $  7,080,755     $  1,190,254
                                     ============     ============    ============     ============
</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 JUNE 30, 2001 AND SEPTEMBER 30, 2000

Total assets were $535.1  million at June 30, 2001 compared to $559.7 million at
September 30, 2000.  Earning assets  declined to $496.7 million at June 30, 2001
from $524.2 million at September 30, 2000,  reflecting sales of certain mortgage
loans and mortgage-backed  securities,  as discussed below.  Earning assets were
92.8% of total assets at June 30, 2001 compared to 93.8% at September 30, 2000.

Interest-bearing overnight deposits in financial institutions were $14.7 million
at June 30, 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 June 30, 2001
was an advantageous period due to declining interest rates. During the three and
nine months ended June 30, 2001, the Bank sold $7.2 million and $53.8 million of
mortgage-backed  securities,  respectively.  The  Bank  had  no  mortgage-backed
securities  sales  during  the  comparative  periods  ended  June 30,  2000.  In
addition, during the nine months ended June 30, 2001, the bank securitized $12.3
million of loans held for sale into mortgage-backed securities. As a net result,
the  mortgage-backed  securities  portfolio  was $60.8 million at June 30, 2001,
compared to $108.5 million at September 30, 2000.

Loans  held for sale  declined  to $16.5  million  at June 30,  2001 from  $32.4
million  at  September  30,  2000,  as a  result  of loan  sales  and the  above
referenced  securitizations,  net of internal  growth.  During the quarter ended
June 30, 2001, the Bank sold $12.7 million of mortgage loans,  taking  advantage
of declining interest rates,  compared to no loan sales during the quarter ended
June 30, 2000. Loans held for investment increased to $349.9 million at June 30,
2001 from $333.8  million at September 30, 2000. To support the risk  associated
with its loan portfolio,  the Bank maintained reserves for potential loan losses
of $5.4  million at June 30, 2001,  compared to $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 June 30,
2001 and September 30, 2000.

Total deposits and  borrowings  declined to $472.2 million at June 30, 2001 from
$502.3 million at September 30, 2000. Total deposits  declined to $467.6 million
at June 30, 2001 from $471.9  million at September 30, 2000.  However,  checking
accounts  increased  to $136.8  million at June 30, 2001 from $110.6  million at
September 30, 2000,  reflecting the Bank's efforts to attract lower costing core
funds.  During the nine months ended June 30, 2001 the Bank used  proceeds  from
the  mortgage  loan and  mortgage-backed  securities  sales to repay  the  $24.0
million of Federal Home Loan Bank ("FHLB")  advances held at September 30, 2000.
Borrowings,  in the form of repurchase  agreements,  amounted to $4.6 million at
June 30, 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 $48.3  million  at June 30,  2001,  compared  to $44.8
million at September 30, 2000.  See  "Consolidated  Statements of  Stockholders'
Equity" for additional  information.  At June 30, 2001, the Company's  equity to
assets  ratio was 9.0%,  compared  to 8.0% at  September  30,  2000,  reflecting
current  period  earnings and an increase in  unrealized  gains on available for
sale securities due primarily to the recent decline in market rates. Accumulated
other comprehensive  income was $1.5 million at June 30, 2001, compared to 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 $47.5 million at June 30, 2001,  substantially in
excess of all  regulatory  capital  requirements.  See  "Liquidity  and  Capital
Resources" below for additional information.

During the quarter ended June 30, 2001, the Company  purchased  10,235 shares of
its  common  stock   through  open  market  and  private   purchases,   totaling
approximately $251,000, pursuant to a stock repurchase plan adopted by the board
of directors.  These shares are being held as treasury  stock,  at cost. At June
30, 2001,  treasury  shares were 1,299,288  totaling $25.3 million,  compared to
1,203,569 shares totaling $23.0 million at September 30, 2000.

On June 21, 2001 the board of directors of the Company declared a quarterly cash
dividend of $0.18 per share,  payable July 20, 2001 to stockholders of record as
of July 5, 2001.  This dividend  payment also represents a payout ratio of 32.7%
of the basic  earnings for the quarter  ended June 30, 2001 and is the Company's
seventeenth consecutive quarterly cash dividend.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE AND NINE MONTHS  ENDED JUNE 30,
2001 AND 2000

GENERAL.  Net income for the three and nine months  ended June 30, 2001 was $1.6
million and $4.3  million,  compared to $903,000  and $2.6 million for the three
and nine months ended June 30, 2000.  Basic earnings per share for the three and
nine  months  ended June 30,  2001 was $0.55 and $1.47 per share,  respectively,
compared to $0.30 and $0.81 per share for the three and nine  months  ended June
30,  2000.  Diluted  earnings per share for the three and nine months ended June
30,  2001 was $0.53 and $1.44 per  share,  respectively,  compared  to $0.30 and
$0.81 per share for the three and nine months ended June 30, 2000. The Company's
outstanding stock options and deferred stock awards plan shares diluted earnings
per share for the June 30, 2000 periods less than one cent per share.

INTEREST  INCOME.  Interest  income was $10.2  million and $32.4 million for the
three and nine months ended June 30, 2001,  compared to $10.1  million and $26.1
million  for the three and nine months  ended June 30,  2000.  This  increase is
primarily  attributable  to  internal  growth and the  growth in 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 $505.6 million and $516.9  million,  respectively,
for the three and nine months  ended June 30, 2001,  compared to $490.3  million
and $418.8  million for the three and nine months ended June 30, 2000. The yield
on  average  interest-earning  assets  was 8.1% and 8.4% for the  three and nine
months  ended June 30,  2001,  compared  to 8.2% and 8.3% for the three and nine
months ended June 30, 2000.

INTEREST  EXPENSE.  Interest expense on deposits and borrowings was $5.3 million
and $17.6 million

                                       8
<PAGE>

for the three and nine months ended June 30, 2001,  compared to $5.2 million and
$13.1  million for the three and nine months ended June 30, 2000.  This reflects
current period changes in rates and volume of deposits and  borrowings,  as well
as the prior year  acquisitions.  Average  deposits and  borrowings  were $478.7
million and $490.9  million for the three and nine months  ended June 30,  2001,
compared  to $468.2  million  and $385.6  million  for the three and nine months
ended June 30, 2000. The effective  cost of average  deposits and borrowings was
4.4% and 4.8%, respectively,  for the three and nine months ended June 30, 2001,
compared to 4.5% for both the three and nine months ended June 30, 2000.

NET INTEREST INCOME.  Net interest income was $4.9 million and $14.8 million for
the three and nine months  ended June 30,  2001,  compared  to $4.9  million and
$13.0  million for the three and nine months ended June 30,  2000.  The interest
rate  spread (the  difference  between the  effective  yield on average  earning
assets and the effective cost of average  deposits and  borrowings) was 3.7% and
3.6% respectively,  for the three and nine months ended June 30, 2001,  compared
to 3.7% and 3.8%,  respectively,  for the three and nine  months  ended June 30,
2000. The net yield on  interest-earning  assets (net interest income divided by
average  interest assets) was 3.8% for both the three and nine months ended June
30, 2001, compared to 4.0% and 4.1%, respectively, for the three and nine months
ended June 30, 2000.  The current  period  decline in the  interest  rate spread
relates to a series of interest  rate  reductions by the Federal  Reserve.  Such
reductions have the effect of pressuring  interest rate spread,  as the yield on
loans tends to decline faster than the cost of deposits.

PROVISION FOR LOAN LOSSES. During the three months ended June 30, 2001, the Bank
recorded no provisions for loan losses,  but recorded  $780,000  during the nine
months ended June 30, 2001,  compared to $250,000  and  $677,000,  respectively,
during the three months and nine months ended June 30, 2000. Such provisions are
necessary  to support  the risk  associated  with the growth in the Bank's  loan
portfolio.  Provisions  are charged to current  operations and the Bank believes
the resulting allowance for loan losses is adequate to absorb probable losses on
loans that may become uncollectible.  Additions to the allowance for loan losses
are  based on a  review  and  classification  of the loan  portfolio  and  other
factors, such as past collection experience, changes in the nature and volume of
the loan  portfolio,  risk  characteristics  of  individual  loans or  groups of
similar loans and underlying  collateral,  overall portfolio quality and current
and prospective economic conditions.  The Bank believes the current level of its
reserves  for loan losses is adequate to provide  for  probable  future  losses;
however,  there are no assurances  that future  losses,  if any, will not exceed
estimated  amounts.  At June 30,  2001,  the Bank had $5.4  million of loan loss
reserves, representing 1.5% of total loans outstanding.

NONINTEREST INCOME. Noninterest income was $1.7 million and $4.8 million for the
three and nine  months  ended June 30,  2001,  compared  $1.1  million  and $2.5
million for the three and nine months  ended June 30, 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
$391,000 and $1.3 million,  respectively, of gains from the previously discussed
sales of loans and  mortgage-backed  securities during the three and nine months
ended June 30,  2001,  compared to no gains from sales during the three and nine
months ended June 30, 2000.

NONINTEREST  EXPENSE.  Noninterest  expenses were $3.9 million and $11.5 million
for the three and nine months ended June 30, 2001,  compared to $4.1 million and
$10.3  million for the three and nine months  ended June 30,  2000.  The largest
component of these expenses,  compensation and fringe benefits, was $2.4 million
and $7.0 million for the three and nine months ended June 30, 2001,  compared to
$2.4 million and $6.4 million for the three and nine months ended June 30, 2000,
reflecting the personnel costs associated with the prior year 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 $1.1 million and $3.0 million for the three
and nine months ended June 30,  2001,  compared to $699,000 and $1.9 million for
the three and nine  months  ended June 30,  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 June
30, 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 June 30, 2001, the Bank had cash, deposits in banks, investment
securities,  mortgage-backed  securities,  FHLB  stock and  loans  held for sale
totaling $164.0 million, or 30.6% 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 FHLB of Atlanta
and the availability of loans held for sale. While scheduled repayments of loans
and  mortgage-backed  securities  are relatively  predictable  sources of funds,
deposit  flows and  general  market  interest  rates,  economic  conditions  and
competition substantially influence loan prepayments.  The Bank also attempts to
manage its deposit pricing in order to maintain a desired deposit mix.

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 June 30, 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 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
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.  SFAS 140 did not have a material
effect on the Company's financial condition or results of operations.

The FASB has issued  Statements of Financial  Accounting  Standards No. 141 (FAS
141),  Business  Combinations,  and  No.  142  (FAS  142),  Goodwill  and  Other
Intangible Assets.

FAS 141 supersedes APB Opinion No. 16, Business Combinations, and FASB Statement
No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires  that all business  combinations  be  accounted  for using the purchase
method. This Statement carries forward without reconsideration those portions of
APB Opinion No. 16, Business Combinations, which provide guidance related to the
application  of the purchase  method.  This Statement  requires that  intangible
assets that meet certain  criteria be recognized as assets apart from  goodwill.
The provisions of this Statement  apply to all business  combinations  initiated
after June 30, 2001.  This Statement  also applies to all business  combinations
accounted  for using the purchase  method for which the date of  acquisition  is
July 1, 2001, or later.

                                       11
<PAGE>

FAS 142 addresses  financial  accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It
addresses how intangible  assets that are acquired  individually or with a group
of other  assets (but not those  acquired in a business  combination)  should be
accounted for in financial  statements  upon their  acquisition.  This Statement
also addresses how goodwill and other intangible  assets should be accounted for
after they have been  initially  recognized  in the financial  statements.  This
Statement carries forward without reconsideration those provisions of Opinion 17
related to the  accounting  for  internally  developed  intangible  assets.  The
provisions  of this  Statement  are required to be applied  starting with fiscal
years beginning  after December 15, 2001 and early  application is permitted for
entities  with fiscal  years  beginning  after  March 15,  2001,  under  certain
conditions.  Impairment  losses for  goodwill  and  indefinite-lived  intangible
assets that arise due to the initial  application of this  Statement  (resulting
from a  transitional  impairment  test) are to be reported as  resulting  from a
change in accounting principle.

The Company is currently evaluating the effect of adopting these pronouncements.

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

Not applicable

ITEM 5.   OTHER INFORMATION

Not applicable

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     A.   Exhibits - None

     B.   Reports on Form 8-K: A Form 8-K was filed on June 25,  2001 under Item
          5: Other  Events,  reporting  the Company had  completed a  previously
          announced 5% stock repurchase program and had adopted a new program to
          repurchase  and  additional  5%  (153,238  shares)  of its  issued and
          outstanding shares of common stock.

                                       12
<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: August 7, 2001                    /s/ William L. Wall
                                        -------------------------
                                        William L. Wall
                                        Executive Vice President
                                        Chief Financial Officer
                                        (Principal Financial Officer)

Date: August 7, 2001                    /s/ Kristie W. Hawkins
                                        --------------------------
                                        Kristie W. Hawkins
                                        Controller
                                        Treasurer
                                        (Principal Accounting Officer)

                                       13