# UNITED STATESSECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549

# Form 10-KSB

(Mark One)   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
       For the Fiscal Year Ended:  December 31, 2006

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from __________ to ________

Commission file number 333-127242

Atlantic Bancshares, Inc.
(Name of small business issuer in its charter)

|South Carolina                           |  | 20-3047433                          
|---------------------------------------- |  | ------------------------------------
|(State of Incorporation)                 |  | (I.R.S. Employer Identification No.)
|                                         |  |                                     
|1 Sherington Drive, Suite J              |  |                                     
|Bluffton, South Carolina                 |  | 29910                               
|(Address of principal executive offices) |  | (Zip Code)                          

Issuers telephone
number:  (843) 815-7111

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:  None

Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 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      No

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).      
Yes      No

State issuer's revenues for
its most recent fiscal year. $2,178,283

The estimated aggregate market value
of the Common Stock held by non-affiliates (shareholders holding less than 5% of an
outstanding class of stock, excluding directors and executive officers) of the Company on
March 19, 2007 was $11,303,840.Because there is not an active trading market for
the Common Stock, we have used our initial public offering price of $10.00 as an estimate
of the market value of a share of our Common Stock for purposes of calculating our public
float.

As of March 23, 2007, the Company had
1,251,577 shares of common stock outstanding.

DOCUMENTS INCORPORATED
BY REFERENCENone.

Transitional Small Business
Disclosure Format.   (Check one):   Yes  
    No

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# Part I

# Item 1.   
Description of Business

This
Report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934.
These statements are based on many assumptions and estimates and are not guarantees of
future performance. Our actual results may differ materially from those anticipated in any
forward-looking statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words may,
would, could, will, expect,
anticipate, believe, intend, plan, and
estimate, as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are not limited
to, those described below under Risk Factors and the following:

| | significant increases in competitive pressure in the banking and financial services
industries;
|- | -----------------------------------------------------------------------------------------------

| | changes in the interest rate environment which could reduce anticipated
or actual margins;
|- | ------------------------------------------------------------------------------------------

| | changes in political conditions or the legislative or regulatory
environment;
|- | -----------------------------------------------------------------------------

| | general economic conditions, either nationally or regionally and
especially in our primary service area, becoming less favorable than expected,
resulting in, among other things, a deterioration in credit quality;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | changes occurring in business conditions and inflation;
|- | -------------------------------------------------------

| | changes in technology;
|- | ----------------------

| | changes in monetary and tax policies;
|- | -------------------------------------

| | the level of allowance for loan loss;
|- | -------------------------------------

| | the rate of delinquencies and amounts of charge-offs;
|- | -----------------------------------------------------

| | the rates of loan growth;
|- | -------------------------

| | adverse changes in asset quality and resulting credit risk-related losses and expenses;
|- | ---------------------------------------------------------------------------------------

| | loss of consumer confidence and economic disruptions resulting
from terrorist activities;
|- | -----------------------------------------------------------------------------------------

| | changes in the securities markets; and
|- | --------------------------------------

| | other risks and uncertainties detailed from time to time in our filings with the Securities and
Exchange Commission.
|- | --------------------------------------------------------------------------------------------------------------------

We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed in this report might not occur.

# General

Atlantic
Bancshares, Inc. was incorporated in South Carolina in June 2005 for purposes of operating
as a bank holding company. Our wholly-owned subsidiary, Atlantic Community Bank, commenced
business on January 26, 2006, and is primarily engaged in the business of accepting
savings, demand, and time deposits and providing mortgage, consumer and commercial loans
to the general public.

# Risk Factors

We are a new bank that
has incurred losses to date, and there is a risk we may never become profitable.

Our
bank is a de novo bank that began operations in January 2006. As is typical with most new
banks, we incurred substantial start-up expenses and are still operating with an
accumulated deficit. In order for us to become profitable, we will need to attract a
larger number of customers to deposit and borrow money. Our future profitability is also
dependent on numerous other factors including the continued success of the economy of the
community and favorable government regulation. While the economy in this area has been
strong in recent years, an economic downturn in the area would hurt our business. We are
also a highly regulated institution. Our ability to grow and achieve profitability may be
adversely affected by state and federal regulations that limit a banks right to make
loans and purchase securities. Although we expect to become profitable in our third year
of

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operation, there is a risk that a
deterioration of the local economy or adverse government regulation could affect our
plans. If this happens, we may never become profitable and you will lose part or all of
your investment.

Our decisions regarding
credit risk and reserves for loan losses may materially and adversely affect our business.

Making
loans and other extensions of credit is an essential element of our business. Although we
seek to mitigate risks inherent in lending by adhering to specific underwriting practices,
our loans and other extensions of credit may not be repaid. The risk of nonpayment is
affected by a number of factors, including:

| |  | the duration of the credit;
| | - | ---------------------------

| |  | credit risks of a particular customer;
| | - | --------------------------------------

| |  | changes in economic and industry conditions; and
| | - | ------------------------------------------------

| |  | in the case of a collateralized loan, risks resulting from uncertainties about the future
value of the collateral.
| | - | ------------------------------------------------------------------------------------------------------------------

We
attempt to maintain an appropriate allowance for loan losses to provide for potential
losses in our loan portfolio. We periodically determine the amount of the allowance based
on consideration of several factors, including:

| |  | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

| |  | our historical loan loss experience;
| | - | ------------------------------------

| |  | evaluation of economic conditions;
| | - | ----------------------------------

| |  | regular reviews of loan delinquencies and loan portfolio quality; and
| | - | ---------------------------------------------------------------------

| |  | the amount and quality of collateral, including guarantees, securing the loans.
| | - | -------------------------------------------------------------------------------

There
is no precise method of predicting credit losses; therefore, we face the risk that
charge-offs in future periods will exceed our allowance for loan losses and that
additional increases in the allowance for loan losses will be required. Additions to the
allowance for loan losses would result in a decrease of our net income, and possibly our
capital.

While
we generally underwrite the loans in our portfolio in accordance with our own internal
underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we
have made loans which exceed either our internal underwriting guidelines, supervisory
guidelines, or both. As of December 31, 2006, approximately $7 million of our loans, or
67.0% of our companys capital, had loan-to-value ratios that exceeded regulatory
supervisory guidelines, of which 7 loans totaling approximately $500,000 had loan-to-value
ratios of 100% or more. At December 31, 2006, $2.3 million of our commercial loans, or
21.6% of our companys capital, exceeded the supervisory loan to value ratio. The
number of loans in our portfolio with loan-to-value ratios in excess of supervisory
guidelines, our internal guidelines, or both could increase the risk of delinquencies and
defaults in our portfolio.

We are dependent on
Robert Trask and our business would suffer if something were to happen to him or if he
were to leave.

Our
growth and development will largely be the result of the contributions of our president,
Robert Trask. The performance of community banks, like Atlantic Community Bank, is often
dependent upon the ability of executive officers to promote the bank in the local market
area. Mr. Trask has extensive and long-standing ties within our primary service areas and
will provide us with an important medium through which to market our products and
services. If we lose the services of Mr. Trask, he would be difficult to replace and our
business and development could be materially and adversely affected. We have an employment
agreement with Mr. Trask and have $1,000,000 of insurance on his life payable to the bank.

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Lack of seasoning of our
loan portfolio may increase the risk of credit defaults in the future.

Due
to our short operating history, the loans in our loan portfolio and our lending
relationships are of relatively recent origin. In general, loans do not begin to show
signs of credit deterioration or default until they have been outstanding for some period
of time, a process we refer to as seasoning. As a result, a portfolio of older
loans will usually behave more predictably than a newer portfolio. Because our loan
portfolio is new, the current level of delinquencies and defaults may not be
representative of the level that will prevail when the portfolio becomes more seasoned,
which may be higher than current levels. If delinquencies and defaults increase, we may be
required to increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.

A significant portion of
our loan portfolio is secured by real estate, and events that negatively impact the real estate
market could hurt our business.

A significant portion of our loan
portfolio is secured by real estate. As of December 31, 2006, approximately 90% of our
loans had real estate as a primary or secondary component of collateral. The real estate
collateral in each case provides an alternate source of repayment in the event of default
by the borrower and may deteriorate in value during the time the credit is extended. A
weakening of the real estate market in our primary market area could result in an increase
in the number of borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, which in turn could have an adverse effect on our
profitability and asset quality. If we are required to liquidate the collateral securing a
loan to satisfy the debt during a period of reduced real estate values, our earnings and
capital could be adversely affected. Acts of nature, including hurricanes, tornados,
earthquakes, fires and floods, which may cause uninsured damage and other loss of value to
real estate that secures these loans, may also negatively impact our financial condition.

We face strong
competition for customers, which could prevent us from obtaining customers
and may cause us to payhigher interest rates to attract customers.

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual
funds, as well as other super-regional, national, and international financial institutions
that operate offices in our primary market areas and elsewhere. We compete with these
institutions both in attracting deposits and in making loans. In addition, we have to
attract our client base from other existing financial institutions and from new residents.
Many of our competitors are well-established, larger financial institutions. These
institutions offer some services, such as extensive and established branch networks, that
we do not currently provide. Also, a number of community banks are entering our primary
service area. They include denovo banks and branches of established banking operations,
both headquartered in-market as well as out-of-market. As is the case with other financial
service providers, they are attracted to our primary service areas demographic
trends and growing deposit base. There is a risk that we will not be able to compete
successfully with other financial institutions in our market, and that we may have to pay
higher interest rates to attract deposits, resulting in reduced profitability. In
addition, competitors that are not depository institutions are generally not subject to
the extensive regulations that apply to us.

We are subject to
extensive regulation that could limit or restrict our activities. This regulation is \
for protection of the banks depositors and not for the investors.

We
operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by various regulatory agencies. Our compliance with these
regulations is costly and restricts certain of our activities, including payment of
dividends, mergers and acquisitions, investments, loans and interest rates charged,
interest rates paid on deposits, and locations of offices. We are also subject to

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capitalization guidelines established
by our regulators, which require us to maintain adequate capital to support our growth.

The
laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial
banks and bank holding companies, our cost of compliance could adversely affect our
ability to operate profitably.

Although
we are subject to extensive and comprehensive regulation by various banking regulatory
agencies such as the FDIC and the South Carolina Board of Financial Institution, the
purpose of these banking regulatory agencies is to protect and insure the interests and
deposits of our banks depositors. These agencies do not consider preserving or
maximizing the investment made by the companys investors when regulating the
banks activities.

We will face risks with
respect to future expansion and acquisitions or mergers.

Although
we do not have any current plans to do so, we may seek to acquire other financial
institutions or parts of those institutions. We may also expand into new markets or lines
of business or offer new products or services. These activities would involve a number of
risks, including:

| |  | taking additional time and creating expense associated with identifying and evaluating
potential acquisitions and merger partners;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | using inaccurate estimates and judgments to evaluate credit, operations, management, and
market risks with respect to the target institution or assets;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diluting our existing shareholders in an acquisition;
| | - | -----------------------------------------------------

| |  | taking additional time and creating expense associated with evaluating new markets for
expansion, hiring experienced local management, and opening new offices, as there may be a
substantial time lag between these activities before we generate sufficient assets and
deposits to support the costs of the expansion;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking a significant amount of time negotiating a transaction or working on expansion
plans, resulting in managements attention being diverted from the operation of our
existing business;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking time and creating expense integrating the operations and personnel of the combined
businesses;
| | - | -----------------------------------------------------------------------------------------------------

| |  | creating an adverse short-term effect on our results of operations; and
| | - | -----------------------------------------------------------------------

| |  | losing key employees and customers as a result of an acquisition that is poorly received.
| | - | -----------------------------------------------------------------------------------------

We
have never acquired another institution before, so we lack experience in handling any of
these risks. There is also a risk that any expansion effort will not be successful.

The costs of being an SEC
registered company are proportionately higher for small companies such as Atlantic Bancshares
because of the requirements imposed by the Sarbanes-Oxley Act.

The
Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the
Securities and Exchange Commission have increased the scope, complexity, and cost of
corporate governance, reporting, and disclosure practices. These regulations are
applicable to our company. We expect to experience increasing compliance costs, including
costs related to internal controls, as a result of the Sarbanes-Oxley Act. These necessary
costs are proportionately higher for a company of our size and will affect our
profitability more than that of some of our larger competitors.

We
are in the process of evaluating our internal controls over financial reporting to allow
management to report on our internal controls over financial reporting for our fiscal year
2007, and for our independent registered public accounting firm to attest to our internal
controls for fiscal year 2008, as required by regulations relating to Section 404 of the
Sarbanes-Oxley Act. While we currently anticipate that we will be able to fully

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implement the requirements relating
to internal controls and other aspects of Section 404 in a timely manner, we could
identify deficiencies that we may not be able to remediate in time to meet the applicable
deadlines. If we are not able to implement or maintain the requirements of Section 404 in
a timely manner or with adequate compliance, we could be subject to scrutiny by regulatory
authorities and the trading price of our stock could decline. Moreover, effective internal
controls are necessary for us to produce reliable financial reports and are important to
helping prevent financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed, investors and
regulators could lose confidence in our reported financial information, and the trading
price of our stock could drop significantly. We currently anticipate that we will fully
implement the requirements relating to internal controls and all other aspects of Section
404 within the required time frames.

An economic downturn,
especially one affecting Beaufort and Jasper Counties and the surrounding communities, could
reduce our customer base, our level of deposits, and demand for financial products
such as loans.

Our
success will significantly depend upon the growth in population, income levels, deposits,
and housing starts in our primary service area. If the primary service area in which we
operate does not grow or if prevailing economic conditions locally or nationally are
unfavorable, our business may not succeed. An economic downturn would likely contribute to
the deterioration of the quality of our loan portfolio and reduce our level of deposits,
which in turn would hurt our business. If an economic downturn occurs in the economy as a
whole, or in our primary market, borrowers may be less likely to repay their loans as
scheduled. Moreover, the value of real estate or other collateral that may secure our
loans could be adversely affected. Unlike many larger institutions, we are not able to
spread the risks of unfavorable local economic conditions across a large number of
diversified economies. An economic downturn could, therefore, result in losses that
materially and adversely affect our business.

Changes in prevailing
interest rates may reduce our profitability.

Our
results of operations depend in large part upon the level of our net interest income,
which is the difference between interest income from interest-earning assets, such as
loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and other borrowings. Depending on the terms and maturities
of our assets and liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. Many factors cause changes in interest
rates, including governmental monetary policies and domestic and international economic
and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our
efforts may not be effective and our financial condition and results of operations could
suffer.

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# Marketing Focus

Historically,
the banks in Beaufort County were local branches of large regional banks. Recently there
has been, and there may continue to be, an influx of community banks within our primary
service area. The mix of incoming banks includes denovo banks and established operations,
both headquartered in-market as well as out-of-market. Size continues to provide the
larger banks certain advantages in competing for business from large corporations,
including higher lending limits and the ability to offer services in other areas of South
Carolina and in Beaufort County.

We
have created a niche in the community banking market in our primary service area via our
staffing, advertising and approach to service. Generally, we do not attempt to compete for
the banking relationships of large corporations, but concentrate our efforts on small to
medium-sized businesses, entrepreneurs and professional concerns. The bank advertises to
emphasize the companys brand image, local ownership, community bank nature, and
ability to provide more personalized service than its competition.

# Location and Service Area

Our
main office is currently located at 1 Sherington Drive, Suite J (Sheridan Park), Bluffton,
South Carolina 29910. The location was formerly subleased through Regional Bankshares,
Inc. until January 24, 2006 when we entered into a new lease with Carolina Partners, LLC.
The facility is 2,190 square feet and is leased until 2010 with a three-year option to
renew. We also lease a facility for our operations department at 70 Pennington Drive,
Suite 21 (Sheridan Park), Bluffton, South Carolina 29910. This facility is approximately
1⁄4 mile south of the Sheridan Park branch location and is in the same commercial
subdivision. This operations department facility has approximately 2,000 square feet of
office space and houses between seven and ten employees. We anticipate leasing the
location housing our operations department through 2007 and possibly into 2008. We are
exploring the possibility of entering into a new lease agreement for a facility that would
consolidate and house both our main office and our operations department.

We
also have a loan production office located at 1 Corpus Christi Place, Suite 108, Hilton
Head Island, South Carolina 29928. The 1,837 square feet facility housing the loan
production office is leased from MB Partners, LLC, a separate company whose ownership, in
part, includes the eight directors of Atlantic Bancshares, Inc.

Current
plans project opening additional branch offices within five years. As is the case with any
and all branching efforts, we would need to receive approval from appropriate regulatory
bodies. We anticipate converting our Hilton Head Island loan production office into a full
service depository branch. In 2006, MB Partners, LLC purchased an approximately one and a
half acre commercial parcel in Jasper County. This commercial parcel is located at the
corner of Meade Road and Argent Boulevard. We may enter into a purchase, lease and/or
build-to-suit agreement relating to this parcel and the development of a branch facility
on this parcel. In the event that Atlantic Bancshares, Inc. determines to move forward
with a branch on this parcel, we would, again, need to receive, prior to consummation,
approval from appropriate regulatory bodies.

Our
primary service area consists of southern Beaufort County and a portion of Jasper County.
Our office is located in Bluffton.Our geographical market area includes southern
Beaufort County and a portion of Jasper County. The area is generally defined by the Broad
River and Interstate 95 to the North, the State of Georgia to the South, the Atlantic
Ocean and Broad River to the East, and Interstate 95 to the West. Additional communities
falling within our market area include Hilton Head Island, Palmetto Bluff, Pritchardville,
Sun City, Okatie, Hardeeville and Ridgeland.

Our
primary service areas economic strength comes from the industries of tourism, real
estate development, education, government and services. The commercial sector of the
economy is orientated towards real estate development. According to Claritas, Inc., a
marketing research firm, 2006s average household income in our primary service area
was $89,196 compared to $65,849 for the United States as a whole. Within

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the primary service area, the average
household income is projected to increase by 10.3% between 2006 and 2011. We believe that
the community will continue to experience rapid growth in the commercial sectors offering
services to residents and visitors. We anticipate that growth in residential and
commercial activity in the primary service area and surrounding areas will increase the
demand for depository and lending services within our market and believe that the
conditions are favorable for the growth of our company.

We
believe our primary service area will sustain continued growth. According to Claritas,
Inc., the population growth for our primary service area from 2000 to 2006 was
approximately 18.6%. They are projecting a growth of 12.7% between 2006 and 2011 compared
to the projected national average of 4.8%. The number of households in our primary service
area is projected to increase by 13.5% between 2006 and 2011 compared to the projected
national average of 5%. As a result, we anticipate the areas expanding population
and expected growth in total households will enlarge Atlantic Community Banks
potential customer base.

# Lending Activities

General.
          We offer a range of lending services, including real estate, commercial, and
          equity-line and consumer loans to individuals, small- to medium-sized
          businesses, and professional concerns that are located in or conduct a
          substantial portion of their business in the banks market area. We compete
          for these loans with competitors who are well established in our service area
          and have greater resources and lending limits and also denovo banking
          organizations new to our market. As a result, we have charged, from time to
          time, lower interest rates to attract borrowers and may continue to do so.

The
well established banks in our service area will make proportionately more loans to
medium-to-large-sized businesses than we will. Many of the banks commercial loans
are made to small-to-medium-sized businesses which are less able to withstand competitive,
economic, and financial conditions than larger borrowers.

Loan
Approval and Review. The banks loan approval policies provide for various levels
of officer lending authority. When the amount of aggregate loans to a single borrower
exceeds that individual officers lending authority, the loan request is considered
and approved by an officer with a higher lending limit or the board of directors
loan committee. The bank does not make any loans to any director of the bank unless the
loan is approved by the board of directors of the bank and is made on terms not more
favorable to the person than would be available to a person not affiliated with the bank.
The bank currently intends to adhere to Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation guidelines in its mortgage loan review process, but may
choose to alter this policy in the future. The bank sells residential mortgage loans that
it originates on the secondary market.

Loan Distribution.
The distribution of our loans for the first year is as follows:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

Our deposit and loan distribution
going forward depend on our customers requirements and other factors and will likely
vary over time.

Allowance
for Loan Losses. We maintain an allowance for loan losses, which we establish through
a provision for loan losses charged against income. We charge loans against this allowance
when we believe that the collectibility of the principal is unlikely. The allowance is an
estimated amount that we believe will be adequate to absorb losses inherent in the loan
portfolio based on evaluations of its collectibility. Our allowance

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for loan losses equals approximately
1.0% of the average outstanding balance of our loans. Over time, we periodically determine
the amount of the allowance based on our consideration of several factors, including:

| |  | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

| |  | our historical loan loss experience;
| | - | ------------------------------------

| |  | evaluation of economic conditions;
| | - | ----------------------------------

| |  | specific problem loans and commitments that may affect the borrowers ability to pay;
| | - | -------------------------------------------------------------------------------------

| |  | regular reviews of loan delinquencies and loan portfolio quality by our internal
auditors and our bank regulators; and
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | the amount and quality of collateral, including guarantees, securing the loans.
| | - | -------------------------------------------------------------------------------

Lending
Limits. The banks lending activities are subject to a variety of lending limits
imposed by federal law. In general, the bank is subject to a legal limit on loans to a
single borrower equal to 15% of the banks capital and unimpaired surplus. Different
limits may apply based on the type of loan or the nature of the borrower, including the
borrowers relationship to the bank. These limits will increase or decrease as the
banks capital increases or decreases. Unless the bank is able to sell participations
in its loans to other financial institutions, the bank is not be able to meet all of the
lending needs of loan customers requiring aggregate extensions of credit above these
limits.

Credit
Risk. The principal credit risk associated with each category of loans is the
creditworthiness of the borrower. Borrower creditworthiness is affected by general
economic conditions and the strength of the manufacturing, services, and retail market
segments. General economic factors affecting a borrowers ability to repay include
interest, inflation, employment rates, and the strength of local and national economy, as
well as other factors affecting a borrowers customers, suppliers, and employees.

Real
Estate Loans. We expect that loans secured by first or second mortgages on real estate
will make up approximately 85% of the banks loan portfolio. These loans will
generally fall into one of two categories: commercial real estate loans or construction
and development loans. We also expect to make residential real estate loans secured by
first or second mortgages on real estate. Each of these categories is discussed in more
detail below, including their specific risks. Interest rates for all categories may be
fixed or adjustable, and will more likely be fixed for shorter-term loans. The bank
generally charges an origination fee for each loan.

| | Real estate loans are subject to the same general risks as other loans. Real estate loans are
also sensitive to fluctuations in the value of the real estate securing the loan. On first
and second mortgage loans we do not advance more than regulatory limits. We require a
valid mortgage lien on all real property loans along with a title lien policy which
insures the validity and priority of the lien. We also require borrowers to obtain hazard
insurance policies and flood insurance, if applicable. Additionally, certain types of real
estate loans have specific risk characteristics that vary according to the collateral type
securing the loan and the terms and repayment sources for the loan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have the ability to originate some real estate loans for sale into the secondary market.
We can limit our interest rate and credit risk on these loans by locking the interest rate
for each loan with the secondary investor and receiving the investors underwriting
approval prior to originating the loan.

| |  | Commercial Real Estate Loans. Commercial real estate loans generally have terms of
five years or less, although payments may be structured on a longer amortization basis.
Inherent in commercial real estate loans credit risk is the risk that the primary
source of repayment, the operating commercial real estate company, will be insufficient to
service the debt. If a real estate loan is in default, we also run the risk that the value
of a commercial real estate loans secured real estate will decrease, and thereby be
insufficient to satisfy the loan. To mitigate these risks, we evaluate each borrower on an
individual basis and attempt to determine its business risks and credit profile. We
attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans
on owner-occupied office and retail buildings where the loan-to-value ratio is established
by independent
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | appraisals. We typically review the personal financial statements of
the principal owners and require their personal guarantees. These reviews often reveal
secondary sources of payment and liquidity to support a loan request.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Construction and Development Real Estate Loans.We offer adjustable and fixed rate
residential and commercial construction loans to builders and developers and to consumers
who wish to build their own home. The term of construction and development loans generally
is limited to 18 months, although payments may be structured on a longer amortization
basis. Most loans will mature and require payment in full upon the sale of the property.
Construction and development loans generally carry a higher degree of risk than long term
financing of existing properties. Repayment usually depends on the ultimate completion of
the project within cost estimates and on the sale of the property. Specific risks include:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | cost overruns;
| | - | --------------

| |  | mismanaged construction;
| | - | ------------------------

| |  | inferior or improper construction techniques;
| | - | ---------------------------------------------

| |  | economic changes or downturns during construction;
| | - | --------------------------------------------------

| |  | a downturn in the real estate market;
| | - | -------------------------------------

| |  | rising interest rates which may prevent sale of the property; and
| | - | -----------------------------------------------------------------

| |  | failure to sell completed projects in a timely manner.
| | - | ------------------------------------------------------

| |  | We attempt to reduce risk by obtaining personal guarantees where possible, and by keeping the
loan-to-value ratio of the completed project below specified percentages. We also reduce
risk by selling participations in larger loans to other institutions when possible.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Residential Real Estate Loans. These loans generally have longer terms, up to 30
years. We offer fixed and adjustable rate mortgages, and we sell most or all of the
residential real estate loans that we generate in the secondary market soon after we
originate them. At this time, we do not intend to retain servicing rights for these loans.
Inherent in residential real estate loans credit risk is the risk that the primary
source of repayment, the residential borrower, will be insufficient to service the debt.
If a real estate loan is in default, we also run the risk that the value of a residential
real estate loans secured real estate will decrease, and thereby be insufficient to
satisfy the loan. To mitigate these risks, we evaluate each borrower on an individual
basis and attempt to determine its credit profile. By selling these loans in the secondary
market, we significantly reduce our exposure to credit risk because the loans will be
underwritten through a third party agent without any recourse against the bank. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Commercial
Loans. The bank makes loans for commercial purposes in various lines of businesses. We
focus our efforts on commercial loans of $1,000,000 or less. Equipment loans are typically
made for a term of five years or less at fixed or variable rates, with the loan fully
amortized over the term and secured by the financed equipment. Working capital loans
typically have terms not exceeding one year and are usually secured by accounts
receivable, inventory, or personal guarantees of the principals of the business. For loans
secured by accounts receivable or inventory, principal will typically be repaid as the
assets securing the loan are converted into cash, and in other cases principal will
typically be due at maturity. We issue trade letters of credit, standby letters of credit,
and foreign exchange directly and, in some cases, through a correspondent bank as agent
for the bank. Commercial loans primarily have risk that the primary source of repayment,
the borrowing business, will be insufficient to service the debt. Often this occurs as the
result of changes in local economic conditions or in the industry in which the borrower
operates which impact cash flow or collateral value.

We
have access to small business loans utilizing government enhancements such as the Small
Business Administrations 7(a) program and SBAs 504 and LowDoc
programs. Typically, these loans are partially guaranteed by the government which may help
to reduce the banks risk. Government guarantees of SBA loans will not exceed 80% of
the loan value, and will generally be less.

10

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# Banking Services

We
offer a full range of deposit services that are typically available in most banks and
savings and loan associations, including checking accounts, NOW accounts, commercial
accounts, savings accounts, and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The transaction accounts and
time certificates are tailored to our principal market area at rates competitive to those
offered in the Beaufort and Jasper County area. In addition, we offer certain retirement
account services, including IRAs. We solicit these accounts from individuals, businesses,
and other organizations.

# Other Banking Services

We
offer cashiers checks, banking by mail, direct deposit of payroll and social
security checks, United States Savings Bonds, and travelers checks. We are associated with
the Honor, Star, Presto, and Cirrus ATM networks that may be used by the banks
customers throughout the country. We believe that by being associated with a shared
network of ATMs, we are better able to serve our customers and will be able to attract
customers who are accustomed to the convenience of using ATMs.We also offer a
debit card and credit card services through a correspondent bank as an agent for the bank.
We offer on-line banking, lines of credit, and telephone banking. And, we provide deposit
courier service for customers who fall within our primary service area. We do not expect
the bank to exercise trust powers during its initial years of operation.

We
offer products and services via the traditional means of brick and mortar, phone banking,
ATM network and Internet banking.

# Competition

The
banking business is highly competitive. We compete as a financial intermediary with other
commercial banks, community banks, savings banks, credit unions, finance companies, and
money market mutual funds operating in the Bluffton area and surrounding communities. Some
of these competitors have been in business for a long time and have already established
their customer base and name recognition. Many are larger than we are and have greater
financial and personnel resources than currently have. Some are large super-regional and
regional banks, like Wachovia Bank, Bank of America, and SunTrust Bank, and others are
more established community banks, like CoastalStates Bank, Liberty Savings Bank FSB, First
Federal S&L of Charleston, Beach First National Bank, and Lowcountry National Bank.
Many of these institutions offer services, including extensive and established branch
networks and trust services that we either do not expect to provide or will not provide
for some time. Due to this competition, we may pay higher rates of interest to attract
deposits from time to time. In addition, competitors that are not depository institutions
are generally not subject to the extensive regulations that apply to our bank. Most of
these institutions have substantially greater resources and lending limits than we have.
Nevertheless, we believe that our management team, our focus on relationship banking,
successful branding advertising campaign, and the economic and demographic dynamics of our
service area have allowed us to gain a meaningful share of the areas deposits in a
relatively short period of time.

# Employees

As
of March 1, 2007, we had 20 full-time employees and 3 part-time employees.

11

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# SUPERVISION AND
REGULATION

Both
Atlantic Bancshares, Inc., and Atlantic Community Bank are subject to extensive state and
federal banking regulations that impose restrictions on and provide for general regulatory
oversight of their operations. These laws generally are intended to protect depositors and
not shareholders. The following summary is qualified by reference to the statutory and
regulatory provisions discussed. Changes in applicable laws or regulations may have a
material effect on our business and prospects. Our operations may be affected by
legislative changes and the policies of various regulatory authorities. We cannot predict
the effect that fiscal or monetary policies, economic control, or new federal or state
legislation may have on our business and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# Atlantic Bancshares, Inc.

We
own 100% of the outstanding capital stock of the bank, and therefore we are considered to
be a bank holding company under the federal Bank Holding Company Act of 1956 (the
Bank Holding Company Act). As a result, we are primarily subject to the
supervision, examination and reporting requirements of the Board of Governors of the
Federal Reserve (the Federal Reserve) under the Bank Holding Company Act and
its regulations promulgated thereunder. As a bank holding company located in South
Carolina, the South Carolina Board of Financial Institutions also regulates and monitors
all significant aspects of our operations.

Permitted
Activities. Under the Bank Holding Company Act, a bank holding company is
generally permitted to engage in, or acquire direct or indirect control of more than 5% of
the voting shares of any company engaged in, the following activities:

| |  | banking or managing or controlling banks; and
| | - | ---------------------------------------------

| |  | furnishing services to or performing services for our subsidiaries; and
| | - | -----------------------------------------------------------------------

| |  | any activity that the Federal Reserve determines to be so closely related to banking as to
be a proper incident to the business of banking.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

Activities
that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:

| |  | factoring accounts receivable;
| | - | ------------------------------

| |  | making, acquiring, brokering or servicing loans and usual related activities;
| | - | -----------------------------------------------------------------------------

| |  | leasing personal or real property;
| | - | ----------------------------------

| |  | operating a non-bank depository institution, such as a savings association;
| | - | ---------------------------------------------------------------------------

| |  | trust company functions;
| | - | ------------------------

| |  | financial and investment advisory activities;
| | - | ---------------------------------------------

| |  | conducting discount securities brokerage activities;
| | - | ----------------------------------------------------

| |  | underwriting and dealing in government obligations and money market instruments;
| | - | --------------------------------------------------------------------------------

12

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| |  | providing specified management consulting and counseling activities;
| | - | --------------------------------------------------------------------

| |  | performing selected data processing services and support services;
| | - | ------------------------------------------------------------------

| |  | acting as agent or broker in selling credit life insurance and other types of insurance in connection
with credit transactions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | performing selected insurance underwriting activities.
| | - | ------------------------------------------------------

As
a bank holding company we also can elect to be treated as a financial holding
company, which would allow us engage in a broader array of activities. In sum, a
financial holding company can engage in activities that are financial in nature or
incidental or complementary to financial activities, including insurance underwriting,
sales and brokerage activities, providing financial and investment advisory services,
underwriting services and limited merchant banking activities. We have not sought
financial holding company status, but may elect such status in the future as our business
matures. If we were to elect in writing for financial holding company status, each insured
depository institution we control would have to be well capitalized, well managed and have
at least a satisfactory rating under the CRA (discussed below).

The
Federal Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank holding companys
continued ownership, activity or control constitutes a serious risk to the financial
safety, soundness or stability of it or any of its bank subsidiaries.

Change
in Control.In addition, and subject to certain exceptions, the Bank
Holding Company Act and the Change in Bank Control Act, together with regulations
promulgated there under, require Federal Reserve approval prior to any person or company
acquiring control of a bank holding company. Moreover, the South Carolina
Board of Financial Institutions also must approve an acquisition of a South Carolina bank
holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of a bank holding company. Control
is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of
any class of voting securities and either:

| |  | the company has registered
securities under Section 12 of the Securities Exchange Act of 1934; or
| | - | -------------------------------------------------------------------------------------------------

| |  | no other person owns a greater percentage of that class of voting securities immediately
after the transaction.
| | - | ---------------------------------------------------------------------------------------------------------------

Our
common stock is not registered under Section 12 of the Securities Exchange Act of 1934. If
we have more than 500 shareholders of record on December 31,of any year, we will be
required to register our common stock under Section 12 of the Securities Exchange Act
during the first 120 days of the following year. Any shareholder of 10% or more, but less
than 25% of any class of our voting securities would be required to either file as a
controlling shareholder of the company or rebut the presumption of control in accordance
with Federal Reserve regulations. The regulations provide a procedure for rebutting
control when ownership of any class of voting securities is below 25%.

Source
of Strength. In accordance with Federal Reserve Board policy, we are
expected to act as a source of financial strength to the bank and to commit resources to
support the bank in circumstances in which we might not otherwise do so. Under the bank
Holding Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Boards determination that such
activity or control constitutes a serious risk to the financial soundness or stability of
any depository institution subsidiary of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiaries if the agency determines that
divestiture may aid the depository institutions financial condition.

13

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Capital
Requirements. The Federal Reserve Board imposes certain capital
requirements on the bank holding company under the bank Holding Company Act, including a
minimum leverage ratio and a minimum ratio of qualifying capital to
risk-weighted assets. These requirements are described below under Atlantic
Community Bank  Capital Regulations. Subject to our capital requirements and
certain other restrictions, we are able to borrow money to make a capital contribution to
the bank, and these loans may be repaid from dividends paid from the bank to the Company.
Our ability to pay dividends is subject to regulatory restrictions as described below in
Atlantic Community Bank Dividends. We are also able to raise capital for
contribution to the bank by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.

South
Carolina State Regulation. As a South Carolina bank holding company under
the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on
sale or merger and to regulation by the South Carolina Board of Financial Institutions. We
are not required to obtain the approval of the S.C. Board prior to acquiring the capital
stock of a national bank, but we must notify them at least 15 days prior to doing so. We
must receive the Boards approval prior to engaging in the acquisition of a South
Carolina state chartered bank or another South Carolina bank holding company.

# Atlantic Community Bank

The
bank operates as a state bank incorporated under the laws of the State of South Carolina
and is subject to examination by the South Carolina Board of Financial Institutions.

The
South Carolina Board of Financial Institutions and the FDIC regulate or monitor virtually
all areas of the banks operations, including:

| |  | security devices and procedures;
| | - | --------------------------------

| |  | adequacy of capitalization and loss reserves;
| | - | ---------------------------------------------

| |  | loans;
| | - | ------

| |  | investments;
| | - | ------------

| |  | borrowings;
| | - | -----------

| |  | deposits;
| | - | ---------

| |  | mergers;
| | - | --------

| |  | issuances of securities;
| | - | ------------------------

| |  | payment of dividends;
| | - | ---------------------

| |  | interest rates payable on deposits;
| | - | -----------------------------------

| |  | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| |  | establishment of branches;
| | - | --------------------------

| |  | corporate reorganizations;
| | - | --------------------------

| |  | maintenance of books and records; and
| | - | -------------------------------------

| |  | adequacy of staff training to carry on safe lending and deposit
gathering practices.
| | - | ------------------------------------------------------------------------------------

14

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The
South Carolina Board of Financial Institutions requires the bank to maintain specified
capital ratios and imposes limitations on the banks aggregate investment in real
estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial
Institutions also requires the bank to prepare quarterly reports on the banks
financial condition in compliance with its minimum standards and procedures.

All
insured institutions must undergo regular on site examinations by their appropriate
banking agency. The cost of examinations of insured depository institutions and any
affiliates may be assessed by the appropriate agency against each institution or affiliate
as it deems necessary or appropriate. Insured institutions are required to submit annual
reports to the FDIC, their federal regulatory agency, and their state supervisor when
applicable. The FDIC has developed a method for insured depository institutions to provide
supplemental disclosure of the estimated fair market value of assets and liabilities, to
the extent feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC Improvement
Act also requires the federal banking regulatory agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution holding
companies relating, among other things, to the following:

| |  | internal controls;
| | - | ------------------

| |  | information systems and audit systems;
| | - | --------------------------------------

| |  | loan documentation;
| | - | -------------------

| |  | credit underwriting;
| | - | --------------------

| |  | interest rate risk exposure; and
| | - | --------------------------------

| |  | asset quality.
| | - | --------------

Prompt
Corrective Action.As an insured depository institution, the bank is
required to comply with the capital requirements promulgated under the Federal Deposit
Insurance Act and the regulations thereunder, which set forthfive capital
categories, each with specific regulatory consequences. Under these regulations, the
categories are:

| |  | Well Capitalized  The institution exceeds the required minimum level for each
relevant capital measure. A well capitalized institution is one (i) having a total
capital ratio of 10% or greater, (ii) having a tier 1 capital ratio of 6% or greater,
(iii) having a leverage capital ratio of 5% or greater and (iv) that is not
subject to any order or written directive to meet and maintain a specific capital level
for any capital measure.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Adequately Capitalized  The institution meets the required minimum level for each
relevant capital measure. No capital distribution may be made that would result in the
institution becoming undercapitalized. An adequately capitalized institution is one
(i) having a total capital ratio of 8% or greater, (ii) having a tier 1 capital
ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or
a leverage capital ratio of 3% or greater if the institution is rated composite 1 under
the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market
risk) rating system.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Undercapitalized  The institution fails to meet the required minimum level for any
relevant capital measure. An undercapitalized institution is one (i) having a total
capital ratio of less than 8% or (ii) having a tier 1 capital ratio of less than 4%
or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a
composite 1 under the CAMELS rating system, a leverage capital ratio of less than 3%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Significantly Undercapitalized  The institution is significantly below the required
minimum level for any relevant capital measure. A significantly undercapitalized
institution is one (i) having a total capital ratio of less than 6% or
(ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage
capital ratio of less than 3%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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| |  | Critically Undercapitalized  The institution fails to meet a critical capital level
set by the appropriate federal banking agency. A critically undercapitalized institution
is one having a ratio of tangible equity to total assets that is equal to or less than 2%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
the FDIC determines, after notice and an opportunity for hearing, that the bank is in an
unsafe or unsound condition, the regulator is authorized to reclassify the bank to the
next lower capital category (other than critically undercapitalized) and require the
submission of a plan to correct the unsafe or unsound condition.

If
the bank is not well capitalized, it cannot accept brokered deposits without prior FDIC
approval and, if approval is granted, cannot offer an effective yield in excess of 75
basis points on interests paid on deposits of comparable size and maturity in such
institutions normal market area for deposits accepted from within its normal market
area, or national rate paid on deposits of comparable size and maturity for deposits
accepted outside the banks normal market area. Moreover, if the bank becomes less
than adequately capitalized, it must adopt a capital restoration plan acceptable to the
FDIC. The bank also would become subject to increased regulatory oversight, and is
increasingly restricted in the scope of its permissible activities. Each company having
control over an undercapitalized institution also must provide a limited guarantee that
the institution will comply with its capital restoration plan. Except under limited
circumstances consistent with an accepted capital restoration plan, an undercapitalized
institution may not grow. An undercapitalized institution may not acquire another
institution, establish additional branch offices or engage in any new line of business
unless determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan, or unless the FDIC determines that the proposed action
will further the purpose of prompt corrective action. The appropriate federal banking
agency may take any action authorized for a significantly undercapitalized institution if
an undercapitalized institution fails to submit an acceptable capital restoration plan or
fails in any material respect to implement a plan accepted by the agency. A critically
undercapitalized institution is subject to having a receiver or conservator appointed to
manage its affairs and for loss of its charter to conduct banking activities.

An
insured depository institution may not pay a management fee to a bank holding company
controlling that institution or any other person having control of the institution if,
after making the payment, the institution, would be undercapitalized. In addition, an
institution cannot make a capital distribution, such as a dividend or other distribution
that is in substance a distribution of capital to the owners of the institution if
following such a distribution the institution would be undercapitalized. Thus, if payment
of such a management fee or the making of such would cause the bank to become
undercapitalized, it could not pay a management fee or dividend to us.

As
of December 31, 2006, the bank was deemed to be well capitalized.

FDIC
Assessments. Deposits at the bank are insured by the Deposit Insurance
Fund (the DIF) as administered by the FDIC, up to the applicable limits
established by law  generally $100,000 per accountholder and $250,000 for certain
retirement accountholders. In accordance with regulations adopted to implement the Federal
Deposit Insurance Reform Act of 2005 (FDIRA), deposit insurance premium
assessments are based upon perceived risks to the DIF, by evaluating an institutions
supervisory ratios and other financial ratios and then determining insurance premiums
based upon the likelihood an institution could be downgraded to a CAMELS 3 or worse in the
succeeding year. As a result, institutions deemed to pose less risk, pay lower premiums
than those institutions deemed to pose more risk, which pay more.

FDIRA
caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash
dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio.
Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC is
required to issue cash dividends, awarded on a historical basis, for half of the amount of
the excess. Pursuant to the FDIRA, the FDIC will begin indexing deposit insurance coverage
levels for inflation beginning in 2012. Moreover, if we become undercapitalized we cannot
accept employee benefit plan deposits.

Transactions
with Affiliates and Insiders. The bank is subject to the provisions of
Section 23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with, affiliates
and on the amount of advances to third parties collateralized by the

16

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securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the banks capital and surplus and, as to all affiliates
combined, to 20% of the banks capital and surplus. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to avoid the
taking of low quality assets.

The
bank also is subject to the provisions of Section 23B of the Federal Reserve Act which,
among other things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The bank is subject to
certain restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has issued Regulation W, which codifies prior regulations under
Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the affiliate
transaction rules but expands the exemption to cover the purchase of any type of loan or
extension of credit from an affiliate. In addition, under Regulation W:

| |  | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
| | - | -----------------------------------------------------------------------------------

| |  | covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation
W generally excludes all non-bank and non-savings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. The regulation also limits the amount of loans
that can be purchased by a bank from an affiliate to not more than 100% of the banks
capital and surplus.

Branching.
          Under current South Carolina law, we may open branch offices throughout South
          Carolina with the prior approval of the South Carolina Board of Financial
          Institutions. In addition, with prior regulatory approval, the bank will be able
          to acquire existing banking operations in South Carolina. Furthermore, federal
          legislation has been passed that permits interstate branching by banks if
          allowed by state law, and interstate merging by banks.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their respective
jurisdictions, a financial institutions primary regulator, which is the FDIC for the
bank, shall evaluate the record of each financial institution in meeting the credit needs
of its local community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional requirements
and limitations on our bank. Additionally, we must publicly disclose the terms of various
Community Reinvestment Act-related agreements.

Finance
Subsidiaries. Under the Gramm-Leach-Bliley Act (the GLBA),
subject to certain conditions imposed by their respective banking regulators, national and
state-chartered banks are permitted to form financial subsidiaries that may
conduct financial or incidental activities, thereby permitting bank subsidiaries to engage
in certain activities that previously were impermissible. The GLBA imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the

17

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GLBA imposes new restrictions on
transactions between a bank and its financial subsidiaries similar to restrictions
applicable to transactions between banks and non-bank affiliates.

Other
Regulations. Interest and other charges collected or contracted for by the
bank are subject to state usury laws and federal laws concerning interest rates. The
banks loan operations are also subject to federal laws applicable to credit
transactions, such as the:

| |  | The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
| | - | ----------------------------------------------------------------------------------------------

| |  | The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the community
it serves;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
Transactions Act, governing the use and provision of information to credit reporting
agencies, certain identity theft protections and certain credit and other disclosures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | The Rules and regulations of the various federal agencies charged with the responsibility
of implementing these federal laws.
| | - | -----------------------------------------------------------------------------------------------------------------------------

The
deposit operations of the bank also are subject to:

| |  | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Enforcement
Powers. The bank and its institution-affiliated parties,
including its management, employees, agents, independent contractors, and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs, are subject to potential civil and criminal penalties for
violations of law, regulations or written orders of a government agency. These practices
can include the failure of an institution to timely file required reports or the filing of
false or misleading information or the submission of inaccurate reports. Civil penalties
may be as high as $1,000,000 a day for such violations. Criminal penalties for some
financial institution crimes have been increased to twenty years. In addition, regulators
are provided with greater flexibility to commence enforcement actions against institutions
and institution-affiliated parties. Possible enforcement actions include the termination
of deposit insurance. Furthermore, banking agencies power to issue cease-and-desist
orders were expanded. Such orders may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnifications or guarantees against loss. A financial institution may
also be ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be appropriate.

USA
PATRIOT Act.The USA PATRIOT Act became effective on
October 26, 2001, amended, in part, the bank Secrecy Act, and provides, in part, for
the facilitation of information sharing among governmental entities and financial
institutions for the purpose of combating terrorism and money laundering by enhancing
anti-money laundering and financial transparency laws, as well as enhanced information
collection tools and enforcement

18

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mechanics for the U.S. government,
including: (i) requiring standards for verifying customer identification at account
opening; (ii) rules to promote cooperation among financial institutions, regulators,
and law enforcement entities in identifying parties that may be involved in terrorism or
money laundering; (iii) reports by nonfinancial trades and businesses filed with the
Treasury Departments Financial Crimes Enforcement Network for transactions exceeding
$10,000; and (iv) filing suspicious activities reports by brokers and dealers if they
believe a customer may be violating U.S. laws and regulations and requires enhanced due
diligence requirements for financial institutions that administer, maintain, or manage
private bank accounts or correspondent accounts for non-U.S. persons.

Under
the USA PATRIOT Act, the Federal Bureau of Investigation (FBI) can send our
banking regulatory agencies lists of the names of persons suspected of involvement in
terrorist activities. The bank can be requested, to search its records for any
relationships or transactions with persons on those lists. If the bank finds any
relationships or transactions, it must file a suspicious activity report and contact the
FBI.

The
Office of Foreign Assets Control (OFAC), which is a division of the U.S.
Department of the Treasury, is responsible for helping to insure that United States
entities do not engage in transactions with enemies of the United States, as
defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send,
our banking regulatory agencies lists of names of persons and organizations suspected of
aiding, harboring or engaging in terrorist acts. If the bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report and notify the FBI. The bank has appointed an
OFAC compliance officer to oversee the inspection of its accounts and the filing of any
notifications. The bank actively checks high-risk OFAC areas such as new accounts, wire
transfers and customer files. The bank performs these checks utilizing software, which is
updated each time a modification is made to the lists provided by OFAC and other agencies
of Specially Designated Nationals and Blocked Persons.

Privacy
and Credit Reporting.Financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is jointly
sponsoring a product or service with a nonaffiliated third party. Additionally, financial
institutions generally may not disclose consumer account numbers to any nonaffiliated
third party for use in telemarketing, direct mail marketing or other marketing to
consumers. It is the banks policy not to disclose any personal information unless
required by law.

Like
other lending institutions, the bank utilizes credit bureau data in its underwriting
activities. Use of such data is regulated under the Federal Credit Reporting Act on a
uniform, nationwide basis, including credit reporting, prescreening, sharing of
information between affiliates, and the use of credit data. The Fair and Accurate Credit
Transactions Act of 2003 (the FACT Act) authorizes states to enact identity
theft laws that are not inconsistent with the conduct required by the provisions of the
FACT Act.

Payment
of Dividends. A South Carolina state bank may not pay dividends from its
capital. All dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. The bank is authorized to pay cash
dividends up to 100% of net income in any calendar year without obtaining the prior
approval of the South Carolina Board of Financial Institutions, provided that the bank
received a composite rating of one or two at the last federal or state regulatory
examination. The bank must obtain approval from the South Carolina Board of Financial
Institutions prior to the payment of any other cash dividends. In addition, under the
FDICIA, the bank may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized.

Check
21. The Check Clearing for the 21st Century Act gives substitute
checks, such as a digital image of a check and copies made from that image, the same
legal standing as the original paper check. Some of the major provisions include:

| |  | allowing check truncation without making it mandatory;
| | - | ------------------------------------------------------

| |  | demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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| |  | legalizing substitutions for and replacements of paper checks without agreement from consumers;
| | - | -----------------------------------------------------------------------------------------------

| |  | retaining in place the previously mandated electronic collection and return of checks
between financial institutions only when individual agreements are in place;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and demonstrate
that the account debit was accurate and valid; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring the re-crediting of funds to an individuals account on the next business
day after a consumer proves that the financial institution has erred.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed
Legislation and Regulatory Action. New regulations and statutes are regularly
proposed that contain wide-ranging proposals for altering the structures, regulations, and
competitive relationships of the nations financial institutions. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.

# Item 2.   Description of
Property.

We
are located at 1 Sherington Drive, Suite J (Sheridan Park), Bluffton, South Carolina
29910. The location was formerly subleased through Regional Bankshares, Inc. until January
24, 2006 when we entered into a new lease with Carolina Partners, LLC. The facility is
2,190 square feet and is leased until 2010 with a thee-year option to renew. Sheridan Park
is an established commercial subdivision fronting Highway 278 and includes the South
Carolina Division of Motor Vehicles, restaurants, retail stores, wholesalers, and
professional office space. The commercial building that contains our leased space also
borders on and provides signage on Highway 278. Signage is also provided directly over the
main public entrance.

We
also lease a facility for our operations department at 70 Pennington Drive, Suite 21
(Sheridan Park), Bluffton, South Carolina 29910. This facility is approximately 1⁄4
mile south of the Sheridan Park branch location and is in the same commercial subdivision.
This operations department facility has approximately 2,000 square feet of office space
and houses between seven and ten employees. We anticipate leasing this temporary location
through 2007 and possibly into 2008.

On
January 1, 2006 we opened a loan production office on the south end of Hilton Head Island.
We leased a facility at 1 Corpus Christi Place, Suite 108, Hilton Head Island, South
Carolina 29928 that has a total of 1,837 square feet for a period of one year with a one
year option to renew. The organizers of the company, along with other non-organizers, have
formed a separate company, MB Partners, LLC, which purchased this location that we lease.
We entered into a new lease agreement beginning August 1, 2006 for a minimum of ten years.
The lease provides for two ten-year renewal options.

See
the discussion under Location and Service Area in Item 1 above for additional
information regarding our properties and certain potential future properties.

20

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# Item 3.   Legal
Proceedings.

On
or about July 05, 2006, we were served with a complaint filed by our former chief
financial officer, Timothy C. King, against our company and our bank in the Court of
Common Pleas for Beaufort County, South Carolina. The complaint was originally filed on
June 16, 2006 and was amended and refiled on June 29, 2006. The complaint alleges that the
company and the bank breached the employment agreement we had entered into with Mr. King
by not appointing him to the board of directors. The complaint alleges that, rather than
voluntarily resigning, Mr. King was constructively discharged from employment with the
company and the bank. The complaint seeks an unspecified amount of damages relating, among
other things, to Mr. Kings alleged loss of compensation, loss on the sale of his
home in New Hampshire, loss of professional prestige, opportunities, and financial
benefits associated with being a director of our bank, loss on funds Mr. King invested in
our common stock, costs and expenses relating to continuing health care coverage and Mr.
Kings job search, punitive damages, pre-judgment interest, and attorneys fees.
We have retained the law firm of Gignilliat, Savitz & Bettis, L.L.P. of Columbia,
South Carolina, to represent us in this matter. We filed a Motion to Dismiss the complaint
on August 01, 2006. We intend to vigorously defend this action.

Except
as described above, we are not a party to, nor are any of our properties subject to, any
material legal proceedings, other than legal proceedings that we believe are routine
litigation incidental to our business.

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

No
matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.

# Part II.

# Item 5.   Market for
Common Equity and Related Stockholder Matters.

There
is no established market for our common stock. We do not expect to qualify for listing on
Nasdaq or any other exchange for at least several years. Subject to receiving regulatory
clearance, a sponsoring broker-dealer may begin to match buy and sell orders for our
common stock and enter quotes for our common stock on the OTC Bulletin Board. However,
even if we become quoted, the trading markets on the OTC Bulletin Board lack the depth,
liquidity, and orderliness necessary to maintain a liquid market. There can be no
assurance that our common stock will become quoted on the OTC Bulletin Board.

As
of March 16, 2007, there were 1,251,577 shares of common stock outstanding held by
approximately 392 shareholders of record. All of our currently issued and outstanding
common stock was issued in our initial public offering which was completed on March 1,
2006. The price per share in our initial public offering was $10.00. We are not aware of
any trades of our common stock except for a trade for 500 shares of our common stock at a
price of $11.00 on March 19, 2007.

We
have not declared or paid any cash dividends on our common stock since our inception. For
the foreseeable future we do not intend to declare cash dividends. We intend to retain
earnings to grow our business and strengthen our capital base. Our ability to pay
dividends depends on the ability of our subsidiary, Atlantic Community Bank, to pay
dividends to us. As a South Carolina state bank, our bank may only pay dividends out of
its net profits, after deducting expenses, including losses and bad debts. In addition,
our bank is prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital.

Additional
information regarding our equity compensation plans is set forth in Item 11 below.

21

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# Item 6.   
Managements Discussion and Analysis or Plan of Operation

# Selected Financial Data

The following selected financial data
for the period ended December 31, 2006 is derived from the financial statements and other
data of Atlantic Bancshares, Inc. (the Company). The selected financial data should be
read in conjunction with the financial statements of the Company, including the
accompanying notes, included elsewhere herein.

|                                                         | 2006
|-------------------------------------------------------- | ----
|(Dollars in thousands)                                   |     
|Income Statement Data:                                   |     
|Interest Income                                          |     
|Interest Expense                                         |     
|Net Interest Income                                      |     
|Provision for loan losses                                |     
|Net interest income (loss) after provision for loan loss |     
|Noninterest income                                       |     
|Noninterest expense                                      |     
|Loss before income taxes                                 |     
|Income taxes                                             |     
|Net loss                                                 |     
|                                                         |     
|Balance Sheet Data:                                      |     
|Assets                                                   |     
|Earning assets                                           |     
|Securities (1)                                           |     
|Loans, net of unearned income (2)                        |     
|Allowance for loan losses                                |     
|Deposits                                                 |     
|Shareholder's equity                                     |     
|                                                         |     
|Per share data:                                          |     
|Earnings (losses) per share                              |     
|Book value (period end)                                  |     

_________________ (1)   
All securities are available for sale and are stated at fair value.
(2)    Loans are stated at gross amounts before allowance for loan
losses.

22

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# Forward Looking
Statements

This report contains
forward-looking statements within the meaning of the securities laws. All
statements that are not historical facts are forward-looking statements. You
can identify these forward-looking statements through our use of words such as
may, will, expect, anticipate,
believe, intend, estimate, project,
continue, or other similar words. Forward-looking statements include, but are
not limited to, statements regarding our future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, income, business operations and
proposed services.

These forward-looking statements are
based on current expectations, estimates and projections about our industry,
managements beliefs, and assumptions made by management. Such information includes,
without limitation, discussions as to estimates, expectations, beliefs, plans, strategies,
and objectives concerning our future financial and operating performance. These statements
are not guarantees of future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict, particularly in light of the fact that we are a
new company with no operating history. Therefore, actual results may differ materially
from those expressed or forecasted in such forward-looking statements. The risks and
uncertainties include, but are not limited to:

| | our growth and our ability to maintain growth;
|- | ----------------------------------------------

| | governmental monetary and fiscal policies, as well as legislative and regulatory changes;
|- | -----------------------------------------------------------------------------------------

| | the effect of interest rate changes on our level and composition of deposits, loan demand and the value
of our loan collateral and securities;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | the effects of competition from other financial institutions operating in our market area
and elsewhere, including institutions operating locally, regionally, nationally and
internationally, together with competitors that offer banking products and services by
mail, telephone and computer and/or the Internet;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | failure of assumptions underlying the establishment of our allowance for loan losses,
including the value of collateral securing loans;
|- | ---------------------------------------------------------------------------------------------------------------------------------------

| | loss of consumer confidence and economic disruptions resulting from terrorist activities;
and
|- | ---------------------------------------------------------------------------------------------

| | other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission, including, without limitation, those described under
the caption Risk Factors in Item 1 of our Form 10-KSB filed for the year ended
December 31, 2006.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed in this report might not occur.

# Introduction

The following discussion describes
our results of operations for 2006 and also analyzes our financial condition as of
December 31, 2006. Like most community banks, we derive most of our income from interest
we receive on our loans and investments. Our primary source of funds for making these
loans and investments is our deposits, on which we pay interest. Consequently, one of the
key measures of our success is our amount of net interest income, or the difference
between the income on our interest-earning assets, such as loans and investments, and the
expense on our interest-bearing liabilities, such as deposits. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate we pay on
our interest-bearing liabilities.

23

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We have included a number of tables
to assist in our description of these measures. For example, the Average
Balances table shows the average balance in 2006 of each category of our assets and
liabilities, as well as the yield we earned or the rate we paid with respect to each
category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest earning assets, which is why we intend to channel a
substantial percentage of our earning assets into our loan portfolio. We also track the
sensitivity of our various categories of assets and liabilities to changes in interest
rates, and we have included an Interest Sensitivity Analysis Table to help
explain this. Finally, we have included a number of tables that provide detail about our
investment securities, our loans, and our deposits.

Naturally, there are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb probable losses on
existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings. In the
Provision and Allowance for Loan Loss section, we have included a detailed
discussion of this process, as well as several tables describing our allowance for loan
losses and the allocation of this allowance among our various categories of loans.

In addition to earning interest on
our loans and investments, we earn income through fees and other expenses we charge to our
customers. We describe the various components of this noninterest income, as well as our
noninterest expense, in the Noninterest Income and Expense section.

The following discussion and analysis
also identifies significant factors that have affected our financial position and
operating results during the periods included in the accompanying financial statements. We
encourage you to read this discussion and analysis in conjunction with the financial
statements and the related notes and the other information included in this report.

# Basis of Presentation

The following discussion should be
read in conjunction with the preceding Selected Financial Data and the
Companys Financial Statements and the Notes thereto and the other information
included elsewhere in this Annual Report. The financial information provided below has
been rounded in order to simplify its presentation. However, the ratios and percentages
provided below are calculated using the detailed financial information contained in the
Financial Statements, the Notes thereto and the other financial data included elsewhere in
this Annual Report.

# General

Atlantic Bancshares, Inc. (the
Company) is a bank holding company headquartered in Bluffton, South Carolina. Its
subsidiary, Atlantic Community Bank (the Bank), opened for business on January 26, 2006.
The principal business activity of the Bank is to provide banking services to domestic
markets, principally in the Beaufort county region of South Carolina. Our deposits are
insured by the Federal Deposit Insurance Corporation.

We completed an initial public
offering of our common stock on March 1, 2006in which we sold a total of 1,251,577
shares of common stock at $10 per share. Proceeds of the stock issuance, net of offering
costs totaling $533,648, were used to pay organizational costs and provide the initial
capital for the Bank.

# Results of Operations

# For the year ended
December 31, 2006

Net interest income for the year
ended December 31, 2006 was $1,197,451. Total interest income for the period was
$2,178,283 and was offset by interest expense of $980,832. The components of interest
income were from loans, including fees, of $1,421,776, federal funds sold of $668,325,
investment income of $70,690, and other interest income of $17,492.

24

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The Companys net interest
spread and net interest margin were 1.92% and 3.64%, respectively, in 2006. The largest
component of average earning assets was loans.

The provision for loan losses was
$390,174 in 2006. The charges to the provision were to maintain the allowance for loan
losses at a level sufficient to cover possible future losses in the loan portfolio.

Noninterest income for the year ended
December 31, 2006 totaled $197,420. The largest portion of noninterest income was
generated by fees from the origination of mortgage loans which totaled $139,057 for the
period. Service charges on deposit accounts totaled $24,343 for the year ended December
31, 2006.

Noninterest expense for the year
ended December 31, 2006 totaled $3,425,670. Noninterest expenses included $740,680 in
pre-opening expenses. Salaries and employee benefits totaled $1,732,164 for the year.
Salaries included the cost of key personnel employed during the organizational period.
Additional components of noninterest expense for the year consisted of professional fees
of $280,562, occupancy expense of $263,599, data processing expense of $245,413, and other
operating expenses of $534,013. The Bank launched a substantial advertising campaign
emphasizing its a brand which contributed to marketing expenses totaling
$369,919 for the year ended December 31, 2006. The campaign has achieved a recognizable
image for the Bank in our competitive local market during our first year of operations.

Our net loss for the year ended
December 31, 2006 was $1,598,113. The net loss for the period is after the recognition of
an income tax benefit of $822,860. The income tax benefit was based on an effective tax
rate of 34%. The benefit was based on all expenses since the Companys inception. As
stated earlier, the net loss includes pre-opening expenses of $740,680.

For the period October 1,
2004 (inception) to December 31, 2005

Our net loss of $13,204 for the
period October 1, 2004 (inception) to December 31, 2005 consisted primarily of expenses to
organize the Bank. The Company incurred $615,729 in organizational and pre-opening
expenses for the period of October 1, 2004 to December 31, 2005. However, these expenses
were recorded as a receivable on the Companys books since these expenses related to
the formation of the Bank. As discussed in Note 1 to the financial statements, these
expenses were transferred to the bank during the first quarter of 2006. Information
related to the period October 1, 2004 (inception) to December 31, 2005 is not considered
meaningful and therefore is not presented.

# Net Interest Income

General.    
          For an established financial institution, the largest component of net income is
          its net interest income, which is the difference between the income earned on
          assets and interest paid on deposits and borrowings used to support such assets.
          Net interest income is determined by the yields earned on our interest-earning
          assets and the rates paid on its interest-bearing liabilities, the relative
          amounts of interest-earning assets and interest-bearing liabilities, and the
          degree of mismatch and the maturity and repricing characteristics of its
          interest-earning assets and interest-bearing liabilities. This net interest
          income divided by average interest-earning assets represents our net interest
          margin.

Average Balances, Income and
Expenses and Rates. The following tables set forth, for the period
indicated, certain information related to our average balance sheet and our average yields
on assets and average costs of liabilities. Such yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities and are then
annualized. Average balances have been derived from the daily balances throughout the
period indicated.

25

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|                                          | 
|----------------------------------------- | 
|
|
|
|Assets:                                   | 
|Earning assets:                           | 
|Loans (1)                                 | 
|Securities, taxable                       | 
|Nonmarketable equity securities           | 
|Federal funds sold                        | 
|Time deposits with other banks            | 
|                                          | 
|Total earning-assets                      | 
|                                          | 
|Cash and due from banks                   | 
|Premises and equipment                    | 
|Other Assets                              | 
|Allowance for loan losses                 | 
|                                          | 
|Total Assets                              | 
|                                          | 
|Liabilities:                              | 
|Interest-bearing liabilities:             | 
|Interest-bearing transaction accounts     | 
|Savings and money market accounts         | 
|Time deposits                             | 
|Other borrowings                          | 
|                                          | 
|Total interest-bearing deposits           | 
|                                          | 
|Demand deposits                           | 
|Accrued interest and other liabilities    | 
|Shareholder's equity                      | 
|                                          | 
|Total liabilites and shareholder's equity | 
|                                          | 
|Net interest income                       | 
|                                          | 
|Net interest spread                       | 
|                                          | 
|Net interest margin (2)                   | 
|                                          | 

(1)    
          There were no loans in nonaccrual status. The effect of fees collected on loans
          totaling $32,763 increased the annualized yield on loans by .18% from 7.89%. The
          effect on the annualized yield on earning assets was an increase of .10% from
          6.52%. The effect on net interest spread and net interest margin was an increase
          of .10% and .10% from 1.82% and 3.54%, respectively. The net interest spread is
          the difference between the yield we earn on our interest-earning assets and the
          rate we pay on our interest-bearing liabilities.

(2)    
          Interest income divided by average earning assets.

Analysis of Changes in Net
Interest Income.Due to 2006 being the year of commencement, all interest income
and expense is attributable to the volume of earning assets and interest-bearing
liabilities, respectively.

Interest
Sensitivity. We monitor and manage the pricing and maturity of our assets
and liabilities in order to diminish the potential adverse impact that changes in interest
rates could have on its net interest income. The principal monitoring technique employed
by us is the measurement of our interest sensitivity gap, which is the
positive or negative dollar difference between assets and liabilities that are subject to
interest rate repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities available for sale,
replacing an asset or liability at maturity, or adjusting the interest rate during the
life of an asset or liability. Managing the amount of assets and liabilities repricing in
this same time interval helps to hedge the risk and minimize the impact on net interest
income of rising or falling interest rates.

26

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The following table sets forth our
interest rate sensitivity at December 31, 2006:

# Interest Sensitivity
Analysis

|                                   |  |  |   | Greater |   
|---------------------------------- |  |  | - | ------- | --
|
|
|
|
|(Dollars in thousands)             |  |  |   |         |   
|Assets                             |  |  |   |         |   
|Earning Assets;                    |  |  |   |         |   
|Loans                              |  |  | $ | 11,094  |   
|Investment securities              |  |  |   | -       |   
|Nonmarketable equity securities    |  |  |   | -       |   
|Federal funds sold                 |  |  |   | 6,611   |   
|                                   |  | 
|Total earning assets               |  |  | $ | 17,705  |   
|                                   |  |  |   |         |   
|Liabilities                        |  |  |   |         |   
|Interest-bearing liabilities:      |  |  |   |         |   
|Demand deposits                    |  |  | $ | 4,379   |   
|Savings and money market deposits  |  |  |   | 14,736  |   
|Time deposits                      |  |  |   | 3,830   |   
|                                   |  | 
|Total interest-bearing liabilities |  |  | $ | 22,945  |   
|                                   |  |  |   |         |   
|Period gap                         |  |  |   | (5,240  | ) 
|                                   |  | 
|Cumulative gap                     |  |  |   | (5,240  | ) 
|                                   |  | 
|Ratio of cumulative gap to         |  |  |   |         |   
|Total earning assets               |  |  |   | (10.68  | )%
|                                   |  | 

The above table reflects the balances
of interest-earning assets and interest-bearing liabilities at the earlier of their
repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing
interval due to the immediately available nature of the instruments. Debt securities are
reflected at each instruments ultimate maturity date. Scheduled payment amounts of
fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled
payment amounts of variable rate amortizing loans are reflected at each scheduled payment
date until the loan may be repriced contractually; the unamortized balance is reflected at
that point. Interest-bearing liabilities with no contractual maturity, such as savings
deposits and interest-bearing transaction accounts, are reflected in the earliest
repricing period due to contractual arrangements which give us the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate time
deposits, principally certificates of deposit, are reflected at their contractual maturity
date.

We generally would benefit from
increasing market rates of interest when it has an asset-sensitive gap position and
generally would benefit from decreasing market rates of interest when it is
liability-sensitive. We are cumulatively liability sensitive through the first twelve
months and cumulatively asset sensitive beyond one year. However, our gap analysis is not
a precise indicator of its interest sensitivity position. The analysis presents only a
static view of the timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and liabilities
equally. Net interest income may be impacted by other significant factors in a given
interest rate environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.

27

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# Provision and
Allowance for Loan Losses

General.
          We have developed policies and procedures for evaluating the overall quality of
          its credit portfolio and the timely identification of potential problem credits.
          On a quarterly basis, our Board of Directors reviews and approves the
          appropriate level for our allowance for loan losses based upon managements
          recommendations, the results of the internal monitoring and reporting system,
          and an analysis of economic conditions in our market. The objective of
          management has been to fund the allowance for loan losses at approximately 1% of
          total loans outstanding until a history is established.

Additions to the allowance for loan
losses, which are expensed as the provision for loan losses on our income statement, are
made periodically to maintain the allowance at an appropriate level based on
managements analysis of the risk inherent in the loan portfolio. Loan losses and
recoveries are charged or credited directly to the allowance. The amount of the provision
is a function of the level of loans outstanding, the level of nonperforming loans, the
amount of loan losses actually charged against the reserve during a given period, and
current and anticipated economic conditions.

Our allowance for loan losses is
based upon judgments and assumptions about risk elements in the portfolio, future economic
conditions, and other factors affecting borrowers. The process includes identification and
analysis of loss potential in various portfolio segments utilizing a credit risk grading
process and specific reviews and evaluations of significant problem credits. In addition,
management monitors the overall portfolio quality through observable trends in
delinquencies, charge-offs, and general and economic conditions in the service area. The
adequacy of the allowance for loan losses and the effectiveness of our monitoring and
analysis system are also reviewed periodically by the banking regulators.

Based on present information and an
ongoing evaluation, we consider the allowance for loan losses to be adequate to meet
presently known and inherent risks in the loan portfolio. Our judgment about the adequacy
of the allowance is based upon a number of assumptions about future events which it
believes to be reasonable but which may or may not be accurate. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for loan losses
or that additional increases in the allowance for loan losses will not be required. We do
not allocate the allowance for loan losses to specific categories of loans but evaluates
the adequacy on an overall portfolio basis utilizing a risk grading system.

The following table sets forth
certain information with respect to our allowance for loan losses and the composition of
charge-offs and recoveries for the year ended December 31, 2006.

# Interest Sensitivity
Analysis

|                                                            | 2006
|----------------------------------------------------------- | ----
|(Dollars in thousands)                                      |     
|Total loans outstanding at end of period                    |     
|Average loans outstanding                                   |     
|Balance of allowance for loan losses at beginning of period |     
|Net loan losses                                             |     
|Provision for loan losses                                   |     
|                                                            |     
|Balance of allowance for loan losses at end of year         |     
|                                                            |     
|Allowance for loan losses to period end loans               |     
|                                                            |     

28

---

# Nonperforming Assets

Nonperforming
Assets. There were no nonperforming assets at December 31, 2006.

Our policy with respect to
nonperforming assets is as follows. Accrual of interest will be discontinued on a loan
when we believe, after considering economic and business conditions and collection efforts
that the borrowers financial condition is such that the collection of interest is
doubtful. A delinquent loan will generally be placed in nonaccrual status when it becomes
90 days or more past due. When a loan is placed in nonaccrual status, all interest which
has been accrued on the loan but remains unpaid will be reversed and deducted from current
earnings as a reduction of reported interest income. No additional interest will be
accrued on the loan balance until the collection of both principal and interest becomes
reasonably certain. When a problem loan is finally resolved, there may ultimately be an
actual writedown or charge-off of the principal balance of the loan which would
necessitate additional charges to earnings.

Potential Problem
Loans. At December 31, 2006, loans totaling $777,690 were criticized and no
loans were classified or impaired by our internal review mechanisms. The results of this
internal review process are considered in determining our assessment of the adequacy of
the allowance for loan losses. However, based on the prior experience of management and
other new banks, we have established the overall objective to maintain the allowance for
loan losses at approximately 1% of total loans to provide for the risk of loss inherent in
the loan portfolio.

# Noninterest Income and
Expense

Noninterest
Income. The largest component of noninterest income was mortgage
origination fees for the year ended December 31, 2006 which totaled $139,057. There was no
noninterest income for the period October 1, 2004 (inception) to December 31, 2005.

The following table sets forth the
principal components of noninterest income for the year ended December 31, 2006.

|                                   | 2006
|---------------------------------- | ----
|Mortgage origination fees          |     
|Service charge on deposit accounts |     
|Other                              |     
|                                   |     
|Total noninterest income           |     
|                                   |     

29

---

Noninterest Expense.Salaries and employee benefits comprised the largest component of noninterest expense
which totaled $1,732,164 for the year ended December 31, 2006. Pre-opening expenses
associated with forming the Company comprise $740,680 of total noninterest expenses.

The following table sets forth the
primary components of noninterest expense for the year ended December 31, 2006.

|                                         | 2006
|---------------------------------------- | ----
|Salaries and employee benefits           |     
|Net occupancy expense                    |     
|Insurance                                |     
|Application and license fees             |     
|Advertising and marketing expense        |     
|Office supplies, stationary and printing |     
|Data processing                          |     
|Professional fees                        |     
|Furniture and equipment expense          |     
|Telephone                                |     
|Postage                                  |     
|Other                                    |     
|                                         |     
|Total noninterest expense                |     
|                                         |     

# Earning Assets

Loans.Loans are the largest category of earning assets and typically provide
          higher yields than the other types of earning assets. Associated with the higher
          loan yields are the inherent credit and liquidity risks which we attempt to
          control and counterbalance. Loans averaged $17,607,733 in 2006. At December 31,
          2006, total loans were $38,938,635.

The following table sets forth the
composition of the loan portfolio by category at December 31, 2006 and highlights our
general emphasis on real-estate lending.

# Composition of Loan
Portfolio

|                                                    | December 31, 2006
|--------------------------------------------------- | -----------------
|
|
|Commerical and industrial                           |                  
|Real estate:                                        |                  
|Mortgage                                            |                  
|Construction, land development and other land loans |                  
|Consumer                                            |                  
|                                                    |                  
|Total loans                                         |                  
|                                                    |                  
|                                                    |                  
|Allowance for loan losses                           |                  
|Deferred loan origination fees                      |                  
|                                                    |                  
|Net loans                                           |                  
|                                                    |                  

The largest component of loans in our
loan portfolio is real estate mortgage loans. At December 31, 2006 real estate mortgage
loans totaled $22,333,490 and represented 57.35% of the total loan portfolio.

In the context of this discussion, a
real estate mortgage loan is defined as any loan, other than a loan for
construction, land development and other land, secured by real estate, regardless of the
purpose of the loan. It is common practice for financial institutions in the
Companys market area to obtain a security interest in real estate whenever possible,
in addition to any other available collateral. This collateral is taken to reinforce the
likelihood

30

---

of the ultimate repayment of the loan
and tends to increase the magnitude of the real estate loan portfolio component.

Residential mortgage loans totaled
$15,688,108 at December 31, 2006. Residential real estate loans consist of first and
second mortgages on single or multi-family residential dwellings. Nonresidential mortgage
loans, which include commercial loans and other loans secured by multi-family properties
and farmland, totaled $6,645,382 at December 31, 2006.

Construction, land development and
other land loans totaled $12,739,992 at December 31, 2006. The demand for this type of
loan has been strong due to development in the area and growth is expected to continue in
the near future.

Commercial and industrial loans
totaled $3,576,762 at December 31, 2006 and comprised 9.19% of the total portfolio.

Our loan portfolio also includes
consumer loans. At December 31, 2006, consumer loans totaled $288,391 and represented .74%
of the total loan portfolio.

Our loan portfolio reflects the
diversity of our market. Our home office is located in Bluffton, South Carolina. We opened
a loan production office on Hilton Head Island, South Carolina, in January 2006.
Substantial growth is expected in our region over the next few years.The diversity
of the economy creates opportunities for various types of lending. We do not engage in
foreign lending.

The repayment of loans in the loan
portfolio as they mature is also a source of liquidity for us. The following table sets
forth our loans maturing within specified intervals at December 31, 2006.

# Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates

|                                    |  | Over One |   |      
|----------------------------------- |  | -------- | - | -----
|
|
|
|
|Commerical and industrial           |  |          | $ | 1,639
|Real estate-mortgage                |  |          |   | 2,074
|Real estate-construction, land      |  |          |   |      
|development and other land          |  |          |   | 3,206
|Consumer and other                  |  |          | $ | 26   
|                                    |  |          |   |      
|                                    |  |          | $ | 6,945
|                                    |  |          |   |      
|Loans maturing after one year with: |  |          |   |      
|Fixed interest rates                |  |          |   |      
|Floating interest rates             |  |          |   |      
|                                    |  |          |   |      
|                                    |  |          |   |      
|                                    |  |          |   |      

The information presented in the
above table is based on the contractual maturities of the individual loans, including
loans which may be subject to renewal at their contractual maturity. Renewal of such loans
is subject to review and credit approval as well as modification of terms upon their
maturity. Consequently, we believe this treatment presents fairly the maturity and
repricing structure of the loan portfolio shown in the above table.

Investment
Securities. The investment securities portfolio is also a component of our
total earning assets. Total securities averaged $1,304,183 in 2006. At December 31, 2006,
the total securities portfolio was $3,560,807. All securities were designated as available
for sale and were recorded at market value.

31

---

The following table sets forth the
scheduled maturities and average yields of securities available for sale at December 31,
2006.

# Investment Securities
Maturity Distribution and Yields

|                |  | Over One Year | Over Five Years |   | 
|--------------- |  | ------------- | --------------- | - | 
|
|
|
|Government-     |  |               |                 |   | 
|sponsored       |  |               |                 |   | 
|enterprises     |  |               | $               | - | 
|Mortgage-backed |  |               |                 |   | 
|securities      |  |               |                 | - | 
|                |  |              
|Total           |  |               | $               | - | 
|                |  |              

Other attributes of the securities
portfolio, including yields and maturities, are discussed above in   Net
Interest Income  Interest Sensitivity.

Short-Term
Investments. Short-term investments, which consist primarily of federal
funds sold, averaged $13,610,436 in 2006. At December 31, 2006, short-term investments
totaled $6,611,000. These funds are an important source of our liquidity. Federal funds
are generally invested in an earning capacity on an overnight basis. The significant
balance in short-term investments was partially attributable to the investment in federal
funds sold as a result of excess funds from the stock offering.

# Deposits and Other
Interest-Bearing Liabilities

Deposits.    
          Average total deposits totaled $24,805,978 during 2006. At December 31, 2006,
          total deposits were $41,211,144. Average interest-bearing liabilities totaled
          $20,873,007 in 2006.

The following table sets forth our
deposits by category as of December 31, 2006.

|                                  | December 31, 2006
|--------------------------------- | -----------------
|
|
|Demand deposit accounts           |                  
|NOW accounts                      |                  
|Savings and money market accounts |                  
|Time deposits of $100 or over     |                  
|Other time deposits               |                  
|                                  |                  
|Total deposits                    |                  
|                                  |                  

Core deposits, which exclude
certificates of deposit of $100,000 or more, provide a relatively stable funding source
for our loan portfolio and other earning assets. Our core deposits were $31,483,699 at
December 31, 2006.

Deposits, and particularly core
deposits, have been a primary source of funding and have enabled us to meet successfully
both our short-term and long-term liquidity needs. Competition for core deposits is
intense in our market and we expect the deposit competition to increase in the near
future. Our loan-to-deposit ratio was 94.20% at December 31, 2006.

32

---

The maturity distribution of our time
deposits over $100,000 at December 31, 2006, is set forth in the following table:

# Maturities of
Certificates of Deposit of $100,000 or More

|                           | Within | After Three | One | Greater | 
|-------------------------- | ------ | ----------- | --- | ------- | 
|
|
|                           |        |            
|Certificates of deposit of |        |             |     |         | 
|$100 or more               |        |             | $   | 1,879   | 
|                           |        |            

19.32% of our time deposits over
$100,000 had scheduled maturities within three months, 72.46% had maturities after three
through twelve months and 8.22% have maturities of one year to five years. Large
certificate of deposit customers tend to be extremely sensitive to interest rate levels,
making these deposits less reliable sources of funding for liquidity planning purposes
than core deposits.

# Capital

The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on
the Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Banks capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Banks Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total capital
for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2
capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total
risk-based capital.

The Bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum.

The Bank exceeded the regulatory
capital requirements at December 31, 2006 as set forth in the following table.

33

---

# Analysis of Capital and
Capital Ratios

|December 31,                                                       | 2006
|------------------------------------------------------------------ | ----
|(Dollars in thousands)                                             |     
|Tier 1 capital                                                     |     
|Tier 2 capital                                                     |     
|                                                                   |     
|Total qualifying capital                                           |     
|                                                                   |     
|Risk-adjusted total assets (including off-balance-sheet-exposures) |     
|                                                                   |     
|Tier 1 risk-based capital ratio                                    |     
|                                                                   |     
|Total risk-based capital ratio                                     |     
|                                                                   |     
|Tier 1 leverage ratio                                              |     
|                                                                   |     

# Off-Balance Sheet Risk

Through our operations, we have made
contractual commitments to extend credit in the ordinary course of our business
activities. These commitments are legally binding agreements to lend money to our
customers at predetermined interest rates for a specified period of time. At December 31,
2006, we had issued commitments to extend credit of $9,100,759 through various types of
lending arrangements. There were also $121,236 outstanding commercial letters of credit at
December 31, 2006.

The following table sets forth the
length of time until maturity for unused commitments to extend credit and standby letters
of credit at December 31, 2006.

|                      | Within | After Three | One | Greater | 
|--------------------- | ------ | ----------- | --- | ------- | 
|
|
|Unused commitments to |        |             |     |         | 
|extend credit         |        |             | $   | 1,182   | 
|                      |        |            

We evaluate each customers
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by us upon extension of credit, is based on its credit evaluation of the
borrower. Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate.

# Critical Accounting
Policies

We have adopted various accounting
policies which govern the application of accounting principles generally accepted in the
United States in the preparation of our financial statements. Our significant accounting
policies are described in the footnotes to the consolidated financial statements at
December 31, 2006 as included in Item 7 of this annual report on Form 10-KSB. Certain
accounting policies involve significant judgments and assumptions which have a material
impact on the carrying value of certain assets and liabilities. These accounting policies
are considered to be critical accounting policies. The judgments and assumptions used are
based on historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions, actual
results could differ from these judgments and estimates which could have a material impact
on the carrying values of assets and liabilities and results of operations.

We believe the allowance for loan
losses is a critical accounting policy that requires the most significant judgments and
estimates used in preparation of the consolidated financial statements. Refer to the
portion of the discussion above that addresses the allowance for loan losses for a
description of our processes and methodology for determining our allowance for loan
losses.

34

---

# Liquidity Management and
Capital Resources

Liquidity management involves
monitoring our sources and uses of funds in order to meet our day-to-day cash flow
requirements while maximizing profits. Liquidity represents the ability of us to convert
assets into cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities. Without proper liquidity management, we would not be able
to perform the primary function of a financial intermediary and would, therefore, not be
able to meet the needs of the communities it serves.

Liquidity management is made more
complex because different balance sheet components are subject to varying degrees of
management control. For example, the timing of maturities of the investment portfolio is
very predictable and subject to a high degree of control at the time investment decisions
are made. However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control. We also have the ability to obtain funds
from various financial institutions should the need arise.

# Impact of Inflation

Unlike most industrial companies, the
assets and liabilities of financial institutions such as the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the Banks
performance than do the effects of changes in the general rate of inflation and change in
prices. In addition, interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets and
liabilities in order to protect against wide interest rate fluctuations, including those
resulting from inflation.

|                         | 
|------------------------ | 
|Return on average assets | 
|Return on average equity | 
|Equity to assets ratio   | 

35

---

# Item 7.   Financial
Statements

# Elliott DavisAccountants
and Business Advisors1901 Main Street, Suite 1650 P.O. Box 2227 Columbia, South Carolina 29202-2227Phone: 803.256.0002Fax: 803.254.4724

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of DirectorsAtlantic Bancshares, Inc.Bluffton, South Carolina

We have audited the accompanying
consolidated balance sheets of Atlantic Bancshares, Inc.as of
December 31, 2006 and 2005, and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income and cash flows for the year ended
December 31, 2006 and for the period October 1, 2004 (inception) to December 31, 2005.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Atlantic Bancshares, Inc.as of December 31,
2006 and 2005, and the results of their operations and cash flows for the year ended
December 31, 2006 and for the period October 1, 2004 (inception) to December 31, 2005 in
conformity with accounting principles generally accepted in the United States of America.

/s/ Elliott Davis, LLC

Elliott Davis, LLCColumbia,
South Carolina March 15, 2007

36

---

# ATLANTIC BANCSHARES,
INC.

# Consolidated Balance
Sheets

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|
|
|Assets:                                                      |             
|Cash and cash equivalents:                                   |             
|Cash and due from banks                                      |             
|Federal funds sold                                           |             
|                                                             |             
|Total cash and cash equivalents                              |             
|                                                             |             
|Securities available for sale                                |             
|Nonmarketable equity securities                              |             
|                                                             |             
|Loans receivable                                             |             
|Less allowance for loan losses                               |             
|                                                             |             
|Loans, net                                                   |             
|                                                             |             
|Accrued interest receivable                                  |             
|Premises, furniture and equipment, net                       |             
|Deferred tax asset                                           |             
|Other assets                                                 |             
|                                                             |             
|Total assets                                                 |             
|                                                             |             
|Liabilities:                                                 |             
|Deposits:                                                    |             
|Noninterest bearing transaction accounts                     |             
|Interest-bearing transaction accounts                        |             
|Savings and money market                                     |             
|Time deposits $100,000 and over                              |             
|Other time deposits                                          |             
|                                                             |             
|Total deposits                                               |             
|                                                             |             
|Note payable                                                 |             
|Stock subscription deposits                                  |             
|Accrued interest payable                                     |             
|Other liabilities                                            |             
|                                                             |             
|Total liabilities                                            |             
|                                                             |             
|Commitments and contingencies (Notes 12 and 17)              |             
|                                                             |             
|Shareholders equity:                                        |             
|Preferred stock, no par value; 10,000,000 shares authorized; |             
|no shares issued and outstanding                             |             
|Common stock, no par value; 10,000,000 shares authorized;    |             
|1,251,577 and 10 shares issued and outstanding at            |             
|December 31, 2006 and 2005, respectively                     |             
|                                                             |             
|Capital surplus                                              |             
|Accumulated other comprehensive income                       |             
|Retained deficit                                             |             
|                                                             |             
|Total shareholders' equity                                   |             
|                                                             |             
|Total liabilities and shareholders' equity                   |             
|                                                             |             

The accompanying notes are an integral part of the consolidated financial statements.

37

---

# ATLANTIC BANCSHARES,
INC.

# Consolidated
Statements of OperationsFor the year ended December 31, 2006 and for the 
period October 1, 2004 (inception) to December 31, 2005

|                                                    | 2006 | 2005
|--------------------------------------------------- | ---- | ----
|
|
|Interest income:                                    |      |     
|Loans, including fees                               |      |     
|Securities, available for sale, taxable             |      |     
|Federal funds sold and other                        |      |     
|                                                    |      |     
|Interest expense:                                   |      |     
|Time deposits $100,000 and over                     |      |     
|Other deposits                                      |      |     
|Other borrowings                                    |      |     
|                                                    |      |     
|Total                                               |      |     
|                                                    |      |     
|Net interest income                                 |      |     
|                                                    |      |     
|Provision for loan losses                           |      |     
|                                                    |      |     
|Net interest income after provision for loan losses |      |     
|                                                    |      |     
|Noninterest income:                                 |      |     
|Service fees on deposit accounts                    |      |     
|Residential mortgage origination fees               |      |     
|Other income                                        |      |     
|                                                    |      |     
|Total noninterest income                            |      |     
|                                                    |      |     
|Noninterest expenses:                               |      |     
|Salaries and employee benefits                      |      |     
|Net occupancy                                       |      |     
|Professional fees                                   |      |     
|Marketing                                           |      |     
|Furniture and equipment                             |      |     
|Data processing and related costs                   |      |     
|Other operating                                     |      |     
|                                                    |      |     
|Total noninterest expenses                          |      |     
|                                                    |      |     
|Loss before income tax benefit                      |      |     
|                                                    |      |     
|Income tax benefit                                  |      |     
|                                                    |      |     
|Net loss                                            |      |     
|                                                    |      |     
|Basic loss per share                                |      |     
|                                                    |      |     
|Diluted loss per share                              |      |     
|                                                    |      |     
|Average shares outstanding                          |      |     
|                                                    |      |     

The
accompanying notes are an integral part of the consolidated financial statements.

38

---

# ATLANTIC BANCSHARES,
INC.

# Consolidated
Statements of Changes in Shareholders Equity and Comprehensive Income 
For the year ended December 31, 2006 and for the period from October 1,
2004 (inception) through December 31, 2005

|                          | Common Stock |  | Accumulated |           | 
|------------------------- | ------------ |  | ----------- | --------- | 
|
|
|
|Proceeds from issuance of |              |  |             |           | 
|common stock              |              |  |             | 10        | 
|Net Loss                  |              |  |             | -         | 
|                          |              |  |             |           | 
|December 31, 2005         |              |  |             | 10        | 
|                          |              |  |             |           | 
|Proceeds from issuance of |              |  |             |           | 
|common stock, net         |              |  |             |           | 
|of offering costs of      |              |  |             |           | 
|$533,648                  |              |  |             | 1,251,567 | 
|                          |              |  |             |           | 
|Net loss                  |              |  |             | -         | 
|                          |              |  |             |           | 
|Other comprehensive       |              |  |             |           | 
|loss, net of tax          |              |  |             | -         | 
|                          |              |  |             |           | 
|Total comprehensive loss  |              |  |             | -         | 
|                          |              |  |             |           | 
|Stock based compensation  |              |  |             |           | 
|                          |              |  |             |           | 
|December 31, 2006         |              |  |             | 1,251,577 | 
|                          |              |  |             |           | 

The accompanying notes are an integral part of the consolidated financial statements.

39

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# ATLANTIC BANCSHARES,
INC.

# Consolidated
Statements of Cash Flows For the year ended December 31, 2006 and for the period October 1, 2004
(inception) through December 31, 2005

|                                                                  |  | For the period from
|----------------------------------------------------------------- |  | -------------------
|
|
|
|Cash flows from operating activities                              |  |                    
|Net loss                                                          |  |                    
|Adjustments to reconcile net income to net cash                   |  |                    
|used in operating activities:                                     |  |                    
|Provision for loan losses                                         |  |                    
|Depreciation and amortization expense                             |  |                    
|Discount accretion                                                |  |                    
|Stock-based compensation expense                                  |  |                    
|Deferred income tax benefit                                       |  |                    
|Increase in interest receivable                                   |  |                    
|Increase in interest payable                                      |  |                    
|Decrease (increase) in other assets                               |  |                    
|Increase (decrease) in other liabilities                          |  |                    
|                                                                  |  |                    
|Net cash used in operating activities                             |  |                    
|                                                                  |  |                    
|Cash flows from investing activities                              |  |                    
|Net increase in loans receivable, net                             |  |                    
|Purchase of premises, furniture and equipment                     |  |                    
|Reimbursement from the Bank for premises, furniture and equipment |  |                    
|Purchase of securities available for sale                         |  |                    
|Purchase of nonmarketable equity securities                       |  |                    
|Repayments of securities available for sale                       |  |                    
|                                                                  |  |                    
|Net cash used in investing activities                             |  |                    
|                                                                  |  |                    
|Cash flows from financing activities                              |  |                    
|Increase in noninterest-bearing deposits                          |  |                    
|Increase in interest-bearing deposits                             |  |                    
|Net increase (decrease) in stock subscription deposits            |  |                    
|Net increase (decrease)  in note payable                          |  |                    
|Proceeds from sale of common stock, net                           |  |                    
|                                                                  |  |                    
|Net cash provided by financing activities                         |  |                    
|                                                                  |  |                    
|Net increase in cash and cash equivalents                         |  |                    
|                                                                  |  |                    
|Cash and cash equivalents at beginning of  the period             |  |                    
|                                                                  |  |                    
|Cash and cash equivalents at end of the period                    |  |                    
|                                                                  |  |                    
|Supplemental information                                          |  |                    
|Cash paid for                                                     |  |                    
|Interest                                                          |  |                    
|                                                                  |  |                    
|Income taxes                                                      |  |                    
|                                                                  |  |                    

The accompanying notes are
an integral part of the consolidated financial statements

40

---

# ATLANTIC BANCSHARES,
INC.

# Notes to Consolidated
Financial Statements

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Organization
 Atlantic Bancshares, Inc. (the Company) was incorporated to serve as a bank holding
company for its subsidiary, Atlantic Community Bank (the Bank). Atlantic Community Bank
commenced business on January 26, 2006. The principal business activity of the Bank is to
provide banking services to domestic markets, principally in the Beaufort County region of
South Carolina. The Bank is a state-chartered commercial bank, and its deposits are
insured by the Federal Deposit Insurance Corporation. The consolidated financial
statements include the accounts of the parent company and its wholly-owned subsidiary
after elimination of all significant intercompany balances and transactions.

Managements
Estimates  The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.

Material estimates that are
particularly susceptible to significant change relate to the determination of the
allowance for losses on loans, including valuation allowances for impaired loans, and the
valuation of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for significant
properties. Management must also make estimates in determining the estimated useful lives
and methods for depreciating premises and equipment.

While management uses available
information to recognize losses on loans and foreclosed real estate, future additions to
the allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowances for losses on loans and foreclosed real
estate. Such agencies may require the Company to recognize additions to the allowances
based on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near term.

Concentrations of Credit
Risk  Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of loans receivable, investment
securities, federal funds sold and amounts due from banks.

The Company makes loans to
individuals and small businesses for various personal and commercial purposes primarily in
the Beaufort County region of South Carolina. The Companys loan portfolio is not
concentrated in loans to any single borrower or a relatively small number of borrowers.
The Company may have a concentration of construction, land and land development loans;
however, within this loan category, the collateral, purpose and structure of the loans
vary substantially. Additionally, management is not aware of any concentrations of loans
to classes of borrowers or industries that would be similarly affected by economic
conditions.

41

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

In addition to monitoring potential
concentrations of loans to particular borrowers or groups of borrowers, industries and
geographic regions, management monitors exposure to credit risk from concentrations of
lending products and practices such as loans that subject borrowers to substantial payment
increases (e.g. principal deferral periods, loans with initial interest-only periods,
etc), and loans with high loan-to-value ratios. Management has determined that there is no
concentration of credit risk associated with its lending policies or practices.
Additionally, there are industry practices that could subject the Company to increased
credit risk should economic conditions change over the course of a loans life. For
example, the Company makes variable rate loans and fixed rate principal-amortizing loans
with maturities prior to the loan being fully paid (i.e. balloon payment loans). These
loans are underwritten and monitored to manage the associated risks. Therefore, management
believes that these particular practices do not subject the Company to unusual credit
risk.

The Companys investment
portfolio consists principally of obligations of the United States, its agencies or its
corporations. In the opinion of management, there is no concentration of credit risk in
its investment portfolio. The Company places its deposits with correspondent accounts and
sells its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.

Securities
Available-for-Sale Securities available-for-sale are carried at amortized
cost and adjusted to estimated market value by recognizing the aggregate unrealized gains
or losses in a valuation account. Aggregate market valuation adjustments are recorded in
shareholders equity net of deferred income taxes. Reductions in market value
considered by management to be other than temporary are reported as a realized loss and a
reduction in the cost basis of the security. The adjusted cost basis of investments
available-for-sale is determined by specific identification and is used in computing the
gain or loss upon sale.

Nonmarketable Equity
Securities Nonmarketable equity securities include the cost of the
Companys investment in the stock of Federal Home Loan Bank. This stock has no quoted
market value and no ready market for it exists. Investment in the Federal Home Loan Bank
is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to
collateralize such borrowings. At December 31, 2006, the Companys investment in
Federal Home Loan Bank stock was $93,200.

Loans Receivable
 Loans are stated at their unpaid principal balance. Interest income is computed
using the simple interest method and is recorded in the period earned.

When serious doubt exists as to the
collectibility of a loan or when a loan becomes contractually 90 days past due as to
principal or interest, interest income is generally discontinued unless the estimated net
realizable value of collateral exceeds the principal balance and accrued interest. When
interest accruals are discontinued, income earned but not collected is reversed.

The Company identifies impaired loans
through its normal internal loan review process. Loans on the Companys problem loan
watch list are considered potentially impaired loans. These loans are evaluated in
determining whether all outstanding principal and interest are expected to be collected.
Loans are not considered impaired if a minimal payment delay occurs and all amounts due,
including accrued interest at the contractual interest rate for the period of delay, are
expected to be collected. At December 31, 2006, management has determined that no
impairment of loans existed.

42

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Loan origination and commitment fees
and certain direct loan origination costs (principally salaries and employee benefits) are
deferred and amortized to income over the contractual life of the related loans or
commitments, adjusted for prepayments, using the straight-line method.

Allowance for Loan
Losses  An allowance for loan losses is maintained at a level deemed
appropriate by management to provide adequately for known and inherent losses in the loan
portfolio. Since there is no prior loan loss history, management has elected to maintain
the allowance for loan losses at approximately 1% of gross loans. Loans which are deemed
to be uncollectible are charged off and deducted from the allowance. The provision for
loan losses and recoveries of loans previously charged off are added to the allowance.

Premises, Furniture and
Equipment  Premises, furniture and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the straight-line
method, based on the estimated useful lives for furniture and equipment of 3 to 10 years
and software of 1 year. Leasehold improvements are amortized over 3 years. The cost of
assets sold or otherwise disposed of and the related allowance for depreciation are
eliminated from the accounts and the resulting gains or losses are reflected in the income
statement when incurred. Maintenance and repairs are charged to current expense. The costs
of major renewals and improvements are capitalized.

Income Taxes
 Income taxes are the sum of amounts currently payable to taxing authorities and the
net changes in income taxes payable or refundable in future years. Income taxes deferred
to future years are determined utilizing a liability approach. This method gives
consideration to the future tax consequences associated with differences between financial
accounting and tax bases of certain assets and liabilities which are principally the
allowance for loan losses, depreciable premises and equipment, and the net operating loss
carryforward.

Advertising
Expense  Advertising and public relations costs are generally
expensed as incurred. External costs incurred in producing media advertising are expensed
the first time the advertising takes place. External costs relating to direct mailing
costs are expended in the period in which the direct mailings are sent.

Pre-opening
expenses  The activities associated with organizing the Bank were
conducted in the name of the Company during the developmental stage period (October 1,
2004 to December 31, 2005). The Company transferred certain organizational expenses to the
Bank.

A summary of expenses that were
transferred included:

|                         | 
|------------------------ | 
|Salaries and benefits    | 
|Professional fees        | 
|Advertising              | 
|Depreciation             | 
|Insurance                | 
|Office supplies          | 
|Rent                     | 
|Telephone                | 
|Travel and entertainment | 
|Utilities                | 
|Other                    | 
|                         | 
|Total                    | 
|                         | 

43

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

As of December 31, 2005, the Company
recorded $615,729 as a receivable from the Bank for expenses associated with forming the
Bank. The Bank reimbursed the Company and recorded these expenses in the statement of
operations for the year ended December 31, 2006.

Loss Per Share
 Basic loss per share represents income available to shareholders divided by the
weighted-average number of common shares outstanding during the period. Dilutive loss per
share reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The only potential common share equivalents are
those related to stock options and warrants.

Stock-Based
Compensation  The Company accounts for options and warrants under the
fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No.
123(R), Accounting for Stock-Based Compensation. Compensation expense is recognized in the
consolidated statement of operations.

In calculating the compensation
expense for stock options, the fair value of options granted is estimated as of the date
granted using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2006: dividend yield of 0 percent; expected volatility of
10 percent; risk-free interest rates that range from 4.40% to 5.12%; and expected life of
7.50 years. For purposes of this calculation, compensation expense is recognized on a
straight-line basis over the vesting period.

In calculating the compensation
expense for stock warrants, the fair value of warrants granted is estimated as of the date
granted using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2006: dividend yield of 0 percent; expected volatility of
10 percent; risk-free interest rate of 4.73%; and expected life of 7.50 years. For
purposes of this calculation, compensation expense is recognized on a straight-line basis
over the vesting period.

Comprehensive
Income  Accounting principles generally require that recognized
income, expenses, gains, and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive
income and related tax effects are as follows for the year ended December 31, 2006:

|                                                             | 
|------------------------------------------------------------ | 
|Unrealized gains on securities available-for-sale            | 
|Reclassification adjustment for gains realized in net income | 
|                                                             | 
|Net unrealized gain on securities                            | 
|                                                             | 
|Tax effect                                                   | 
|                                                             | 
|Net-of-tax amount                                            | 
|                                                             | 

Statement of Cash
Flows  For purposes of reporting cash flows in the financial
statements, the Company considers certain highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents include amounts
due from banks and federal funds sold. Generally, federal funds are sold for one-day
periods.

44

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Off-Balance-Sheet Financial
Instruments  In the ordinary course of business, the Company enters
into off-balance-sheet financial instruments consisting of commitments to extend credit
and letters of credit. These financial instruments are recorded in the financial
statements when they become payable by the customer.

Recent Accounting
Pronouncements  The following is a summary of recent authoritative
pronouncements that may affect accounting, reporting, and disclosure of financial
information by the Company:

In February 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and
140. This Statement amends SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No.
155 is effective for all financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after September 15, 2006. The Company does
not believe that the adoption of SFAS No. 155 will have a material impact on its financial
position, results of operations and cash flows.

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB
Statement No. 140. This Statement amends FASB No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering
into a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable; permits an
entity to choose its subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities; at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question the treatment of
other available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and requires
separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity should adopt
SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a material
impact on its financial position, results of operations and cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures and transitions. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently analyzing the effects of FIN 48.

45

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company on January 1, 2008 and is not expected to have a significant impact on the
Companys financial statements.

In September 2006, the FASB issued
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans(SFAS 158), which amends SFAS 87 and SFAS
106 to require recognition of the over funded or under funded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior
service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106
that have not yet been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date  the date at which the benefit
obligation and plan assets are measured  is required to be the companys fiscal
year end. SFAS 158 is effective for publicly held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are effective for
fiscal years ending after December 15, 2008. The Company has no defined benefit pension
plan. Therefore, SFAS 158 will have no impact on the Company.

In September, 2006, The FASB ratified
the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to
EITF 06-4 Accounting for the Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 addresses
employer accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize a
liability for future benefits in accordance with FASB Statement of Financial Accounting
Standards (SFAS) No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions,or Accounting Principles Board (APB) Opinion No. 12,
Omnibus Opinion1967".EITF 06-4 is effective for fiscal years
beginning after December 15, 2006. Entities should recognize the effects of applying this
Issue through either (a) a change in accounting principle through a cumulative-effect
adjustment to retained earnings or to other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption or (b) a
change in accounting principle through retrospective application to all prior periods. The
Company does not believe the adoption of EITF 06-4 will have a material impact on its
financial position, results of operations and cash flows.

On September 13, 2006, the SEC issued
Staff Accounting Bulleting No. 108 (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior to SAB
108, Companies might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income statement approach
focusing on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a companys balance
sheet. Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires that
companies view financial statement misstatements as material if they are material
according to either the income statement or balance sheet approach. The Company has
analyzed SAB 108 and determined that upon adoption it will have no impact on the reported
results of operations or financial conditions.

46

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies are not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.

Risks and
Uncertainties  In the normal course of its business, the Company
encounters two significant types of risks: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk. The Company
is subject to interest rate risk to the degree that its interest-bearing liabilities
mature or reprice at different speeds, or on different basis, than its interest-earning
assets. Credit risk is the risk of default on the Companys loan portfolio that
results from borrowers inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral underlying loans
receivable and the valuation of real estate held by the Company.

The Company is subject to the
regulations of various governmental agencies. These regulations can and do change
significantly from period to period. The Company also undergoes periodic examinations by
the regulatory agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions from the
regulators judgments based on information available to them at the time of their
examination.

# NOTE 2  CASH AND
DUE FROM BANKS

The Company is required to maintain
cash balances with its correspondent banks to cover all cash letter transactions. At
December 31, 2006, the requirement was met by the cash balance in the vault.

# NOTE 3  INVESTMENT
SECURITIES

The amortized costs and fair value of
investment securities available for sale are as follows:

|                                 | December 31, 2006
|-------------------------------- | -----------------
|
|
|Government-sponsored enterprises |                  
|Mortgage-backed securities       |                  
|                                 |                  
|Total investment securities      |                  
|                                 |                  

The amortized costs and fair values
of investment securities available for sale at December 31, 2006, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities because
issuers have the right to prepay the obligations with or without call or prepayment
penalties.

|                                 | December 31, 2006
|-------------------------------- | -----------------
|
|
|Due within one year              |                  
|Due after one through five years |                  
|Due after five through ten years |                  
|Due after ten years              |                  
|                                 |                  
|Total investment securities      |                  
|                                 |                  

47

---

# NOTE 3  INVESTMENT
SECURITIES (continued)

The Company sold no investment
securities in 2006. Accordingly, no gains or losses were recorded. At December 31, 2006,
approximately $3,087,533 of securities was pledged as collateral for lines of credit with
correspondent banks.

The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time
that individual securities have been in a continuous realized loss position, at December
31, 2006.

|                           | Less than 12 months | 12 months or more | Total
|-------------------------- | ------------------- | ----------------- | -----
|
|
|Government-sponsored       |                     |                   |      
|enterprises                |                     |                   | $    
|Mortgage-backed securities |                     |                   |      
|                           |                     |                   |      
|                           |                     |                   | $    
|                           |                     |                   |      

Securities classified as
available-for-sale are recorded at fair market value. None of the individual securities
were in a continuous loss position for more than twelve months.

# NOTE 4  LOANS

The composition of net loans by major
loan categories is as follows:

|                                        | December 31, 2006
|--------------------------------------- | -----------------
|Real estate:                            |                  
|Mortgage                                |                  
|Construction, land and land development |                  
|                                        |                  
|Total real estate loans                 |                  
|                                        |                  
|Commercial and industrial               |                  
|Consumer and other                      |                  
|Deferred origination fees, net          |                  
|                                        |                  
|Gross loans                             |                  
|Less allowance for loan losses          |                  
|                                        |                  
|Loans, net                              |                  
|                                        |                  

At December 31, 2006, there were no non-performing loans. No loans were classified or
impaired as of December 31, 2006.

The
composition of gross loans by rate type is as follows:

|                               | December 31, 2006
|------------------------------ | -----------------
|Variable rate loans            |                  
|Fixed rate loans               |                  
|Deferred origination fees, net |                  
|                               |                  
|Gross loans                    |                  
|                               |                  

The allowance for loan losses is available to absorb future loan charge-offs. The allowance is
increased by provisions charged to operating income and by recoveries of loans that were
previously written-off. The allowance is decreased by the aggregate loan balances, if any,
that were deemed uncollectible during the year.

48

---

# NOTE 4  LOANS
(continued)

Transactions
in the allowance for loan losses during 2006 are summarized below:

|                                | 
|------------------------------- | 
|Balance, beginning of the year  | 
|Provision charged to operations | 
|Net charge-offs                 | 
|                                | 
|Balance, end of year            | 
|                                | 

# NOTE 5 
PREMISES, FURNITURE AND EQUIPMENT

Property and equipment are stated at
cost less accumulated depreciation. Components of property and equipment included in the
consolidated balance sheets are as follows:

|                             | December 31, 2006
|---------------------------- | -----------------
|Leasehold improvements       |                  
|Furniture and equipment      |                  
|Accumulated depreciation     |                  
|                             |                  
|Total property and equipment |                  
|                             |                  

Depreciation
expense for the year ended December 31, 2006 was $159,848.

# NOTE 6  DEPOSITS

At December 31, 2006 the scheduled
maturities of certificates of deposit are as follows:

|     | 
|---- | 
|2007 | 
|2008 | 
|2009 | 
|     | 
|     | 
|     | 

# NOTE 7  STOCK
COMPENSATION PLAN

Under the terms of employment
agreements with the Companys Chief Executive Officer (CEO), Chief Credit
Officer (CCO), Chief Operating Officer (COO) and the
Companys Chief Financial Officer (CFO), stock options were granted to
each as part of their compensation and benefits package. Under these agreements, the CEO
was granted options to purchase common stock equal to 2% of the shares sold in the
offering or 25,031 options. The CCO and the COO were granted options to purchase common
stock equal to 1% of the shares sold in the offering or 12,516 options to each. The CFO
was granted 10,000 stock options. One other officer was granted 8,500 stock options. These
options vest over a five year period. The options have an exercise price of $10 per share
and terminate ten years after the date of grant.

The Company also established the 2006
Stock Incentive Plan which provides for the granting of options to employees. The Company
granted a total of 9,500 stock options under this Plan to various employees. These options
vest over a five year period. The options have an exercise price of $10 per share and
terminate ten years after the date of grant. The weighted average grant date fair value
was $10 per share in 2006.

49

---

# NOTE 7  STOCK
COMPENSATION PLAN (continued)

A summary of the status of the
Companys stock options as of December 31, 2006, and changes during the year are
presented below:

|                                 | 2006
|-------------------------------- | ----
|
|
|
|Outstanding at January 1, 2006   |     
|Granted                          |     
|Exercised                        |     
|Forfeited                        |     
|                                 |     
|Outstanding at December 31, 2006 |     
|                                 |     

None of these options were
exercisable at December 31, 2006.

The following table summarizes
information about the stock options outstanding under the Companys Plan at December
31, 2006:

|                                | Outstanding
|------------------------------- | -----------
|Number of options               |            
|Weighted average remaining life |            
|Weighted average exercise price |            
|High exercise price             |            
|Low exercise price              |            

# NOTE
8  STOCK WARRANTS

The organizers of the Bank received
stock warrants giving them the right to purchase one share of common stock for every share
they purchased in the initial offering of the Companys common stock up to 10,000
shares at a price of $10 per share. The warrants vest over a five year period. All
unexercised organizer warrants expire on the tenth anniversary of the opening date of the
bank, subject to earlier termination in certain circumstances pursuant to individual stock
warrant agreements. There were 80,000 warrants granted during the twelve months ended
December 31, 2006.

A summary of the status of
Companys stock warrants as of December 31, 2006, and changes during the year is
presented below:

|                                 | 2006
|-------------------------------- | ----
|
|
|
|Outstanding at January 1, 2006   |     
|Granted                          |     
|Exercised                        |     
|Forfeited                        |     
|                                 |     
|Outstanding at December 31, 2006 |     
|                                 |     

None of these warrants were
exercisable at December 31, 2006.

50

---

# NOTE 9  INCOME
TAXES

Income tax expense for 2006 is
summarized as follows:

|                      | December 31, 2006
|--------------------- | -----------------
|Current portion:      |                  
|Federal               |                  
|State                 |                  
|                      |                  
|Total current         |                  
|                      |                  
|Deferred income taxes |                  
|                      |                  
|Income tax benefit    |                  
|                      |                  

The gross amounts of deferred tax
assets and deferred tax liabilities are as follows:

|                                                 | December 31, 2006
|------------------------------------------------ | -----------------
|Deferred tax assets:                             |                  
|Allowance for loan losses                        |                  
|Net operating loss carryforward                  |                  
|Organizational and start-up costs                |                  
|Unrealized loss on securities available for sale |                  
|Accumulated depreciation                         |                  
|Other                                            |                  
|                                                 |                  
|Total deferred tax assets                        |                  
|                                                 |                  
|Deferred tax liabilities:                        |                  
|Net capitalized loan costs and fees              |                  
|Prepaid expenses                                 |                  
|                                                 |                  
|Total deferred tax liabilities                   |                  
|                                                 |                  
|Net deferred tax asset                           |                  
|                                                 |                  

Deferred tax assets represent the future
tax benefit of deductible differences and, if it is more likely than not that tax assets
will not be realized, a valuation allowance is required to reduce the recorded deferred
tax assets to net realizable value. As of December 31, 2006, management has not recorded a
valuation allowance. Net deferred tax assets are recorded in other assets on the
Companys consolidated balance sheet.

The Company has a net operating loss
for income tax purposes of $1,475,153 as of December 31, 2006. This net operating loss
expires in the year 2026.

A reconciliation between the income
tax expense and the amount computed by applying the Federal statutory rate of 34% for 2006
to income before income taxes follows:

|                                                   | 2006
|-------------------------------------------------- | ----
|Tax expense (benefit) at a statutory rate          |     
|State income tax, net of federal income tax effect |     
|Stock-based compensation                           |     
|Other                                              |     
|                                                   |     
|Income tax benefit                                 |     
|                                                   |     

51

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# NOTE 10  LEASES

The Company has entered into various
lease agreements which are more fully described below.

The Company entered into a lease
agreement for a minimum term of thirty-six months which ends on October 15, 2007. This
lease was amended on January 24, 2006. Monthly rental expense for the initial term is
$4,563. The lease agreement provides for two three-year renewal terms with monthly rental
amounts of $4,928 and $5,292 for the two terms, respectively. This space serves as the
main branch location for the Bank.

The Company entered into a lease
agreement beginning September 1, 2005 for a minimum term of one year, ending on August 31,
2006. On May 24, 2006, this lease was extended for an additional one year term, ending on
August 31, 2007. Monthly rental expense for the extended term is $1,666. The extended
lease agreement provides for one six month renewal term with monthly rental amounts of
$1,750. This space serves as the Operations Department for the Bank.

On January 1, 2006, the Company
opened a loan production office on Hilton Head Island, South Carolina. The leased facility
was sold in August 2006 to a limited liability corporation owned primarily by directors of
the Company. The Company entered into a new lease agreement beginning August 1, 2006 for a
minimum of ten years. The lease agreement provides for two ten year renewal terms. Monthly
rental expense for the first two years of the lease is $2,000. At the end of the second
year of the initial term, and at the end of each subsequent two year period and of any
renewal term of this lease, the base rent may be adjusted according to the provisions in
the lease.

The Company has assumed liability for
a lease agreement for an automobile. The lease terms call for monthly payments of $400.
The lease expires October 20, 2007.

Rental expense for the year ending
December 31, 2006 totaled $192,537, including rental expense for the period October 1,
2004 (inception) to December 31, 2005 totaling $71,089 which was transferred to the bank
as organizational expenses.

Under these assumptions, minimum
future rental payments under non-cancelable operating leases having remaining terms in
excess of one year for each of the next five years in the aggregate are:

|     | 
|---- | 
|2007 | 
|2008 | 
|2009 | 
|2010 | 
|2011 | 

# NOTE 11  RELATED PARTY TRANSACTIONS

Certain parties (principally certain
directors and executive officers of the Company, their immediate families and business
interests) were loan customers of and had other transactions in the normal course of
business with the Company. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk of
collectibility. As of December 31, 2006, the Company had related party loans totaling
$783,668. Advances made totaled $1,145,591 and repayments totaled $361,923 during the year
ended December 31, 2006.

52

---

# NOTE 11  RELATED PARTY TRANSACTIONS (continued)

Deposits by directors, including
their affiliates and executive officers, at December 31, 2006 were approximately
$4,540,796.

One of the leases described in Note
10 is with a limited liability corporation that is owned primarily by the directors of the
Company. The expense associated with this lease totaled $14,889 for the year ended
December 31, 2006.

# NOTE 12 
COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and lawsuits
which arise primarily in the ordinary course of business. Management is not aware of any
legal proceedings which management expects to have a material adverse effect on the
financial position or operating results of the Company.

# NOTE 13  LOSS PER
SHARE

Basic loss per share is computed by
dividing net income (loss) by the weighted-average number of common shares outstanding.
Diluted loss per share is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding and dilutive common share equivalents using the
treasury stock method. There were no dilutive common share equivalents outstanding during
2006; therefore, basic loss per share and diluted earnings per share were the same.

|                                          | 
|----------------------------------------- | 
|2006                                      | 
|Net loss per share - basic computation:   | 
|Net loss to common shareholders           | 
|                                          | 
|Average common shares outstanding - basic | 
|                                          | 
|Basic loss per share                      | 
|                                          | 

# NOTE 14 
REGULATORY MATTERS

The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct adverse
material effect on the Banks financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Banks assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of the
allowance for loan losses subject to certain limitations. Total capital for purposes of
computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

53

---

# NOTE 14 
REGULATORY MATTERS (continued)

The Bank is also required to maintain
capital at a minimum level based on total average assets, which is known as the leverage
ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement
of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

As of December 31, 2006, the Bank
exceeded its minimum regulatory capital ratios, as well as the ratios to be considered
well-capitalized.

The following table summarizes the
capital amounts and ratios of the Bank and the regulatory minimum requirements at December
31, 2006:

|                                         |  |  | To be well capitalized
|---------------------------------------- |  |  | ----------------------
|
|
|
|
|
|(Dollars in thousands)                   |  |  |                       
|As of December 31,2006                   |  |  |                       
|Total Capital (to risk weighted assets)  |  |  | $                     
|Tier 1 Capital (to risk weighted assets) |  |  |                       
|Tier 1 Capital (to average assets)       |  |  |                       

The Federal Reserve also requires
bank holding companies to maintain capital at adequate levels based on a percentage of
assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.
The Federal Reserve guidelines contain an exemption from the capital requirements for
small bank holding companies. Prior to March 2006, all bank holding companies
with less than $150 million in total assets, including the Company, qualified for this
exemption. On March 30, 2006, the Federal Reserve adopted a new rule expanding the
definition of a small bank holding company. The new definition includes bank
holding companies with less than $500 million in total assets. However, bank holding
companies will not qualify under the new definition if they (i) are engaged in significant
nonbanking activities either directly or indirectly through a subsidiary, (ii) conduct
significant off-balance sheet activities, including securitizations or managing or
administering assets for third parties, or (iii) have a material amount of debt or equity
securities (including trust preferred securities) outstanding that are registered with the
SEC. The Federal Reserves use of the phrase material amount of . . . equity
securities . . . registered with the SEC created uncertainty, as the SEC
registration requirements apply to classes of securities not to a portion of the shares in
a class. According to the Federal Reserve Board, the revision of the criterion to exclude
any bank holding company that has outstanding a material amount of SEC-registered debt or
equity securities reflects the fact that SEC registrants typically exhibit a degree of
complexity of operations and access to multiple funding sources that warrants excluding
them from the new policy statement and subjecting them to the capital guidelines. In the
adopting release for the new rule, the Federal Reserve Board stated that what constitutes
a material amount of SEC-registered debt or equity for a particular bank
holding company depends on the size, activities and condition of the relevant bank holding
company. In lieu of using fixed measurable parameters of materiality across all
institutions, the rule provides the Federal Reserve with supervisory flexibility in
determining, on a case-by-case basis, the significance or materiality of activities or
securities outstanding such that a bank holding company should be excluded from the policy
statement and subject to the capital guidelines. Based on informal discussions with staff
members of the Federal Reserve, we believe the new Federal Reserve rule is intended to
exclude companies whose stock is listed on a stock exchange and is actively traded. Since
our stock is not listed on an exchange or actively traded, and since our stock is not
registered under Section 12 of the Securities Exchange Act of 1934, we believe the Company
qualifies as a small bank holding company and is exempt from the capital requirements.
Nevertheless, until the Federal Reserve provides further guidance on the new rules, it
will be unclear whether our holding company will be subject to the exemption from the
capital requirements for small bank holding companies. Regardless, our bank is subject to
these minimum capital requirements as set per bank regulatory agencies.

54

---

# NOTE 15  UNUSED
LINES OF CREDIT

As of December 31, 2006, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$7,400,000, of which, $2,800,000 is secured by investment securities. The lenders have
reserved the right to withdraw the lines at their option. These lines of credit are
available on various structures for general corporate purposes.

# NOTE 16 
RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

The ability of the Company to pay
cash dividends to stockholders is dependent upon receiving cash in the form of dividends
from its banking subsidiary. However, certain restrictions exist regarding the ability of
the subsidiary to transfer funds in the form of cash dividends to the Company. State
chartered banks are authorized to pay cash dividends up to 100% of net income in any
calendar year without obtaining the prior approval of the State Board of Financial
Institutions or the Commissioner of Banking provided that the Bank received a composite
rating of one or two at the last examination conducted by the State or Federal regulatory
authority. Otherwise, the Bank must file an income and expense report and obtain the
specific approval of the State Board.

Under Federal Reserve Board
regulations, the amount of loans or advances from the banking subsidiary to the parent
company is also restricted.

# NOTE 17  FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist of commitments to
extend credit and standby letters of credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. A commitment involves, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance sheet. The
Companys exposure to credit loss in the event of nonperformance by the other party
to the instrument is represented by the contractual notional amount of the instrument.
Since certain commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company uses
the same credit policies in making commitments to extend credit as it does for
on-balance-sheet instruments. Letters of credit are conditional commitments issued to
guarantee a customers performance to a third party and have essentially the same
credit risk as other lending facilities.

Collateral held for commitments to
extend credit and letters of credit varies but may include accounts receivable, inventory,
property, plant, equipment and income-producing commercial properties.

The following table summarizes the
Banks off-balance-sheet financial instruments whose contract amounts represent
credit risk:

|                             | December 31, 2006
|---------------------------- | -----------------
|Commitments to extend credit |                  
|                             |                  

There were $121,236 outstanding
commercial letters of credit at December 31, 2006.

55

---

# NOTE 18 FAIR VALUE
OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about
Fair Value of Financial Instruments requires disclosure of fair value information,
whether or not recognized in the consolidated balance sheets, when it is practical to
estimate the fair value. SFAS No. 107 defines a financial instrument as cash, evidence of
an ownership interest in an entity or contractual obligations which require the exchange
of cash or other financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Companys common stock, property and equipment
and other assets and liabilities.

Fair value approximates carrying
value for the following financial instruments due to the short-term nature of the
instrument: cash and due from banks, and federal funds sold.

Securities are valued using quoted
fair market prices.

Fair value for variable rate loans that
reprice frequently is based on the carrying value. Fair value for fixed rate mortgage
loans, personal loans and all other loans (primarily commercial) is based on the
discounted present value of the estimated future cash flows. Discount rates used in these
computations approximate the rates currently offered for similar loans of comparable terms
and credit quality.

Fair value for demand deposit
accounts and interest-bearing accounts with no fixed maturity date is equal to the
carrying value. The fair value of certificate of deposit accounts is estimated by
discounting cash flows using current interest rates on similar instruments.

The Company has used
managements best estimate of fair value based on the above assumptions. Thus, the
fair values presented may not be the amounts that could be realized in an immediate sale
or settlement of the instrument. In addition, any income taxes or other expenses, which
would be incurred in an actual sale or settlement, are not taken into consideration in the
fair value presented.

The estimated fair values of the
Companys financial instruments at December 31, 2006 and 2005 are as follows:

|                                         | December 31, 2006 | December 31, 2005
|---------------------------------------- | ----------------- | -----------------
|
|
|Financial Assets:                        |                   |                  
|Cash and due from banks                  |                   |                  
|Federal funds sold                       |                   |                  
|Investment securities available for sale |                   |                  
|Nonmarketable equity securities          |                   |                  
|Loans                                    |                   |                  
|Accrued interest receivable              |                   |                  
|                                         |                   |                  
|Financial Liabilities:                   |                   |                  
|Demand deposits, interest-bearing        |                   |                  
|transaction and savings accounts         |                   |                  
|Time deposits                            |                   |                  
|Accrued interest payable                 |                   |                  

|                             | Notional | Fair | Notional | Fair     
|---------------------------- | -------- | ---- | -------- | ---------
|
|Commitments to extend credit |          |      | $        | 9,100,759
|Standby letters of credit    |          |      | $        | 121,336  

56

---

# NOTE 19  PARENT
COMPANY FINANCIAL INFORMATION

Following is condensed financial
information of Atlantic Bancshares, Inc. (parent company only):

# Condensed Balance
SheetsDecember 31, 2006 and 2005

|                                           | December 31,
|------------------------------------------ | ------------
|
|
|
|Assets:                                    |             
|Cash and cash equivalents                  |             
|Deferred tax benefit                       |             
|Other assets                               |             
|Investment in subsidiaries                 |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and Shareholders Equity       |             
|Note payable                               |             
|Stock subscription deposits                |             
|Accrued interest payable                   |             
|Other liabilities                          |             
|                                           |             
|Total liabilities                          |             
|                                           |             
|Shareholders equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

# Condensed Statements
of Operations For the year ended December 31, 2006 and for theperiod October 1, 2004
(inception) to December 31, 2005

|                                                              |  | For the period
|------------------------------------------------------------- |  | --------------
|
|
|Interest income                                               |  |               
|                                                              |  |               
|Salaries and benefits                                         |  |               
|Interest expense                                              |  |               
|Other expense                                                 |  |               
|                                                              |  |               
|Total expense                                                 |  |               
|                                                              |  |               
|Income (loss) before income taxes and equity in undistributed |  |               
|losses of subsidiary                                          |  |               
|                                                              |  |               
|Income tax benefit                                            |  |               
|                                                              |  |               
|Equity in undistributed net loss of subsidiary                |  |               
|                                                              |  |               
|Net loss                                                      |  |               
|                                                              |  |               

57

---

# NOTE 19  PARENT
COMPANY FINANCIAL INFORMATION (continued)

# Condensed Statements
of Cash FlowsFor the year ended December 31, 2006 and for the 
period October 1, 2004 (inception) to December 31, 2005

|                                                              |  | For the period
|------------------------------------------------------------- |  | --------------
|
|
|Operating activities                                          |  |               
|Net loss                                                      |  |               
|Adjustments to reconcile net loss to net cash                 |  |               
|used by operating activities                                  |  |               
|Equity in undistributed net loss of subsidiary                |  |               
|Stock based compensation expense                              |  |               
|Decrease  in other assets                                     |  |               
|Decrease in accounts payable and accrued expenses             |  |               
|                                                              |  |               
|Increase (decrease) in other liabilities                      |  |               
|                                                              |  |               
|Net cash used by operating activities                         |  |               
|                                                              |  |               
|Investing activities                                          |  |               
|Reimbursement from Bank for premises, furniture and equipment |  |               
|Investment in subsidiary                                      |  |               
|                                                              |  |               
|Net cash used in investing activities                         |  |               
|                                                              |  |               
|Financing activities                                          |  |               
|Proceeds from sale of common stock, net                       |  |               
|Net increase (decrease) in borrowed funds                     |  |               
|Net increase (decrease) in stock subscription deposits        |  |               
|                                                              |  |               
|Net cash provided by financing activities                     |  |               
|                                                              |  |               
|Net increase (decrease) in cash and cash equivalents          |  |               
|                                                              |  |               
|Cash and cash equivalents, beginning of year                  |  |               
|                                                              |  |               
|Cash and cash equivalents, end of year                        |  |               
|                                                              |  |               

58

---

# CORPORATE DATA

# ANNUAL MEETING:

The Annual Meeting of Shareholders of
Atlantic Bancshares, Inc. will be held on May 11, 2007 at 10:00 AM at the Shults Park
Community Center, 77 Shults Road, Bluffton, South Carolina.

|                               | 
|------------------------------ | 
|
|
|CORPORATE OFFICE:              | 
|                               | 
|One Sherington Drive, Suite J  | 
|Bluffton, South Carolina 29910 | 
|Phone: 843.815.7111            | 
|Fax: 843.815.7112              | 
|                               | 
|INDEPENDENT AUDITORS:          | 
|                               | 
|Elliott Davis, LLC             | 
|1901 Main Street, Suite 1650   | 
|Columbia, South Carolina 29202 | 
|                               | 

# STOCK INFORMATION:

The Common  Stock of  Atlantic  Bancshares,  Inc.  is not listed on any  exchange.  Management  is not aware of any
trading of the common stock.  As of December 31, 2006, there were 392 shareholders of record.

The ability of Atlantic Bancshares,
Inc. to pay cash dividends is dependent upon receiving cash in the form of dividends from
Atlantic Community Bank. However, certain restrictions exist regarding the ability of the
Bank to transfer funds to the Company in the form of cash dividends. All of the
Banks dividends to the Company are payable only from the undivided profits of the
Bank.

# LOCATIONS:

|                                         | 
|---------------------------------------- | 
|Sheridan Park Branch                     | 
|One Sherington Drive, Suite J            | 
|Bluffton, South Carolina 29910           | 
|Phone: 843.815.7111                      | 
|Fax: 843.815.7112                        | 
|                                         | 
|Loan Production Office                   | 
|One Corpus Christi Place, Suite 108      | 
|Hilton Head Island, South Carolina 29928 | 
|Phone: 843.785.3400                      | 
|Fax: 843.785.3350                        | 
|                                         | 
|"a" Online:                              | 
|www.atlanticcommunitybank.com            | 

59

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# Item 8.   Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

None.

# Item 8A.   Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of December 31, 2006. There have been
no significant changes in our internal controls over financial reporting during the fourth
fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# Item 8B.   
Other Information.

None.

# Part III.

# Item 9.   Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act

The
following sets forth information regarding our executive officers and directors. Our
directors are elected to one year terms. Our executive officers serve at the discretion of
our board of directors.

|                              |  | Year First |  |   
|----------------------------- |  | ---------- |  | --
|
|
|
|Gary C. Davis                 |  |            |  | 42
|Frederick Anthony Nimmer, III |  |            |  | 46
|Robyn Josselson Shirley       |  |            |  | 40
|Mark S. Simpson               |  |            |  | 45
|Brian J. Smith                |  |            |  | 34
|Robert P. Trask               |  |            |  | 44
|Allen B. Ward                 |  |            |  | 39
|Edgar L. Woods                |  |            |  | 46
|Michelle M. Monts             |  |            |  | 40
|Todd D. Hoke                  |  |            |  | 35
|Karen B. Sprague              |  |            |  | 36

Gary
C. Davis, director, is a real estate sales consultant with the Hampton Lake
residential community in Bluffton. Prior to that Mr. Davis was broker-in-charge of Hampton
Hall Realty, the real estate sales arm of the Hampton Hall planned unit residential
development located in Bluffton, South Carolina, since 2003. Prior to his current
position, he worked for ten years with the health care manufacturer Johnson & Johnson,
the last three as a district sales manager for the southeastern United States. Mr. Davis
holds a South Carolina real estate brokers

60

---

license. He is a native of Ridgeland in Jasper County, South Carolina and has been living
          in Bluffton since 1999. Mr. Davis received his bachelors degree in business
          administration from Presbyterian College.

Frederick
Anthony Nimmer, III, director, is president of both, Nimmer Turf + Tree Farm and
Nimmer Equipment Rental Company, a position he has held since 1987. He also serves as
vice-president of Turfmasters, Inc., which specializes in the installation of sod. All of
these businesses are based in Ridgeland in Jasper County, South Carolina. Mr. Nimmer
earned a bachelors degree in finance from Clemson University. Mr. Nimmer formerly served
on South Carolina Bank & Trusts Jasper County Advisory Board from January 1999
to October 2004. Mr. Nimmer is a native of Jasper County and has lived in Bluffton since
2001. He is also past president of the Jasper County Rotary Club.

Robyn
Josselson Shirley, director, has been practice manager for the Southeastern Oral and
Maxillofacial Surgery Center, Inc., Bluffton, South Carolina since 1999. She earned a
bachelors degree in sociology from Furman University. She also holds bachelors and masters
degrees in occupational therapy from the Medical University of South Carolina. Mrs.
Shirley holds a South Carolina license in occupational therapy. A native of Yemassee,
South Carolina, she has lived in Bluffton since 2001 and formerly served on the board of
directors of Heroes on Horseback.

Mark
S. Simpson,director, is an attorney and member of the South Carolina Bar. He has been
in private practice with Jones, Patterson, Simpson & Newton, PA practicing in the
fields of real estate and corporate law since 1987. Mr. Simpson earned undergraduate and
law degrees from the University of South Carolina. Mr. Simpson has lived on Hilton Head
Island since 1987. He is a member of the audit committee for the Beaufort County School
District. In addition, he has served as chairman of the United Way of Beaufort County.

Brian
J. Smith,served as chair of the organizing board and is the current chair of our
board of directors. He holds a South Carolina dental license. He has run his practice,
Palmetto Dental Arts, PA in Bluffton, South Carolina, since 1999. Dr. Smith earned
undergraduate and postgraduate degrees from Clemson University and the Medical University
of South Carolina Collegeof Dental Medicine,respectively. He also
completed a General Practice post-doctorate residency program at Palmetto
Richland Health Alliance in Columbia, South Carolina. Dr. Smith has lived in Bluffton
since 1999. He is a member of the Rotary Club of Bluffton and a trustee of Cross Episcopal
School in Bluffton.

Robert
P. Traskis our president and chief executive officer. He isa native of
Beaufort and has lived in southern Beaufort County since 1989. His 18 years of commercial
bank experience are concentrated in the coastal communities of Charleston, Beaufort,
Hilton Head Island and Bluffton, South Carolina and Savannah, Georgia. Most recently, Mr.
Trask served from 2001 until 2004 as senior vice president and retail area executive of
Beaufort County for First Citizens Bank & Trust Company of South Carolina. Prior to
that position, he served from 1997 until 2001 as a vice president of First National Bank
in Bluffton, South Carolina. Prior to that position, Mr. Trask served from 1988 until 1997
for Wachovia Bank, beginning as a credit analyst and later serving as a loan officer and
as a vice president. He earned a bachelors degree in financial management from Clemson
University and a masters degree in business administration from the University of South
Carolina. Mr. Trask is past president of the Rotary Club of Bluffton, founding chair of
the board of trustees of Cross Episcopal School, and is trustee of the Community
Foundation of the Lowcountry, Inc.and trustee of the Technical College of the
Lowcountry Foundation. Inc.

Allen
B. Ward, director, has been president of the Bluffton-based engineering firm of Ward
Edwards Inc., which specializes in land surveying and multi-faceted engineering services,
since 2000. Ward Edwards, Inc. also has offices in Savannah and Beaufort. He holds
professional engineer licenses from multiple states, including South Carolina. Mr. Ward
earned both his bachelors degree in civil engineering and masters degree in environmental
systems engineering from Clemson University. Originally from Kingstree, South Carolina, he
has lived in Bluffton since 1998 and Beaufort County since 1992. Mr. Ward currently serves
as South Carolina Governor Mark Sanfords Ambassador for Economic Development for
Beaufort County.

61

---

Edgar
L. Woods,director, has been president and owner of Palmetto Grain Brokerage LLC,
which specializes in cash grain brokerage, futures/options trading and farm management,
since 1985. He is also president of Performance Ag, LLC, a licensed South Carolina grain
dealer/merchant, and is also a partner in the Agricultural Products Exchange, a feed
ingredients trading company with offices in New York, Iowa, and South Carolina. He holds a
Futures, Series 3 license from the National Futures Association. Mr. Woods earned his
bachelors degree in agricultural mechanization and business from Clemson University. He is
a native of Jasper County and has lived in Bluffton since 1990. Mr. Woods serves on the
executive committee of the Palmetto Agribusiness Council and is past president of both the
South Carolina Grain Dealers association and Southeastern Feed and Grain, a group of feed
and grain dealers from four southeastern states.

Michelle
M. Monts is our Chief Financial Officer and Executive Vice President. Ms. Monts has
been a resident of the low country area for over 15 years. She earned her bachelor of
business administration degree in finance from James Madison University in Virginia,
graduating magna cum laude. She joined the bank in January 2006 and was promoted to her
current position in May 2006. She served as the Vice President and Treasurer of Atlantic
Savings Bank, a wholly-owned subsidiary of Wachovia Corporation, on Hilton Head Island for
over 7 years, from 1991 to 1998. From 1998 to 2005, Ms. Monts remained active in the
Bluffton and Hilton Head Island communities as a volunteer for numerous organizations
while raising three young children. In addition, Ms. Monts has substantial accounting and
finance experience in other industries including the hotel/restaurant, retail and
non-profit sectors. She has held numerous leadership positions in community organizations
and is a graduate of Leadership Hilton Head Island/Bluffton.

Todd
D. Hoke is our Chief Credit Officer and Executive Vice President. Mr. Hoke joined the
bank in 2005 during its formation phase. From 2004 to 2005, he was the Vice President of
Commercial Lending for the Hilton Head Island branch of Carolina First charged with
managing a substantial commercial loan portfolio. Prior to that, he was the Assistant Vice
President for the Bluffton branch of BB&T. Mr. Hoke began his employment with BB&T
in 1999 and his responsibilities included establishing infrastructure and developing
business for BB&Ts denovo Bluffton branch. From 1996 to 1999, Mr. Hoke was
employed by the Wachovia Corporation in Hilton Head Island starting as a commercial credit
analyst and was promoted to commercial lender. He received his bachelor of science degree
in business administration from Bowling Green State University in Ohio. Mr. Hoke has been
a resident of the low country area for over 12 years. He is active in the Bluffton/Okatie
Kiwanis Club and is also a graduate of Leadership Hilton Head Island/Bluffton.

Karen
B. Sprague is our Chief Operations Officer and Executive Vice President. Ms. Sprague
has been a resident of the low country area for over 15 years. Ms. Sprague joined the bank
in September 2005 during its formation phase. Prior to that, she served as Branch Manager
of the Hilton Head Island branch of First Federal from 2001 to 2005. From 1993 to 2005,
Ms. Sprague served Liberty Savings Bank in various capacities ending as Assistant Vice
President and Sales Manager. Ms. Sprague earned her bachelor of arts degree in sociology
from The College of Wooster in Ohio. She is past President and current member of the Zonta
Club of Hilton Head Island and is a graduate of Leadership Hilton Head Island/Bluffton.

# Audit Committee

Our
audit committee has five members, Directors Gary C. Davis, Frederick Anthony Nimmer, III,
and Mark S. Simpson, Brian J. Smith, Edgar L. Woods (chair). None of the current members
of the audit committee nor any other member of our board qualifies as an audit
committee financial expert as defined under the rules of the Securities and Exchange
Commission. As a relatively small public company, it is difficult to identify potential
qualified candidates that are willing to serve on our board and otherwise meet our
requirements for service. At the present, we do not know if or when we will appoint a new
board member that qualifies as an audit committee financial expert. Although none of audit
committee members qualify as financial experts as defined in the SEC rules,
each of our members has made valuable contributions to the company and its shareholders as
members of the audit committee. The board has determined that each member is fully
qualified to monitor the

62

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performance of management, the public
disclosures by the company of its financial condition and performance, our internal
accounting operations, and our independent auditors.

Our
board of directors has implemented a process for shareholders of the company to send
communications to the board. Any shareholder desiring to communicate with the board, or
with specific individual directors, may so do by writing to the secretary of the company,
at Atlantic Bancshares, Inc., 1 Sherington Drive, Suite J, Bluffton, South Carolina 29910.
The secretary has been instructed by the board to promptly forward all such communications
to the addressees indicated thereon.

We
do not have a class of securities registered under Section 12 of the Securities Exchange
Act of 1934. Therefore, our directors, executive officers, promoters and control persons
are not required to comply with Section 16(a) of the Exchange Act.

# Code of Ethics

We
have adopted a Code of Ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, and persons performing
similar functions. The Code of Ethics is available without charge to shareholders upon
request. Shareholders should contact Mark S. Simpson, Secretary, at our main office to
obtain a copy.

# Item 10.   Executive
Compensation

# Summary Compensation
Table

The following table shows the
compensation we paid to our chief executive officer and all other executive officers who
earned over $100,000 for the year ended December 31, 2006 (collectively, the named
executive officers).

|                              |  |  |  | Option | All Other |  
|----------------------------- |  |  |  | ------ | --------- | -
|
|Robert P. Trask               |  |  |  |        |           |  
|President and Chief Executive |  |  |  |        |           |  
|Officer                       |  |  |  | 2006   |           | $
|                              |  |  |  |        |           |  
|Todd D. Hoke                  |  |  |  |        |           |  
|Chief Credit Officer          |  |  |  | 2006   |           | $
|                              |  |  |  |        |           |  
|Michelle M. Monts             |  |  |  |        |           |  
|Chief Financial Officer       |  |  |  | 2006   |           | $
|                              |  |  |  |        |           |  
|Karen B. Sprague              |  |  |  |        |           |  
|Chief Operating Officer       |  |  |  | 2006   |           | $

|_________________ |  | 
|----------------- |  | 

| | (1) | All Other Compensation includes premiums paid regarding group life, accidental
               death and dismemberment, disability, medical and dental insurance and auto
               allowance
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Summary Compensation Table reports compensation earned by named executive
               officers in 2006 and does not include compensation amounts for services
               performed in 2005 that were transferred as pre-opening expenses to the Bank in
               2006
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

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# Employment Agreements

Robert P. Trask. In June 2005,
we entered into an employment agreement with Mr. Trask, under which he agreed to serve as
president and chief executive officer of Atlantic Bancshares and Atlantic Community Bank
for a term of three years. Mr. Trasks employment with the company will automatically
extend for additional terms of one year each unless the company delivers a notice of
termination at least six months prior to the end of the term. During this term, Mr. Trask
is entitled to:

| |  | Initial annual base salary of $117,000, which was increased to $135,000 on January 18,
2006 when the Company broke escrow on its initial offering for the formation of the bank.
This salary may be increased annually by the board of directors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Options to purchase 25,032 shares of common stock for $10 per share. The award agreement
for the stock option shall provide that one-fifth of the shares subject to the option will
vest on each of the first five anniversaries of the opening date of the bank (January 26,
2006), but only if the executive remains employed by the company or one of its
subsidiaries on such date, and shall contain other customary terms and conditions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Term life insurance  policy providing for death benefits  totaling  $500,000 payable to Mr. Trask's spouse
and heirs and $1,000,000 payable to the bank;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reasonable  car  allowance  not to exceed  $450 per  month,  plus  insurance,  taxes,  and  other  related
automobile expenses;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Participate in our retirement, medical, welfare, and other benefit programs;
| | - | ----------------------------------------------------------------------------

| |  | Payment of initiation fees and reimbursement for club dues; and
| | - | ---------------------------------------------------------------

| |  | Reimbursement for travel and business expenses.
| | - | -----------------------------------------------

Pursuant
to the terms of his employment agreement, Mr. Trask is prohibited from disclosing our
trade secrets or confidential information. If we terminate Mr. Trasks employment
without cause, he will be entitled to severance equal to 24 months of his then base
salary. In addition, following a change in control, if Mr. Trask terminates his employment
for a good reason within a 90-day period beginning on the 30th day following a
change in control or within a 90-day period beginning on the one year anniversary of the
change in control:

| |  | he will be entitled to severance equal to 36 months of his then base salary;
| | - | ----------------------------------------------------------------------------

| |  | the restrictions on any outstanding incentive awards (including restricted stock) granted
to him under our long-term equity incentive program or any other incentive plan or
arrangement shall lapse and such awards shall become 100% vested, all stock options and
stock appreciation rights granted to the Mr. Trask shall become immediately exercisable
and shall become 100% vested, all performance units granted to him shall become 100%
vested;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we will continue to pay his life insurance,  disability,  medical,  dental, and  hospitalization  benefits
for three years; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | the restrictive covenants regarding competition and solicitation described
below shall not apply.
| | - | -------------------------------------------------------------------------------------------------

During his employment and for a
period of 12 months thereafter, Mr. Trask may not, subject to limited exceptions, (a)
compete with us by forming, serving as an organizer, director, or officer of, or acquiring
or maintaining an ownership interest in, a depository financial institution or holding
company of a depository financial institution, if the depository institution or holding
company has one or more offices or branches within our territory, (b) solicit our
customers for a competing business, or (c) solicit our employees for a competing business.

Todd D. Hoke. In September
2005, we entered into an employment agreement with Mr. Hoke, under which he agreed to
serve as chief credit officer of Atlantic Bancshares and Atlantic Community Bank for a
term of three years. Mr. Hokes employment with the company will automatically extend
for additional terms of one year each unless the company delivers a notice of termination
at least six months prior to the end of the term. During this term, Mr. Hoke is entitled
to:

65

---

| |  | Initial  annual base salary of $95,000,  which was  increased  to $100,000 on August 1, 2006.  This salary
may be increased annually by the board of directors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Options to purchase shares of common stock equal to 1% of shares sold during
capitalization in accordance with the stock incentive plan approved by the companys
shareholders;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reasonable  car  allowance  not to exceed  $350 per  month,  plus  insurance,  taxes,  and  other  related
automobile expenses;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Participate in our retirement, medical, welfare, and other benefit programs;
| | - | ----------------------------------------------------------------------------

| |  | Payment of initiation fees and reimbursement for club dues; and
| | - | ---------------------------------------------------------------

| |  | Reimbursement for travel and business expenses.
| | - | -----------------------------------------------

Pursuant
to the terms of his employment agreement, Mr. Hoke is prohibited from disclosing our trade
secrets or confidential information. If we terminate Mr. Hokes employment without
cause, he will be entitled to severance equal to 12 months of his then base salary. In
addition, following a change in control, if Mr. Hoke terminates his employment for a good
reason within a 90-day period beginning on the 30th day following a change in
control or within a 90-day period beginning on the one year anniversary of the change in
control:

| |  | he will be entitled to severance equal to 36 months of his then base salary;
| | - | ----------------------------------------------------------------------------

| |  | the restrictions on any outstanding incentive awards (including restricted stock) granted
to him under our long-term equity incentive program or any other incentive plan or
arrangement shall lapse and such awards shall become 100% vested, all stock options and
stock appreciation rights granted to the Mr. Hoke shall become immediately exercisable and
shall become 100% vested, all performance units granted to him shall become 100% vested;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we will continue to pay his life insurance,  disability,  medical,  dental, and  hospitalization  benefits
for three years; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | the restrictive covenants regarding competition and solicitation described below shall
not apply
| | - | ------------------------------------------------------------------------------------------------

Finally, during his employment and
for a period of 12 months thereafter, Mr. Hoke may not, subject to limited exceptions, (a)
compete with us by forming, serving as an organizer, director, or officer of, or acquiring
or maintaining an ownership interest in, a depository financial institution or holding
company of a depository financial institution, if the depository institution or holding
company has one or more offices or branches within our territory, (b) solicit our
customers for a competing business, or (c) solicit our employees for a competing business.

Michelle M. Monts.In August
2006, we entered into an employment agreement with Ms. Monts, under which she agreed to
serve as chief financial officer and executive vice president of Atlantic Bancshares and
Atlantic Community Bank for a term of three years. Ms. Monts employment with the
company will automatically extend for additional terms of one year unless the company
delivers a notice of termination at least 60 days prior to the end of the term. During
this term, Ms. Monts is entitled to:

| | - | Initial annual salary of $100,000, which may be increased periodically by the chief
executive officer;
| | - | ------------------------------------------------------------------------------------------------------

| | - | Options to purchase 10,000 shares of common stock in accordance
with the stock incentive plan approved by the company's shareholders;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | - | Car allowance of $350 per month;
| | - | --------------------------------

| | - | Participate in our retirement, medical, welfare, and other benefit programs;
| | - | ----------------------------------------------------------------------------

| | - | Payment of initiation fees and reimbursement for club dues; and
| | - | ---------------------------------------------------------------

| | - | Reimbursement for travel and business expenses.
| | - | -----------------------------------------------

Pursuant to the terms of his
employment agreement, Ms. Monts is prohibited from disclosing our trade secrets or
confidential information. If we terminate Ms. Monts employment without cause, she
will be entitled to severance equal to 3 months of her then base salary. In addition,
following a change in control, if Ms. Monts terminates her employment for a good reason
within a 90-day period beginning on the 30th day following a change in control:

65

---

| |  | she will be entitled to severance equal to 36 months of his then base salary;
| | - | -----------------------------------------------------------------------------

| |  | the restrictions on any outstanding incentive awards (including restricted stock) granted
to her under our long-term equity incentive program or any other incentive plan or
arrangement shall lapse and such awards shall become 100% vested, all stock options and
stock appreciation rights granted to the Ms. Monts shall become immediately exercisable
and shall become 100% vested, all performance units granted to her shall become 100%
vested;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we will continue to pay her life insurance,  disability,  medical,  dental, and  hospitalization  benefits
for three years; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | the restrictive covenants regarding competition and solicitation described below \
shall not apply
| | - | --------------------------------------------------------------------------------------------------

The amounts described above to be
paid to Ms. Monts in connection with a termination following a change in control will be
grossed up so as to account for any additional taxes that may be owed as a result of the
lump sum payment rather than periodic payments over 36 months.

During her employment and for a
period of 12 months thereafter, Ms. Monts may not, subject to limited exceptions, (a)
compete with us by forming, serving as an organizer, director, or officer of, or acquiring
or maintaining an ownership interest in, a depository financial institution or holding
company of a depository financial institution, if the depository institution or holding
company has one or more offices or branches within our territory, (b) solicit our
customers for a competing business, or (c) solicit our employees for a competing business.

Karen B. Sprague.In August
2006, we entered into an employment agreement with Ms. Sprague, under which she agreed to
serve as chief operating officer and executive vice president of Atlantic Bancshares and
Atlantic Community Bank for a term of three years. Ms. Spragues employment with the
company will automatically extend for additional terms of one year unless the company
delivers a notice of termination at least 60 days prior to the end of the term. During
this term, Ms. Sprague is entitled to:

| | - | Initial annual salary of $90,000, which may be increased periodically by the chief
executive officer;
| | - | -----------------------------------------------------------------------------------------------------

| | - | Options to purchase shares of common stock equal to 1% of shares
sold during capitalization in accordance
with the stock incentive plan approved by the companys shareholders;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Car allowance of $350 per month;
| | - | --------------------------------

| | - | Participate in our retirement, medical, welfare, and other benefit programs;
| | - | ----------------------------------------------------------------------------

| | - | Payment of initiation fees and reimbursement for club dues;
and
| | - | ---------------------------------------------------------------

| | - | Reimbursement for travel and business expenses.
| | - | -----------------------------------------------

Pursuant to the terms of his
employment agreement, Ms. Sprague is prohibited from disclosing our trade secrets or
confidential information. If we terminate Ms. Spragues employment without cause, she
will be entitled to severance equal to 3 months of her then base salary. In addition,
following a change in control, if Ms. Sprague terminates her employment for a good reason
within a 90-day period beginning on the 30th day following a change in control:

| |  | she will be entitled to severance equal to 36 months of his then base salary;
| | - | -----------------------------------------------------------------------------

| |  | the restrictions on any outstanding incentive awards (including restricted stock) granted
to her under our long-term equity incentive program or any other incentive plan or
arrangement shall lapse and such awards shall become 100% vested, all stock options and
stock appreciation rights granted to the Ms. Sprague shall become immediately exercisable
and shall become 100% vested, all performance units granted to her shall become 100%
vested;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we will continue to pay his life insurance,  disability,  medical,  dental, and  hospitalization  benefits
for three years; and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | the restrictive covenants regarding competition and solicitation described below
shall not apply
| | - | ------------------------------------------------------------------------------------------------

66

---

The amounts described above to be
paid to Ms. Sprague in connection with a termination following a change in control will be
grossed up so as to account for any additional taxes that may be owed as a result of the
lump sum payment rather than periodic payments over 36 months.

During her employment and for a
period of 12 months thereafter, Ms. Sprague may not, subject to limited exceptions, (a)
compete with us by forming, serving as an organizer, director, or officer of, or acquiring
or maintaining an ownership interest in, a depository financial institution or holding
company of a depository financial institution, if the depository institution or holding
company has one or more offices or branches within our territory, (b) solicit our
customers for a competing business, or (c) solicit our employees for a competing business.

Potential Change in Control
Related Payments Limitations. In the event that our independent accountants acting as
our auditors on the date of a change in control determine that the payments provided for
in any of our named executive officers employment agreements upon the named
executive officers termination for good reason within a 90-day period beginning on
the 30th day following a change in control constitute excess parachute
payments (as that term is used in Section 280G of the Internal Revenue Code of 1986
and any regulations thereunder), then such compensation will be reduced to an amount the
value of which is $1.00 less than the maximum amount that could be paid to such named
executive officer without the compensation being treated as excess parachute
payments under Section 280G.

# Outstanding Equity
Awards at Fiscal Year-End

|                              |  | Number of |          | 
|----------------------------- |  | --------- | -------- | 
|
|
|
|
|
|Robert P. Trask               |  |           | Options  | 
|President and Chief Executive |  |           | Warrants | 
|Officer                       |  |           |          | 
|                              |  |           |          | 
|Todd D. Hoke                  |  |           | Options  | 
|Chief Credit Officer          |  |           |          | 
|                              |  |           |          | 
|Michelle M. Monts             |  |           | Options  | 
|Chief Financial Officer       |  |           |          | 
|                              |  |           |          | 
|Karen B. Sprague              |  |           | Options  | 
|Chief Operating Officer       |  |           |          | 



|_________________ |  | 
|----------------- |  | 

| | (1) | The stock options and the warrants provide that one-fifth of the options or
               warrants, as applicable, will vest on each of the first five anniversaries of
               the opening date of the bank (January 26, 2006), but only if the executive
               remains employed by us.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the terms of our 2006 stock
incentive plan, upon a change of control of our company after March 28, 2009 all options
outstanding but not otherwise exercisable will generally automatically accelerate and
become exercisable immediately before the effective date of the change of control.

67

---

# Director Compensation

Our bylaws permit our directors to
receive reasonable compensation as determined by a resolution of the board of directors.
We did not pay any directors fees during the fiscal year ended December 31, 2006,
except to those who were executive officers for services preformed as officers. See the
Summary Compensation Table for the compensation of our named executive officers, including
Mr. Trask, our President and Chief Executive Officer, who is also a director. We may,
pursuant to our bylaws, begin to compensate our directors at some time in the future. The
amounts shown in the Option Awards column below represent that amount of expense we
recognized for accounting purposes in 2006 associated with the vesting of warrants granted
to the respective director in connection with the formation of the bank.

|Names of Non-Executive        | Year | Option |     
|----------------------------- | ---- | ------ | ----
|
|Gary C. Davis                 |      |        | 2006
|Frederick Anthony Nimmer, III |      |        | 2006
|Robyn Josselson Shirley       |      |        | 2006
|Mark S. Simpson               |      |        | 2006
|Brian J. Smith                |      |        | 2006
|Allen B. Ward                 |      |        | 2006
|Edgar L. Woods                |      |        | 2006

| | (1) | Each director holds 10,000 warrants. The warrants vest over a five year period
               from the date of the opening date of the bank (January 26, 2006), but only if
               the director continues to serve as a director. All unexercised organizer
               warrants expire on the tenth anniversary of the opening date of the bank
               (January 26, 2016), subject to earlier termination in certain circumstances
               pursuant to individual stock warrant agreements.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Item 11.   Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The
following table shows how much common stock in our company is owned by the directors,
certain executive officers, and owners of more than 5% of the outstanding common stock, as
of March 1, 2007. Unless otherwise indicated, the address of each beneficial owner is c/o
Atlantic Bancshares, Inc., 1 Sherington Drive, Suite J, Bluffton, South Carolina 29910.

|                                     | Number of |  | % of Beneficial
|------------------------------------ | --------- |  | ---------------
|
|Gary C. Davis                        |           |  |                
|Frederick Anthony Nimmer, III        |           |  |                
|Robyn Josselson Shirley              |           |  |                
|Mark S. Simpson                      |           |  |                
|Brian J. Smith                       |           |  |                
|Robert P. Trask                      |           |  |                
|Allen B. Ward                        |           |  |                
|Edgar L. Woods                       |           |  |                
|Michelle M. Monts                    |           |  |                
|Todd D. Hoke                         |           |  |                
|Karen B. Sprague                     |           |  |                
|                                     |           |  |                
|All executive officers and directors |           |  |                
|(11 persons)                         |           |  |                



_________________ 
*Indicates less than 1% ownership.

|(1) |  | Includes shares for which the named person has sole voting and investment power,
               has shared voting and investment power, or holds in an IRA or other retirement
               plan program, and includes shares held by a spouse, unless otherwise indicated
               in these footnotes.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes shares that may be acquired within the next 60 days of March 1, 2007 by
               exercising vested stock options or warrants but does not include any unvested
               stock options or warrants.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | For each individual, this percentage is determined by assuming the named person
               exercises all options and warrants which he or she has the right to acquire
               within 60 days, but that no other persons exercise any options or warrants. For
               the directors and executive officers as a group, this percentage is determined
               by assuming that each director and executive officer exercises all options or
               warrants which he or she has the right to acquire within 60 days, but that no
               other persons exercise any options. The calculations are based on 1,251,577
               shares of common stock outstanding on March 1, 2007.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

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# Equity Compensation
Plan Information

The
following table sets forth the equity compensation plan information at December 31, 2006.

|                              |  |  | Number of securities
|----------------------------- |  |  | --------------------
|
|
|
|
|
|
|Equity compensation plans     |  |  |                     
|approved by security          |  |  |                     
|holders                       |  |  |                     
|                              |  |  |                     
|Equity compensation plans not |  |  |                     
|approved by security          |  |  |                     
|holders                       |  |  |                     
|                              |  |  |                     
|Total                         |  |  |                     

|_________________ |  | 
|----------------- |  | 

| | (1) | Each of our organizers received, for no additional consideration, a warrant to
               purchase one share of common stock for every share they purchased in the initial
               offering of the companys common stock up to 10,000 shares at a price of
               $10 per share. The warrants are represented by separate warrant agreements. The
               warrants vest over a five year period. All unexercised organizer warrants expire
               on the tenth anniversary of the opening date of the bank, subject to earlier
               termination in certain circumstances pursuant to individual stock warrant
               agreements.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 12.   Certain
Relationships and Related Transactions, and Director Independence

We
enter into banking and other transactions in the ordinary course of business with our
directors and officers and their affiliates. It is our policy that these transactions be
on substantially the same terms (including price, or interest rates and collateral) as
those prevailing at the time for comparable transactions with unrelated parties. We do not
expect these transactions to involve more than the normal risk of collectibility nor
present other unfavorable features to us. Loans to individual directors and officers must
also comply with our banks lending policies and statutory lending limits, and
directors with a personal interest in any loan application are excluded from the
consideration of the loan application. We intend for all of our transactions with our
affiliates to be on terms no less favorable to us than could be obtained from an
unaffiliated third party and to be approved by a majority of disinterested directors.

On
January 1, 2006 we opened a loan production office on the south end of Hilton Head Island.
We leased a facility at 1 Corpus Christi Place, Suite 108, Hilton Head Island, SC 29928
that has a total of 1,837 square feet for a period of one year with a one year option to
renew. The organizers of the company, along with other non-organizers, have formed a
separate corporate entity which purchased this location that we lease

Our
board of directors has determined that Davis, Nimmer, Shirley, Simpson, Smith, Ward and
Woods are independent directors, based upon the independence criteria set
forth in the corporate governance listing standards of The NASDAQ Stock Market, the
exchange that we selected in order to determine whether its directors and committee
members meet the independence criteria of a national securities exchange, as required by
Item 407(a) of Regulation S-B.

Our
board of directors has created an audit committee, a nominating committee and a
compensation committee of the board. The board of directors has determined that the
members of each of these committees are independent as contemplated in the
listing standards of The NASDAQ Stock Market.

70

---

# Item 13.   Exhibits.

|      | 
|----- | 
|3.1   | 
|      | 
|      | 
|3.2   | 
|      | 
|4.1   | 
|      | 
|      | 
|      | 
|4.2   | 
|      | 
|      | 
|10.1  | 
|      | 
|      | 
|10.2  | 
|      | 
|      | 
|10.3  | 
|      | 
|      | 
|10.4  | 
|      | 
|      | 
|10.5  | 
|      | 
|      | 
|10.6  | 
|      | 
|      | 
|10.7  | 
|      | 
|      | 
|10.8  | 
|      | 
|      | 
|10.9  | 
|      | 
|      | 
|10.10 | 
|      | 
|      | 
|      | 
|10.11 | 
|      | 
|      | 
|      | 
|10.12 | 
|      | 
|      | 

71

---

|      | 
|----- | 
|10.13 | 
|      | 
|      | 
|      | 
|10.14 | 
|      | 
|      | 
|      | 
|21.1  | 
|      | 
|23.1  | 
|      | 
|24.1. | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32    | 

|_________________ |  | 
|----------------- |  | 

|* |  | Denotes management contract of compensatory plan or arrangement required to be filed as an
Exhibit to this Annual Report on Form 10-KSB.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

# Item 14.   Principal
Accountant Fees and Services

Elliott
Davis LLC was our auditor during the fiscal year ended December 31, 2006. The following
table shows the fees that we paid for services performed in the fiscal year ended December
31, 2006:

|                   | Year Ended
|------------------ | ----------
|
|Audit Fees         |           
|Audit-Related Fees |           
|Tax Fees           |           
|All Other Fees     |           
|                   |           
|Total              |           
|                   |           

Audit
Fees. This category includes the aggregate fees billed for professional services
rendered by the independent auditors during the companys 2006 fiscal year for the
audit of the registrants annual financial statements and review of financial
statements included in the registrants Form 10-QSB or services that are normally
provided by the accountant in connection with statutory and regulatory filings or
engagements.

Audit-Related
Fees. This category includes the aggregate fees billed for non-audit services,
exclusive of the fees disclosed relating to audit fees, during the fiscal year ended
December 31, 2006. These services principally related to the audit of the development
stage financial statements and procedures related to SEC filing of Form SB-2 in connection
with the Companys registration statement.

Tax
Fees. This category includes the aggregate fees billed for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax planning.

All Other Fees. None.

Oversight
of Accountants; Approval of Accounting Fees.Under the provisions of its charter, the
audit committee is responsible for the retention, compensation, and oversight of the work
of the independent auditors. The charter provides that the audit committee must
pre-approve the fees paid for the audit. The policy specifically prohibits certain
non-audit services that are prohibited by securities laws from being provided by an
independent auditor. All of the accounting services and fees reflected in the table above
were reviewed and approved by the audit committee, and none of the services were performed
by individuals who were not employees of the independent auditor.

72

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

|                      |  | ATLANTIC BANCSHARES, INC.            
|--------------------- |  | -------------------------------------
|Date:  March 29, 2007 |  | By:   /s/  Robert P. Trask           
|                      |  | Robert P. Trask                      
|                      |  | President and Chief Executive Officer

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert P. Trask, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and
to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that attorney-in-fact and agent,
or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.

|Signature | Title | Date
|--------- | ----- | ----

| |  | 
| |  | 

|/s/ Gary C. DavisGary C. Davis | Director | March 28, 2007
|------------------------------ | -------- | --------------

|/s/ Michelle M. MontsMichelle M. Monts | Chief Financial Officer and Principal Accounting Officer | March 28, 2007
|-------------------------------------- | -------------------------------------------------------- | --------------

|/s/ Frederick Anthony Nimmer, IIIFrederick Anthony Nimmer, III | Director | March 28, 2007
|-------------------------------------------------------------- | -------- | --------------

|/s/ Robyn Josselson ShirleyRobyn Josselon Shirley | Director | March 28, 2007
|------------------------------------------------- | -------- | --------------

|/s/ Mark S. SimpsonMark S. Simpson | Director | March 28, 2007
|---------------------------------- | -------- | --------------

|/s/ Brian J. SmithBrian J. Smith | Director | March 28, 2007
|-------------------------------- | -------- | --------------

|/s/ Robert P. TraskRobert P. Trask | Chief Executive Officer, Presidentand Director | March 28, 2007
|---------------------------------- | ---------------------------------------------- | --------------

|/s/ Allen B. WardAllen B. Ward | Director | March 28, 2007
|------------------------------ | -------- | --------------

|/s/ Edgar L. WoodsEdgar L. Woods | Vice Chairman, Director | March 28, 2007
|-------------------------------- | ----------------------- | --------------

73

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# Exhibit Index

|      | 
|----- | 
|3.1   | 
|      | 
|      | 
|3.2   | 
|      | 
|4.1   | 
|      | 
|      | 
|      | 
|4.2   | 
|      | 
|      | 
|10.1  | 
|      | 
|      | 
|10.2  | 
|      | 
|      | 
|10.3  | 
|      | 
|      | 
|10.4  | 
|      | 
|      | 
|10.5  | 
|      | 
|      | 
|10.6  | 
|      | 
|      | 
|10.7  | 
|      | 
|      | 
|10.8  | 
|      | 
|      | 
|10.9  | 
|      | 
|      | 
|10.10 | 
|      | 
|      | 
|      | 
|10.11 | 
|      | 
|      | 
|      | 
|10.12 | 
|      | 
|      | 

74

---

|      | 
|----- | 
|10.13 | 
|      | 
|      | 
|      | 
|10.14 | 
|      | 
|      | 
|      | 
|21.1  | 
|      | 
|23.1  | 
|      | 
|24.1. | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32    | 

|_________________ |  | 
|----------------- |  | 

|* |  | Denotes management contract of compensatory plan or arrangement required to be filed as an
Exhibit to this Annual Report on Form 10-KSB.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

75