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, 1998.

     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

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


             Delaware                                           56-1999749
 ------------------------------                             -------------------
(State or other jurisdiction of                              (I.R.S. 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, 1998: 2,909,500

<PAGE>

CONTENTS

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

Item 1.   Financial Statements

          Consolidated Statements of Financial Condition as of
          March 31, 1998 (unaudited) and September 30, 1997                    1

          Consolidated Statements of Operations for the Three
          and Six Months Ended March 31, 1998 and 1997 (unaudited)             2

          Consolidated Statements of Stockholders' Equity for
          the Six Months Ended March 31, 1998 (unaudited)                      3

          Consolidated Statements of Cash Flows for the Six
          Months Ended March 31, 1998 and 1997 (unaudited)                     4

          Notes to Consolidated Financial Statements (unaudited)               5


Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                  6

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

Item 1.   Legal Proceedings                                                   11

Item 2.   Changes in Securities                                               11

Item 3.   Defaults Upon Senior Securities                                     11

Item 4.   Submission of Matters to a Vote of Security Holders                 11

Item 5.   Other Information                                                   11

Item 6.   Exhibits and Reports on Form 8-K                                    11


SIGNATURES                                                                    12

<PAGE>

NewSouth Bancorp, Inc.
Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                               March 31      September 30
                                                                   1998              1997
                                                                   ----              ----
Assets                                                      (unaudited)


<S>                                                       <C>               <C>          
Cash and due from banks                                   $   3,746,417     $   3,027,271
Interest-bearing deposits in financial institutions          11,516,971        12,744,980
Investment securities - available for sale                    3,081,356         3,083,422
Mortgage-backed securities - available for sale              36,837,031        24,818,412
Loans receivable, net:
  Held for sale                                              17,302,615        25,055,845
  Held for investment                                       185,210,155       172,729,060
Premises and equipment, net                                   2,793,874         2,818,167
Deferred income taxes                                           708,803           821,863
Real estate owned                                               364,378           357,503
Federal Home Loan Bank stock, at cost                         1,363,800         1,287,500
Accrued interest receivable                                   1,722,586         1,847,346
Prepaid expenses and other assets                             1,470,354           689,828
                                                          -------------     -------------

TOTAL ASSETS                                              $ 266,118,340     $ 249,281,197
                                                          =============     =============


Liabilities and Stockholders' Equity

Liabilities:
 Deposits
  Demand                                                  $  41,517,285     $  37,500,216
  Savings                                                     6,709,434         6,455,357
  Time                                                      152,537,420       131,160,215
                                                          -------------     -------------
               Total deposits                               200,764,139       175,115,788

Borrowed money                                                2,129,143        12,621,120
Accrued interest payable                                         85,421            91,915
Income taxes payable                                             15,797           457,498
Advance payments by borrowers for
 property taxes and insurance                                    64,194           182,731
Other liabilities                                             5,205,395         2,956,558
                                                          -------------     -------------
                                                            208,264,089       191,425,610

Stockholders' equity:
  Preferred stock, $.01 par value, authorized
   1,000,000 shares; none issued
  Common stock, $.01 par value, authorized
    8,000,000 shares; 2,909,500 issued and outstanding           29,095            29,095
  Additional paid in capital                                 42,654,054        42,654,054
  Unallocated ESOP shares, at cost                           (3,077,471)       (3,118,984)
  Unawarded MRP shares, at cost                              (3,275,299)       (2,050,531)
  Unrealized gain(loss) securities-AFS, net                     475,673           300,318
  Retained income, substantially restricted                  21,048,199        20,041,635
                                                          -------------     -------------
  Total stockholders' equity                                 57,854,251        57,855,587
                                                          -------------     -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 266,118,340     $ 249,281,197
                                                          =============     =============
</TABLE>


See Notes to Consolidated Financial Statements.

                                        1
<PAGE>

NewSouth Bancorp, Inc.
Consolidated Statements of Operations
(unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended           Six Months Ended
                                                                  March 31                    March 31
                                                        -------------------------    -------------------------
                                                              1998           1997           1998          1997
                                                        -------------------------    -------------------------

Interest income:
<S>                                                     <C>            <C>           <C>            <C>       
  Interest and fees on loans                            $4,475,135     $3,844,526    $ 8,915,137    $7,417,160
  Interest and dividends on investments and deposits       855,087        511,278      1,654,667     1,021,558
                                                        ----------     ----------    -----------    ----------
           Total interest income                         5,330,222      4,355,804     10,569,804     8,438,718
                                                        ----------     ----------    -----------    ----------


Interest expense:
  Interest on deposits                                   2,238,436      2,050,120      4,398,560     4,121,897
  Interest on borrowings                                    24,036         73,787         67,598        88,995
                                                        ----------     ----------    -----------    ----------
           Total interest expense                        2,262,472      2,123,907      4,466,158     4,210,892
                                                        ----------     ----------    -----------    ----------

Net interest income before provision for possible
  loan losses                                            3,067,750      2,231,897      6,103,646     4,227,826
Provision for  possible loan losses                              0        100,000        100,000       206,578
                                                        ----------     ----------    -----------    ----------
           Net  interest income                          3,067,750      2,131,897      6,003,646     4,021,248
                                                        ----------     ----------    -----------    ----------

Other income:
  Loan fees and service charges                            220,480        168,917        453,334       326,331
  Loan servicing fees                                      185,013        150,174        331,191       311,752
  Gain on sale of real estate, net                          (7,878)         2,091         32,062         2,091
  Gain on sale of mortgage loans and mortgage-
      backed securities                                    272,580             --        402,744         8,140
  Other  income                                             61,821         45,368        101,387        88,444
                                                        ----------     ----------    -----------    ----------
           Total other income                              732,016        366,550      1,320,718       736,758
                                                        ----------     ----------    -----------    ----------

General and administrative expenses:
  Compensation and fringe benefits                       1,919,184        973,633      3,639,793     1,901,371
  Federal insurance premiums                                27,585         27,707         54,280        27,707
  Premises and equipment                                    83,654        105,871        163,914       201,074
  Advertising                                               29,999         67,305         60,200        92,454
  Payroll and other taxes                                  100,972         82,566        184,848       153,227
  Other                                                    396,687        607,228        749,086       956,542
                                                        ----------     ----------    -----------    ----------
           Total general and administrative expenses     2,558,081      1,864,310      4,852,121     3,332,375
                                                        ----------     ----------    -----------    ----------

Income before income taxes                               1,241,685        634,137      2,472,243     1,425,631

Income taxes                                               475,600        248,600        949,300       558,900
                                                        ----------     ----------    -----------    ----------

Net income                                              $  766,085     $  385,537    $ 1,522,943    $  866,731
                                                        ==========     ==========    ===========    ==========


Diluted earnings per share                              $     0.30     $      n/a    $      0.59    $      n/a
                                                        ==========                   ===========

Dividends per share                                     $     0.10     $      n/a    $      0.20    $      n/a
                                                        ==========                   ===========

Average number of common shares outstanding              2,585,188            n/a      2,590,419           n/a
</TABLE>


See Notes to Consolidated Financial Statements.

                                        2
<PAGE>


NewSouth Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
Six Months Ended March 31, 1998
(unaudited)

<TABLE>
<CAPTION>
                                                                                                            Unrealized
                                                                                                              Gain on
                                                                                 Retained                    Available
                                                    Additional     Earnings     Unallocated    Unawarded     For Sale
                                         Common      Paid-in    Substantially      ESOP           MRP       Securities,
                                          Stock      Capital     Restricted       Shares        Shares          Net         Total
                                         -------   -----------   -----------   -----------    -----------    --------    -----------
<S>                                      <C>       <C>           <C>           <C>            <C>            <C>        <C>        
Balance September 30, 1997               $29,095   $42,654,054   $20,041,635   $(3,118,984)   $(2,050,531)   $300,318   $57,855,587

Net income                                                         1,522,943                                              1,522,943

Change in unrealized gains on securities
  available-for-sale, net of taxes                                                                            175,355       175,355

Acquisition of MRP shares                                                                      (1,224,768)               (1,224,768)

Dividends on common stock                                           (516,379)                                              (516,379)

Release of ESOP shares                                                              41,513                                   41,513
                                         -------   -----------   -----------   -----------    -----------    --------   -----------


Balance March 31, 1998                   $29,095   $42,654,054   $21,048,199   $(3,077,471)   $(3,275,299)   $475,673   $57,854,251
                                         =======   ===========   ===========   ===========    ===========    ========   ===========
</TABLE>


See Notes to Consolidated Financial Statements.

                                        3
<PAGE>

NewSouth Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
                                                                           Six Months Ended
                                                                               March 31
                                                                    -----------------------------
                                                                            1998             1997
                                                                    -----------------------------
Operating activities:
<S>                                                                 <C>              <C>         
   Net Income                                                       $  1,522,943     $    866,731
   Adjustments to reconcile net income to net cash provided
    by (used in) operating activities:
      Provision for loan losses                                          100,000          206,578
      Depreciation                                                        77,308           72,765
      ESOP compensation                                                  406,597               --
      Accretion of discounts on securities                                   186           13,217
      Gain on disposal of premises and equipment and real estate
         acquired in settlement of loans                                 (32,062)          (2,091)
      Gain on sale of mortgage loans and mortgage-backed
         securities                                                     (402,744)           8,140
      Originations of loans held for sale, net                       (31,740,998)     (20,421,852)
      Proceeds from sale of loans held for sale                       21,847,266        4,102,921
      Other operating activities                                         659,484       (1,220,819)
                                                                    ------------     ------------
         Net cash used in operating activities                        (7,562,020)     (16,374,410)
Investing activities:
   Proceeds from maturities of securities available for sale                  --        5,000,000
   Purchases of investment securities                                         --       (2,000,000)
   Proceeds from principal repayments and sales of
    mortgage-backed securities available for sale                      6,321,384        5,114,288
   Loan originations, net of principal repayments of loans
    held for investment                                              (12,771,793)     (19,807,026)
   Proceeds from disposal of premises and equipment and
    real estate acquired in settlement of loans                          217,654          104,840
   Redemptions (purchases) FHLB Stock                                    (76,300)              --
   Purchases of premises and equipment                                   (53,015)         (18,250)
                                                                    ------------     ------------
      Net cash used in investing activities                           (6,362,070)     (11,606,148)
Financing activities:
   Net increase in deposit accounts                                   25,648,351       60,567,952
   Proceeds from FHLB borrowings                                       8,500,000       25,000,000
   Repayments of FHLB borrowings                                     (19,500,000)     (25,000,000)
   Acquisition of MRP shares                                          (1,224,768)              --
   Cash dividends paid                                                  (516,379)              --
   Net change in repurchase agreements                                   508,023          183,116
                                                                    ------------     ------------
      Net cash provided by financing activities                       13,415,227       60,751,068

Increase (decrease) in cash and cash equivalents                        (508,863)      32,770,510

Cash and cash equivalents, beginning of period                        15,772,251        8,576,577
                                                                    ------------     ------------

Cash and cash equivalents, end of period                            $ 15,263,388     $ 41,347,087
                                                                    ============     ============


Supplemental disclosures:
   Real estate acquired in settlement of loans                      $    190,698     $    839,198
   Exchange of loans for mortgage-backed securities                 $ 17,958,559     $  8,310,216
</TABLE>


See Notes to Consolidated Financial Statements.

                                        4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.  Nature of Business

NewSouth Bancorp,  Inc.  (the"Company")  was incorporated  under the laws of the
State of Delaware for the purpose of becoming  the holding  company for NewSouth
Bank (the "Bank") in connection with the Bank's conversion from a North Carolina
chartered mutual savings bank to a North Carolina  chartered  commercial bank on
April 7, 1997,  pursuant  to its Plan of  Conversion.  NewSouth  Bank opened for
business the first day under that name on April 8, 1997. The common stock of the
Company  began  trading on the Nasdaq  National  Market  System on April 8, 1997
under the symbol "NSBC".

Note 2.  Basis of Presentation

The accompanying  unaudited  consolidated  financial  statements (except for the
Statement of Financial  Condition at September 30, 1997,  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,  although the Company did not own any
shares of the Bank and had no assets,  liabilities,  equity or operations at any
date prior to April 7, 1997.  Therefore,  although certain financial  statements
presented  in this  Form  10-Q  include  periods  prior to April 7,  1997,  such
statements  include only the accounts and operations of the Bank. The results of
operations  for the three and six month  periods  ended  March 31,  1998 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1998.

Note 3.  Earnings Per Share

The Company's earnings per share for the three and six month periods ended March
31,  1998 is based on  weighted  average  shares  of  2,585,188  and  2,590,419,
respectively,  of common stock outstanding,  excluding ESOP and MRP benefit plan
shares not  committed  to be released or granted.  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". The Company adopted SFAS No.
128 on October 1, 1997 and it has had no effect on  earnings  per share,  as the
Company had no common stock  equivalents or convertible  securities  outstanding
during the three and six month periods ended March 31, 1998.

Note 4.  Dividends Declared

On March 19, 1998, the Board of Directors  declared a cash dividend of $0.10 per
share to  stockholders  of record as of April 2, 1998 and  payable  on April 24,
1998. This dividend  payment  represents a payout ratio of 33.3% of the earnings
for the quarter  ended  March 31,  1998.

                                       5
<PAGE>

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

Prior to April 7, 1997 the  Company  had no assets and  engaged  in no  business
activities.  Subsequent to the stock  conversion,  the Company has engaged in no
significant  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, 1998 and September 30, 1997

Total  consolidated  assets  were $266.1  million at March 31, 1998  compared to
$249.3 million at September 30, 1997.  Total earning  assets  increased by $15.6
million to $255.3 million at March 31, 1998 from $239.7 million at September 30,
1997.

Interest-bearing  deposits in financial institutions were $11.5 million at March
31, 1998  compared  to $12.7  million at  September  30,  1997.  These funds are
primarily  used  to  support  the  liquidity  management  activities  and  daily
operations  of the Bank . Since  September  30, 1997,  the Bank has  implemented
various investment  strategies as a newly-converted  commercial bank to increase
its regulatory liquidity levels. The Bank has securitized certain mortgage loans
previously  held  for  sale  into  mortgage-backed  securities,  resulting  in a
mortgage-backed securities portfolio of $36.8 million at March 31, 1998 compared
to $24.8  million  at  September  30,  1997.  Consequently,  loans held for sale
declined to $17.3  million at March 31, 1998 from $25.1 million at September 30,
1997. The Bank continued to experience  favorable  consumer and commercial  loan
demand as loans held for  investment  increased  to $185.2  million at March 31,
1998 from $172.7  million at September 30, 1997. To support the risk  associated
with these types of loans,  the Bank had reserves for  potential  loan losses of
$3.2  million  at  March  31,  1998 and  September  30,  1997,  or 1.6% of loans
outstanding at the end of each period. Earning assets amounted to 96.0% of total
assets at March 31, 1998, compared to 96.2% at September 30, 1997.

Total interest-bearing liabilities increased to $202.9 million at March 31, 1998
from $187.7  million at September 30, 1997.  Total  deposits  increased by $25.7
million,  or 14.6%,  to $200.8  million at March 31, 1998 from $175.1 million at
September 30, 1997.  Borrowed  money  declined to $2.1 million at March 31, 1998
from  $12.6  million,  reflecting  principal  repayments  attributable  to funds
provided from the aforementioned deposit growth.

Stockholders'  equity was $57.9  million at March 31, 1998 and at September  30,
1997. See "Consolidated  Statements of Stockholders' Equity". At March 31, 1998,
the Company's  stockholders'  equity to total assets ratio was 21.7% compared to
23.2% at September 30, 1997. 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 $41.0 million at March
31, 1998,  substantially in excess of all regulatory capital  requirements.  See
"Liquidity and Capital Resources" below.

During the six months  ended March 31, 1998,  the  Management  Recognition  Plan
("MRP")  established  for the future  benefit of  directors  and officers of the
Company and the Bank,  purchased  38,680 shares of the Company's common stock in
the open market at an average cost of $31.66 per share,  totaling  approximately
$1.2 million. These shares are being held in trust for

                                       6
<PAGE>

future awards,  subject to stockholder approval, and are reported as a reduction
in stockholders' equity. The MRP has purchased in the open market 116,380 shares
of the Company's common stock, or 4% of all issued and outstanding  shares, at a
weighted average cost of $28.14 per share.

On March 19, 1998 the board of  directors  of the  Company  declared a quarterly
cash  dividend of $0.10 per share,  payable  April 24, 1998 to  stockholders  of
record  of  April  2,  1998.  This  dividend  payment  is the  Company's  fourth
consecutive  quarterly  cash dividend and  represents a payout ratio of 33.3% of
the consolidated earnings for the three months ended March 31, 1998.

Comparison  of  Operating  Results for the Three and Six Months  Ended March 31,
1998 and 1997

General.  Net  income  for the three and six  months  ended  March 31,  1998 was
$766,000 and $1.5  million,  compared to $386,000 and $867,000 for the three and
six months ended March 31, 1997.  Earnings per share are only  presented for the
three and six months ended March 31, 1998.  Prior to the completion of its stock
conversion  on April 7,  1997,  the  Company  had no assets  and  engaged  in no
business activities. Accordingly, prior period comparative financial information
relates to the Bank only, as the Company had not completed its stock offering.

Interest Income. Interest income increased to $5.3 million and $10.6 million for
the three and six  months  ended  March 31,  1998,  from $4.3  million  and $8.4
million for the three and six months  ended  March 31,  1997.  This  increase is
primarily attributable to the increase in the volume of interest-earning assets,
due from the  infusion  of the  proceeds  received  from the  stock  conversion.
Average   interest-earning  assets  were  $246.8  million  and  $243.3  million,
respectively  for the three and six months  ended  March 31,  1998,  compared to
$206.8  million and $199.7  million for the three and six months ended March 31,
1997. The yield on average  interest-  earning assets increased to 8.6% and 8.7%
for the three and six  months  ended  March 31,  1998 from 8.4% and 8.5% for the
three and six months ended March 31, 1997.

Interest  Expense.  Interest  expense on deposits  and  borrowings  had marginal
increases  to $2.3  million and $4.5  million for the three and six months ended
March 31, 1998 from $2.1  million and $4.2  million for the three and six months
ended March 31, 1997. Average  interest-bearing  liabilities increased to $194.9
million  and $191.7  million  for the three and six months  ended March 31, 1998
from $186.2  million and $181.6 million for the three and six months ended March
31,  1997.  The  effective  cost of  average  interest-bearing  liabilities  had
marginal increases to 4.6% and 4.7%, respectively,  for the three and six months
ended March 31, 1998 from 4.5% and 4.6% for the three and six months ended March
31,  1997.  In addition,  the Bank has  increased  its checking  account base by
10.7%,  to $41.5  million at March 31, 1998 from $37.5  million at September 31,
1997, reflecting its efforts of attracting lower costing core deposits.

Net  Interest  Income.  Net interest  income  increased to $3.1 million and $6.1
million for the three and six months  ended March 31, 1998 from $2.2 million and
$4.2 million for the three and six months ended March 31,  1997.  This  increase
resulted  from the  combination  of the  increase  in the  yield  and  volume of
interest-earning  assets in excess of the cost and volume of  interest-  bearing
liabilities.  The Bank's  interest  rate  spread  (the  difference  between  the
effective  yield on average  interest-earning  assets and the effective  cost of
average interest-bearing liabilities) increased to 4.0%, respectively,  for both
the three and six months ended March 31, 1998 from

                                       7
<PAGE>

3.9%, respectively,  for both the three and six months ended March 31, 1997. The
Bank's net yield on  interest-earning  assets (net  interest  income  divided by
average interest-earning  assets) increased to 5.0%, respectively,  for both the
three and six months  ended  March 31, 1998 from 4.3% and 4.2% for the three and
six months ended March 31, 1997.

Provision  for Loan Losses.  During the three  months ended March 31, 1998,  the
Bank recorded no provisions for loan losses, but recorded $100,000 of additional
provisions during the six months ended March 31, 1998,  compared to $100,000 and
$207,000 for the three and six months ended March 31,  1997.  Provisions,  which
are  charged to  operations,  and the  resulting  allowance  for loan losses are
amounts  the Bank  believes  will be  adequate  to  absorb  potential  losses on
existing  loans that may become  uncollectible.  Increases  or  decreases in the
provision and resulting allowances are based upon a review and classification of
the Bank's 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
maintained  an  allowance  for loan losses of $3.2 million at March 31, 1998 and
September 30, 1997, respectively,  or 1.6% of total loans outstanding at the end
of each period.  The Bank  believes the current  level of its allowance for loan
losses is adequate to provide for possible future losses,  although there are no
assurances  that  possible  future  losses,  if any,  will not exceed  estimated
amounts.

Noninterest  Income.  Noninterest  income increased to $732,000 and $1.3 million
for the three and six months ended March 31, 1998 from $366,000 and $737,000 for
the three and six months ended March 31, 1997.  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.  During the three and six months ended March 31, 1998, the Bank recorded
gains  from  sales of loans  and  mortgage-backed  securities  of  $273,000  and
$403,000, respectively, compared to no gains in the three months ended March 31,
1997 and $8,000 for the six months ended March 31, 1997. The volume of loans and
mortgage-backed  securities  sold during the 1998 periods was $16.3  million and
$21.8  million,  respectively,  compared  to no sales and $1.0  million  for the
respective 1997 periods.

Noninterest Expense. Noninterest expenses were $2.5 million and $4.8 million for
the three and six months ended March 31, 1998, compared to $1.9 million and $3.3
million for the three and six months  ended March 31, 1997.  The largest  single
component of these expenses, compensation and fringe benefits, increased to $1.9
million and $3.6  million for the three and six months ended March 31, 1998 from
$974,000  and $1.9  million for the three and six months  ended March 31,  1997.
During  the  three  and six  months  ended  March  31,  1998,  the Bank  accrued
approximately $673,000 and $1.1 million of estimated bonuses under a bonus plan.
In  addition,  during the three and six months  ended March 31,  1998,  the Bank
recorded  $198,000  and  $407,000 in benefits  expense  for the  Employee  Stock
Ownership Plan  ("ESOP").  Other  noninterest  expenses  including  premises and
equipment,  advertising,  and office supplies remained  relatively constant from
period to period.

The bonus plan was adopted in September 1997 to provide  incentive  compensation
to directors,  officers and certain employees only in the event the MRP intended
to be submitted to the  stockholders  of the Company for approval at an April 8,
1998 special meeting of stockholders

                                       8
<PAGE>

was not approved.  The amounts accrued under the bonus plan during the three and
six month periods ended March 31, 1998 were  approximately  equal to the amounts
that would be accrued for the prospective  MRP awards,  in the event the MRP was
approved at the special  meeting.  However,  no payments  were made to potential
awardees  under the bonus plan pending the outcome of the vote on the MRP at the
special meeting. The MRP was approved by the stockholders at the special meeting
and the bonus plan has been  terminated  with no payments or awards  having been
made. No further  accruals under the MRP were deemed necessary for the three and
six months ended March 31, 1998, as the accrual for potential payments under the
bonus plan were  approximately  equal to the accrual that  otherwise  would have
been necessary with respect to the awards under the MRP during these periods.

As part of the stock  conversion,  the  Company  formed  an ESOP  that  acquired
232,760 shares of the Company's  common stock , 8% of all issued and outstanding
shares.  The  compensation  expense  associated  with  the ESOP is  reported  in
accordance  with SOP 93-6,  "Employers'  Accounting for Employee Stock Ownership
Plans".

Income Taxes. Income tax expense was $476,000 and $949,000 for the three and six
months ended March 31, 1998, compared to $248,000 and $559,000 for the three and
six months  ended  March 31,  1997.  The  changes  in the  amounts of income tax
provisions  reflects the changes in income before income taxes 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, 1998,  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, 1998, the Bank had cash, deposits in banks, investment
securities,  mortgage-backed  securities,  FHLB  stock and  loans  held for sale
totaling $73.8 million, or 27.8% of total assets.

The Bank  believes it has the ability to meet  future  liquidity  needs with its
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 loan prepayments are
substantially  influenced by general market interest rates,  economic conditions
and  competition.  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  stockholders'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-

                                       9
<PAGE>

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,
1998.

Impact of Inflation and Changing Prices

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

Year 2000 Compliance

The year 2000 poses many  challenges  for the banking  industry.  Many automated
applications may cease to properly  function as a result of how date fields have
historically been programmed.  Many programs were designed and developed without
considering the impact of the upcoming change in the century. Failure to address
this  issue in a timely  manner may cause  banking  institutions  to  experience
operational  problems  and could cause  disruption  of financial  markets.  Many
experts  believe that even the most prepared  organizations  may encounter  some
implementation  problems.  As a result,  NewSouth Bank has developed a Year 2000
Strategic Plan (the "Plan") to take the necessary  steps to insure that problems
and disruptions are minimized.

The Bank's primary data  processing  systems are outsourced to service  bureaus,
who are  addressing  their Year 2000 program  changes.  The Bank's Plan includes
independent  verification  of Year  2000  compliance  with its  data  processing
service bureau, vendors,  suppliers,  customers and others as may be identified.
The plan also includes  analyzing,  testing,  and  documenting  that its service
bureau systems, and personal computers and equipment the Bank owns are Year 2000
compliant (including each PC, printer,  modem, ATM, etc.). The Bank believes the
cost of addressing the Year 2000 issue will have no material  impact on earnings
or  uncertainty  that  would  cause  reported  financial  information  not to be
necessarily indicative of future operating results or financial condition.

In a related  matter,  during  the six months  ended  March 31,  1998,  the Bank
entered into a services agreement with a new data processing vendor, Bisys, Inc.
Bisys is a  leading  national  provider  of  integrated  outsourcing  technology
solutions.  The Bank  anticipates  completing  the  conversion  to the new Bisys
system during the June 1998 quarter.  Bisys has developed a  comprehensive  Year
2000 testing and verification  program.  Through the Bisys client test facility,
end-to-end  testing will be provided for all the Bank's  hardware,  software and
interfaces.

                                       10
<PAGE>

PART II.  OTHER INFORMATION

Item l.  Legal Proceedings

The Company is not engaged in any legal  proceedings  at the present time.  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 12, 1998, the
following  matters were submitted to a vote of  stockholders  with the following
results:

     A.  The election of directors:

         Name                           Votes For               Votes Withheld
         ----                           ---------               --------------
         Linley H. Gibbs, Jr.           2,472,428                    2,905
         Thomas A. Vann                 2,472,128                    3,205

Item 5.  Other Information

Not applicable

Item 6.  Exhibits and Reports on Form 8-K

     A.  Exhibits

         Exhibit 27 - Financial Data Schedule

     B.  Reports on Form 8-K

         Not applicable

                                       11
<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.


                                                  NEWSOUTH BANCORP, INC.


Date:    May 8, 1998                              /s/ William L. Wall
                                                  -----------------------------
                                                  William L. Wall
                                                  Executive Vice President
                                                  Chief Financial Officer
                                                  (Principal Financial Officer)


Date:    May 8, 1998                              /s/ Kristie W. Hawkins
                                                  -----------------------------
                                                  Kristie W. Hawkins
                                                  Controller
                                                  Treasurer
                                                  (Principal Accounting Officer)

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