U.S.
      SECURITIES AND EXCHANGE COMMISSION





WASHINGTON,
      D. C. 20549





FORM
      10-Q




x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 For
        the
        quarterly period ended September 30, 2006
  o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934


For
      the
      transition period from _____ to _____





Commission
      file number 0-13153





HABERSHAM
                BANCORP(Exact
                name of registrant as specified in its
                charter)





Georgia
            58-1563165(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)





Highway
                441 N. P.O. Box 1980, Cornelia, Georgia
            30531(Address
                of principal executive offices)
            (Zip
                code)





(706)
                778-1000(Issuer’s
                telephone number, including area code)(Former
                name, former address and former fiscal year, if
                changed since last report)





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 x  No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one)





Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes o  No x





State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date:





2,953,740
      shares, common stock, $1.00 par value, as of October 30, 2006







1


Item.
                1
            Financial
                Statements





HABERSHAM
      BANCORP AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEETS (unaudited)


(dollars
      in thousands)





ASSETS
            
            SEPTEMBER30,
                2006
            
            DECEMBER31, 2005Cash
                and due from banks
            
            $
            11,982
            
            $
            16,546Federal
                funds sold
            
            
            1,265
            
            
            36,320Total
                cash and cash equivalents
            
            
            13,247
            
            
            52,866Investment
                securities available for sale (cost of $87,009 at September 30, 2006
                and
                $74,607 at December 31, 2005)
            
            
            85,314
            
            
            73,115Investment
                securities held to maturity (estimated fair value of $3,379 at September
                30, 2006 and $3,514 at December 31, 2005)
            
            
            3,297
            
            
            3,388Other
                investments
            
            
            3,365
            
            
            3,375Loans
                held for sale
            
            
            413
            
            
            2,119Loans
            
            
            346,945
            
            
            320,718Less
                allowance for loan losses
            
            
            (3,489
            )
            
            (3,945
            )Loans,
                net
            
            
            343,456
            
            
            316,773Goodwill
            
            
            3,550
            
            
            3,550Other
                assets
            
            
            23,367
            
            
            23,245TOTAL
                ASSETS
            
            $
            476,009
            
            $
            478,431LIABILITIESNoninterest-bearing
                deposits
            
            $
            52,823
            
            $
            92,698Interest-bearing
                deposits
            
            
            317,403
            
            
            280,064Total
                deposits
            
            
            370,226
            
            
            372,762Short-term
                borrowings
            
            
            788
            
            
            776Federal
                funds purchased and securities sold under repurchase
                agreements
            
            
            7,562
            
            
            8,423Federal
                Home Loan Bank Advances
            
            
            38,000
            
            
            42,300Other
                liabilities
            
            
            5,324
            
            
            3,913TOTAL
                LIABILITIES
            
            
            421,900
            
            
            428,174STOCKOLDERS’
                EQUITYCommon
                Stock, $1.00 par value, 10,000,000 shares authorized; 2,953,740 shares
                issued at September 30, 2006 and 2,921,240 shares issued at December
                31,
                2005
            
            
            2,953
            
            
            2,921Additional
                paid-in capital
            
            
            15,337
            
            
            14,723Retained
                earnings
            
            
            36,880
            
            
            33,545Accumulated
                other comprehensive(loss)income
            
            
            (1,061
            )
            
            (932
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            54,109
            
            
            50,257TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            476,009
            
            $
            478,431





See
      notes
      to unaudited condensed consolidated financial statements.


2


HABERSHAM
      BANCORP AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF EARNINGS


(Uaudited)
      For the Three-Month and Nine-Month Periods Ended September 30, 2006 and 2005


(dollars
      in thousands, except per share amounts)





Three
                Months ended
            
            Nine
                Months ended2006
            
            2005
            
            2006
            
            2005INTEREST
                INCOMELoan
                interest and fees on loans
            
            $
            7,979
            
            $
            6,037
            
            $
            21,956
            
            $
            15,833Taxable
                investment securities
            
            
            763
            
            
            602
            
            
            2,130
            
            
            1,774Tax
                exempt securities
            
            
            266
            
            
            211
            
            
            714
            
            
            603Federal
                funds sold
            
            
            59
            
            
            18
            
            
            368
            
            
            135Other
            
            
            56
            
            
            34
            
            
            177
            
            
            113TOTAL
                INTEREST INCOME
            
            
            9,123
            
            
            6,902
            
            
            25,345
            
            
            18,458INTEREST
                EXPENSETime
                deposits, $100,000 and over
            
            
            1,088
            
            
            527
            
            
            2,726
            
            
            1,385Other
                deposits
            
            
            1,847
            
            
            1,135
            
            
            5,104
            
            
            3,032Short-term
                and other borrowings, primarily FHLB advances
            
            
            537
            
            
            586
            
            
            1,577
            
            
            1,632TOTAL
                INTEREST EXPENSE
            
            
            3,472
            
            
            2,248
            
            
            9,407
            
            
            6,049NET
                INTEREST INCOME
            
            
            5,651
            
            
            4,654
            
            
            15,938
            
            
            12,409Provision
                for loan losses
            
            
            -
            
            
            90
            
            
            -
            
            
            330NET
                INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            5,651
            
            
            4,564
            
            
            15,938
            
            
            12,079NONINTEREST
                INCOMEMortgage
                origination income
            
            
            212
            
            
            371
            
            
            604
            
            
            755Service
                charges on deposits
            
            
            240
            
            
            189
            
            
            647
            
            
            502Other
                service charges and commissions
            
            
            67
            
            
            42
            
            
            200
            
            
            118Investment
                securities (losses) gains, net
            
            
            (7
            )
            
            42
            
            
            (13
            )
            
            12Gain
                on sale of premises and equipment
            
            
            15
            
            
            -
            
            
            33
            
            
            -Gain
                on sale of land
            
            
            -
            
            
            -
            
            
            42
            
            
            -Other
                income
            
            
            437
            
            
            428
            
            
            1,274
            
            
            1,226Total
                noninterest income
            
            
            964
            
            
            1,072
            
            
            2,787
            
            
            2,613NONINTEREST
                EXPENSESalary
                and employee benefits
            
            
            2,485
            
            
            2,224
            
            
            7,214
            
            
            6,185Occupancy
            
            
            573
            
            
            482
            
            
            1,660
            
            
            1,421Computer
                services
            
            
            139
            
            
            103
            
            
            421
            
            
            314General
                and administrative expense
            
            
            1,144
            
            
            1,100
            
            
            3,372
            
            
            2,901Total
                noninterest expense
            
            
            4,341
            
            
            3,909
            
            
            12,667
            
            
            10,821EARNINGS
                BEFORE INCOME TAXES
            
            
            2,274
            
            
            1,727
            
            
            6,058
            
            
            3,871Income
                tax expense
            
            
            741
            
            
            550
            
            
            1,929
            
            
            1,137NET
                EARNINGS
            
            $
            1,533
            
            $
            1,177
            
            $
            4,129
            
            $
            2,734Net
                earnings per common share - Basic
            
            $
            .52
            
            $
            .41
            
            $
            1.41
            
            $
            .94Net
                earnings per common share - Diluted
            
            $
            .51
            
            $
            .40
            
            $
            1.39
            
            $
            .93Weighted
                average number of common shares outstanding
            
            
            2,949,207
            
            
            2,903,018
            
            
            2,938,080
            
            
            2,901,892Weighted
                average number of common and common equivalent shares
                outstanding
            
            
            2,993,256
            
            
            2,937,987
            
            
            2,979,394
            
            
            2,936,452Dividends
                per share
            
            $
            .09
            
            $
            .08
            
            $
            .27
            
            $
            .24





See
      notes
      to unaudited condensed consolidated financial statements.


3


HABERSHAM
      BANCORP AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)
      For the Three- and Nine-Month Periods Ended September 30, 2006 and 2005


(dollars
      in thousands)





Three
                Months ended
            
            Nine
                Months ended2006
            
            2005
            
            2006
            
            2005NET
                EARNINGS
            
            $
            1,533
            
            $
            1,177
            
            $
            4,129
            
            $
            2,734OTHER
                COMPREHENSIVE INCOME (LOSS):Unrealized
                holding (losses) gains on investment securities available for sale
                arising
                during the period
            
            
            1,503
            
            
            (456
            )
            
            (216
            )
            
            (710
            )Unrealized
                holding gains (losses) on derivative financial instruments classified
                as
                cash flow hedges, arising during the period
            
            
            (92
            )
            
            101
            
            
            7
            
            
            160Reclassification
                adjustment for (gains) losses on investment securities available
                for
                sale
            
            
            7
            
            
            (42
            )
            
            13
            
            
            (12
            )Total
                other comprehensive income (loss), before tax
            
            
            1,418
            
            
            (397
            )
            
            (196
            )
            
            (562
            )INCOME
                TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
                holding (losses) gains on investment securities available for sale
                arising
                during the period
            
            
            (511
            )
            
            155
            
            
            73
            
            
            241Unrealized
                holding gains (losses) on derivative financial instruments classified
                as
                cash flow hedges, arising during the period
            
            
            31
            
            
            (34
            )
            
            (2
            )
            
            (54
            )Reclassification
                adjustment for (gains) losses on investment securities available
                for
                sale
            
            
            (2
            )
            
            14
            
            
            (4
            )
            
            4Total
                income taxes related to other comprehensive income (loss)
            
            
            (482
            )
            
            135
            
            
            67
            
            
            191Total
                other comprehensive (loss) income, net of tax
            
            
            936
            
            
            (262
            )
            
            (129
            )
            
            (371
            )Total
                comprehensive (loss) income
            
            $
            2,469
            
            $
            915
            
            $
            4,000
            
            $
            2,363





See
      notes
      to unaudited condensed consolidated financial statements.


4


HABERSHAM
      BANCORP AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)
      For the Nine-Month Periods Ended September 30, 2006 and 2005


(dollars
      in thousands)





2006
            
            2005CASH
                FLOWS PROVIDED BY OPERATING ACTIVITIES, net of effects of purchase
                acquisition in 2005:
            
            $
            7,020
            
            $
            3,123CASH
                FLOWS FROM INVESTING ACTIVITIES, net of effects of purchase acquisition
                in
                2005:Cash
                acquired of $4,631,073 in excess of cash paid for the purchase acquisition
                of Liberty
            
            
            -
            
            
            801Investment
                securities available for sale:Proceeds
                from maturity
            
            
            5,245
            
            
            8,269Proceeds
                from sale and call
            
            
            1,053
            
            
            3,343Purchases
            
            
            (18,832
            )
            
            (11,953
            )Investment
                securities held to maturity:Proceeds
                from maturity
            
            
            24
            
            
            134Proceeds
                from call
            
            
            80
            
            
            275Other
                investments:Proceeds
                from sale
            
            
            553
            
            
            450Purchases
            
            
            (543
            )
            
            (1,356
            )Net
                (increase) decrease in loans
            
            
            (27,698
            )
            
            (31,080
            )Purchases
                of premises and equipment
            
            
            (2,168
            )
            
            (934
            )Proceeds
                from sale of premises and equipment
            
            
            209
            
            
            14Net
                additions of other real estate
            
            
            2
            
            
            (1
            )Proceeds
                from sale of other real estate
            
            
            3,269
            
            
            835Net
                cash (used by) provided by investing activities
            
            
            (38,806
            )
            
            (31,203
            )CASH
                FLOWS FROM FINANCING ACTIVITIES, net of effects of purchase acquisition
                in
                2005:Net
                increase (decrease) in deposits
            
            
            (2,536
            )
            
            22,583Net
                increase (decrease) in short-term borrowings
            
            
            12
            
            
            1Net
                (decrease) increase in federal funds purchased and securities sold
                under
                repurchase agreements
            
            
            (861
            )
            
            8,132Proceeds
                from FHLB advances
            
            
            8,000
            
            
            16,300Repayment
                of FHLB advances
            
            
            (12,300
            )
            
            (10,000
            )Issuance
                of common stock
            
            
            646
            
            
            52Cash
                dividends paid
            
            
            (794
            )
            
            (696
            )Net
                cash (used by) provided by financing activities
            
            
            (7,833
            )
            
            36,372Decrease
                (increase) in cash and cash equivalents
            
            
            (39,619
            )
            
            8,292CASH
                AND CASH EQUIVALENTS: BEGINNING OF PERIOD
            
            
            52,866
            
            
            9,559CASH
                AND CASH EQUIVALENTS: END OF PERIOD
            
            $
            13,247
            
            $
            17,851SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Other
                real estate acquired through loan foreclosures
            
            $
            1,016
            
            $
            2,933Loans
                granted to facilitate the sale of other real estate
            
            
            -
            
            
            500Change
                in components of other comprehensive income
            
            
            (129
            )
            
            (371
            )





See
      notes
      to unaudited condensed consolidated financial statements.


5


HABERSHAM
      BANCORP AND SUBSIDIARIES


Notes
      to
      Unaudited Condensed Consolidated Financial Statements





1.
            Basis
                of Presentation





The
      condensed consolidated financial statements contained in this report are
      unaudited but reflect all adjustments, consisting only of normal recurring
      accruals, which are, in the opinion of management, necessary for a fair
      presentation of the results of the interim periods reflected. Certain
      information and note disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted pursuant to applicable
      rules and regulations of the Securities and Exchange Commission. The results
      of
      operations for the interim periods reported herein are not necessarily
      indicative of results to be expected for the full year.





The
      condensed consolidated financial statements included herein should be read
      in
      conjunction with the Company's 2005 consolidated financial statements and notes
      thereto, included in the Company's Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005.





2.
            Accounting
                Policies





Reference
      is made to the accounting policies of the Company described in the notes to
      the
      consolidated financial statements contained in the Company's Annual Report
      on
      Form 10-K for the fiscal year ended December 31, 2005. The Company has
      consistently followed those policies in preparing this report.





3.
            Other
                Comprehensive Income





Other
      comprehensive income for the Company consists of items recorded directly in
      equity under Statement of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” in addition
      to the net of tax fair value of cash flow hedges. Investment securities
      classified as available for sale are carried at fair value with the related
      unrealized gain or loss, net of deferred income taxes included as a separate
      component of stockholders’ equity. At September 30, 2006, fair value of the
      available for sale investment securities decreased approximately $203,000 when
      compared to the fair value at December 31, 2005. The corresponding equity
      component of unrealized gain and loss on available for sale securities, net
      of
      tax, also decreased approximately $134,000. These changes were the results
      of
      movements in the bond market as it responds to interest rate changes in the
      market. At September 30, 2006, fair value of the cash flow hedges increased
      approximately $7,000 when compared to the fair value at December 31, 2005.
      The
      corresponding equity component of unrealized holding gains on derivative
      financial instruments classified as cash flow hedges, net of tax, also increased
      approximately $5,000. The fair value of the cash flow hedges is based on the
      interest rates associated with the hedges and will fluctuate in response to
      rate
      changes in the market.





4.
            Stock-Based
                Compensation Plans





Habersham
      Bancorp adopted the FASB’s SFAS No. 123(R), *Share-Based
      Payment* ,
      which
      revised and amended SFAS No. 123. SFAS No. 123(R) requires an entity to
      recognize as compensation expense the grant-date fair value of stock options
      and
      other equity-based compensation granted to employees within the statement of
      earnings using a fair-value-based method, eliminating the intrinsic value method
      of accounting previously permissible under Accounting Principles Board Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* (APB No.
      25) and related interpretations. No compensation expense was recorded within
      the
      statement of earnings during the first nine months of 2006, because the Company
      did not grant any stock options and all previous grants were fully
      vested.





Prior
      to
      January 1, 2006, Habersham Bancorp applied APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and related interpretations in accounting for its
      stock options plans.


6


5.
            Net
                Earnings Per Share





Basic
      net
      earnings per share is based on the weighted average number of common shares
      outstanding during the period. Diluted net earnings per share includes the
      effect of potential common shares outstanding during the period. The average
      market price during the period is used to compute equivalent shares.





The
      reconciliation of the amounts used in the computation of both basic net earnings
      per share and diluted net earnings per share for the three- and nine-month
      periods ended September 30, 2006 and 2005, is as follows:





Three
                Months ended
            
            Nine
                Months endedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Net
                earnings
            
            $
            1,532,890
            
            $
            1,176,956
            
            $
            4,129,389
            
            $
            2,734,406Weighted
                average common shares outstanding
            
            
            2,949,207
            
            
            2,903,018
            
            
            2,938,080
            
            
            2,901,892Shares
                issued from assumed exercise of common stock equivalents
            
            
            44,049
            
            
            34,969
            
            
            41,314
            
            
            34,560Weighted
                average number of common and common equivalent shares
                outstanding
            
            
            2,993,256
            
            
            2,937,987
            
            
            2,979,394
            
            
            2,936,452Earnings
                per share:Basic
            
            $
            .52
            
            $
            .41
            
            $
            1.41
            
            $
            0.94Diluted
            
            $
            .51
            
            $
            .40
            
            $
            1.39
            
            $
            0.93





6.
            Commitment





The
      Company entered into a construction contract during the first quarter of 2006
      to
      build its Cumming, Georgia branch building. The construction cost of this 4,898
      square foot building is estimated to be approximately $1.5 million and is
      expected to be completed during the fourth quarter of 2006.




7.
            Recent
                Accounting Pronouncements




*Accounting
      for Uncertainty in Income Taxes*





In
      June
      2006, the Financial Accounting Standards Board ("FASB") issued Financial
      Interpretation No. 48 ("FIN 48") *Accounting
      for Uncertainty in Income Taxes* -
 an interpretation of FASB Statement No. 109. FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in the financial
      statements and prescribes a recognition threshold and measurement attribute
      for
      a tax position taken or expected to be taken in a tax return. This
      interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and transition. This
      interpretation will be effective for The Company beginning in January of 2007.
      The Company is in the process of assessing the impact of this interpretation
      on
      its financial position and results of operations.




7


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





HABERSHAM
      BANCORP AND SUBSIDIARIES





Organization





Habersham
      Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank
      ("Habersham Bank") and The Advantage Group, Inc. Habersham Bank owns all of
      the
      outstanding stock of Advantage Insurers, Inc. (“Advantage Insurers”). Advantage
      Insurers offers a full line of property, casualty and life insurance products.
      Advantage Insurers does not comprise a significant portion of the financial
      position, results of operations, or cash flows of the Company and as a result,
      management’s discussion and analysis, which follows relates primarily to
      Habersham Bank.





The
      Company’s continuing primary business is the operations of banks in rural and
      suburban communities in Habersham, White, Cherokee, Warren, Gwinnett, Stephens
      and Forsyth counties in Georgia. The Company’s primary source of revenue is
      providing loans to businesses and individuals in its market area.





**Executive
      Summary**





The
      Company’s primary source of income is interest income from loans and investment
      securities. Its profitability depends largely on net interest income, which
      is
      the difference between the interest received on interest-earning assets and
      the
      interest paid on deposits, borrowings, and other interest-bearing
      liabilities . Earnings
      for the first nine months of 2006 increased to $4.1 million, or $1.39 per
      diluted share, from $2.7 million, or $.93 per diluted share when compared to
      the
      same period in 2005. A rising interest rate environment in 2006 has impacted
      both interest income and interest expense. Net interest income has been
      positively affected as the variable rate loan portfolio of Habersham Bank
      repriced immediately in response to prime rate increases and by the increase
      in
      new loans which had higher rates.  Net
      interest income increased for the third quarter and year-to-date period ended
      September 30, 2006 when compared to the same periods in 2005 by approximately
      21.42% and 28.44%, respectively. Average balances and loan yields in the loan
      portfolios of Habersham Bank increased for the third quarter and the
      year-to-date period ended September 30, 2006 when compared to the same periods
      in 2005. Increases in the loan portfolios resulted from increased loan demand
      and loan yields have increased in response to prime rate increases during the
      quarter and year-to-date. The increases in loan balances and loan yield were
      offset somewhat by an increase in average deposit balances of approximately
      $57.7 million and $53.9 million for the third quarter and for the year-to-date
      period ended September 30, 2006, respectively, when compared to the same period
      in 2005. Interest rates paid on deposits increased to 3.69% from 2.56% when
      comparing the third quarter of 2006 to the same period in 2005 and increased
      to
      3.40% from 2.33% for the year-to-date period ended September 30, 2006 compared
      to the same period in 2005. Interest expense paid on deposits has also increased
      as the market demanded higher rates to be paid on new deposits and maturing
      certificates of deposits, but at a slower pace.





Total
      assets decreased approximately $2.4 million, or .50%, during the first nine
      months of 2006. Growth in the loan portfolios of Habersham Bank of approximately
      $26.7 million and increases in the investment securities portfolios of
      approximately $12.1 million, were offset by decreases in federal funds sold,
      in
      cash and due from banks and in loans held for sale of approximately $35.1
      million, $4.6 million and $1.7 million, respectively.





Personnel
      costs, occupancy costs and other operating expenses increased approximately
      16.64%, 16.82% and 17.98%, respectively, for the first nine months of 2006
      over
      the first nine months of 2005 as a result of the expansion into the Stephens
      County market with the opening of two new offices located in Toccoa, Georgia
      and
      Eastanollee, Georgia during the third quarter of 2005.





**Forward
      Looking Statements**





Certain
      statements contained in this Quarterly Report on Form 10-Q and the exhibits
      hereto which are not statements of historical fact constitute forward-looking
      statements within the meaning of the Private Securities Litigation Reform Act
      (the “Act”). In addition, certain statements in future filings by the Company
      with the Securities and Exchange Commission, in press releases, and in oral
      and
      written statements made by or with the approval of the Company which are not
      statements of historical fact constitute forward-looking statements within
      the
      meaning of the Act. Examples of forward-looking statements include, but are
      not
      limited to: (1) projections of revenues, income or loss, earnings or loss
      per share, the payment or non-payment of dividends, capital structure and other
      financial items; (2) statements of plans and objectives of the Company or
      its management or Board of Directors, including those relating to products
      or
      services; (3) statements of future economic performance; and
      (4) statements of assumptions underlying such statements. Words such as
“believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar
      expressions are intended to identify forward-looking statements but are not
      the
      exclusive means of identifying such statements.


8


Forward-looking
      statements involve risks and uncertainties which may cause actual results to
      differ materially from those in such statements. Factors that could cause actual
      results to differ from those discussed in the forward-looking statements
      include, but are not limited to: (1) the strength of the U.S. economy in
      general and the strength of the local economies in which operations are
      conducted; (2) the effects of changes in trade, monetary and fiscal
      policies and laws, including interest rate policies of the Board of Governors
      of
      the Federal Reserve System; (3)  inflation, interest rate, market and
      monetary fluctuations; (4) the timely development of and acceptance of new
      products and services and perceived overall value of these products and services
      by users; (5) changes in consumer spending, borrowing and saving habits;
      (6) risks involved in making and integrating acquisitions; (7) the
      ability to increase market share and control expenses; (8) the effect of
      changes in laws and regulations (including laws and regulations concerning
      taxes, banking, securities and insurance) with which the Company and its
      subsidiaries must comply; (9) the effect of changes in accounting policies
      and
      practices, as may be adopted by the regulatory agencies as well as the Financial
      Accounting Standards Board; (10) changes in the Company’s organization,
      compensation and benefit plans; (11) the costs and effects of litigation
      and of unexpected or adverse outcomes in such litigation; and (12) the
      success of the Company at managing the risks involved in the
      foregoing.





Such
      forward-looking statements speak only as of the date on which such statements
      are made, and the Company undertakes no obligation to update any forward-looking
      statement to reflect events or circumstances after the date on which such
      statement is made or to reflect the occurrence of unanticipated
      events.





**Material
      Changes in Financial Condition**





The
      Company’s total assets decreased $2.4 million, or .50% to $476.0 million at
      September 30, 2006 from $478.4 million at December 31, 2005. During this
      nine-month period , growth
      occurred in the loan portfolios of Habersham Bank of approximately $26.7
      million, the investment securities portfolios (net of unrealized loss on
      available for sale securities of approximately $1.7 million) increased
      approximately $12.1 million and investment in premises and equipment increased
      approximately $1.3 million. This growth was offset by decreases in balances
      in
      federal funds sold of approximately $35.1 million, in cash and due from banks
      of
      approximately $4.6 million, in loans held for sale of approximately $1.7
      million, in other real estate for approximately $2.2 million and in the
      allowance for loan losses of approximately $500,000.





During
      the first nine months of 2006, purchases of investment securities totaled
      approximately $19.3 million, offset by maturities and calls of approximately
      $6.9 million. The purchases consisted of $8.3 million in Treasury and Agency
      bonds, $3.2 million in Mortgage Backed Securities, $7.3 million in municipal
      bonds and $.5 million in other investments.





Loan
      growth of the first nine months of 2006 totaling approximately $26.7 million
      occurred primarily within the real estate secured portfolio. Growth in the
      real
      estate secured portfolio and in the consumer lending portfolio totaled
      approximately $26.4 million and $2.2 million, respectively. This growth was
      offset by decreases in the commercial lending portfolio of approximately $1.9
      million. At September 30, 2006, 91.18% of the total loan portfolio consisted
      of
      loans secured by commercial or residential real estate.





Other
      real estate owned decreased approximately $2.2 million during the first nine
      months of 2006 primarily as a result of the sale of a multi-family residential
      property for approximately $2.5 million in August. A gain of approximately
      $13,000 resulted from this sale. Foreclosures occurring during the first nine
      months of 2006 totaled approximately $1.0 million offset by sales and write
      downs of approximately $3.2 million and $16,500, respectively.





During
      the first nine months of 2006, total deposits decreased approximately $2.5
      million. A demand deposit portfolio decrease of $39.9 million was primarily
      the
      result of the loss of a large temporary demand deposit of $39 million present
      at
      December 31, 2005, during the first quarter of 2006 and a further decrease
      of
      approximately $.9 million for the remaining portion of the nine-month period
      ended September 30, 2006. The demand deposit decrease has been offset somewhat
      by growth in the NOW and IMM, saving and certificates of deposit account
      balances of approximately $16.5 million, $6.8 million and $14.3 million,
      respectively.


9


Other
      borrowings decreased approximately $5.1 million during the first nine months
      of
      2006 due to a $4.3 repayment of FHLB advances and activity within commercial
      repo sweep accounts resulted in a decrease of approximately $3.9 million.
      Decreases in the commercial sweep accounts were replaced by federal funds
      purchased of approximately $3 million.





**Material
      Changes in Results of Operations**





Total
      interest income for the third quarter of 2006 increased $2.2 million or 32.18%
      when compared to the third quarter of 2005 primarily due to increases in loan
      interest and fees on loans. Total interest income for the first nine months
      of
      2006 increased $6.9 million or 37.31% when compared to the first nine months
      of
      2005. This increase is primarily the result of increases in the loan yields
      and
      average loan portfolio balances for the third quarter and first nine months
      of
      2006 when compared to the same period in 2005 as follows:





Three
                Months Ended
            
            Nine
                Months Ended2006
            
            2005
            
            2006
            
            2005Average
                balance - loans
            
            $
            333,076,000
            
            $
            306,559,000
            
            $
            326,139,000
            
            $
            287,882,000Average
                yield
            
            
            9.47
            %
            
            7.81
            %
            
            8.98
            %
            
            7.34
            %





Interest
      income from investment securities increased approximately $216,000 and $467,000
      for the third quarter and first nine months of 2006 when compared to the same
      period in 2005. Purchases of investment securities during the year with higher
      yields resulted in increases in interest income from investment securities
      for
      the third quarter and the first nine months of 2006. Increases in the average
      balance of the investment securities portfolio for the third quarter and first
      nine months of 2006 totaled approximately $11.8 million and $8.6 million
      respectively, when compared to the third quarter and first nine months of 2005.
      Yields on investment securities increased to 5.23% for the third quarter of
      2006
      when compared to 4.68% for the third quarter of 2005 and increased to 5.08%
      for
      the first nine months of 2006 when compared to 4.66% for the first nine months
      of 2005.





As
      federal funds sold rates increased during 2006, Habersham Bank was able to
      maintain a higher average balance in federal funds sold resulting in increased
      interest income on federal funds for the quarter and the first nine months
      of
      this year. Interest income from federal funds sold increased approximately
      $41,000 and $233,000 for the third quarter and first nine months of 2006,
      respectively, when compared to the third quarter and first nine months of 2005
      primarily due to increases in the average balances in the third quarter and
      first nine months of 2006 of approximately $1.8 million and $3.2 million,
      respectively, when compared to the third quarter and first nine months of 2005.
      Average yields on federal funds sold increased to 5.43% and 4.86%, respectively,
      for the third quarter and the first nine months of 2006 when compared to 2.94%
      and 2.63% for the third quarter and the first nine months of 2005.


10


Total
      interest expense for the third quarter of 2006 increased $1.2 million or 54.45%
      when compared to the third quarter of 2005. Total interest expense for the
      first
      nine months of 2006 increased $3.4 million or 55.51% when compared to the first
      nine months of 2005. Two factors impact interest expense: average balances
      of
      deposit and borrowing portfolios and average rates paid on each as follows:





Three
                Months Ended
            
            Nine
                Months Ended2006
            
            2005
            
            2006
            
            2005Average
                balance - interest bearing demand deposits
            
            $
            87,252,000
            
            $
            69,783,000
            
            $
            84,511,000
            
            $
            69,737,000Average
                rate
            
            
            1.68
            %
            
            1.12
            %
            
            1.70
            %
            
            0.94
            %Average
                balance - money market and savings
            
            $
            59,758,000
            
            $
            49,275,000
            
            $
            61,039,000
            
            $
            44,231,000Average
                rate
            
            
            4.16
            %
            
            2.60
            %
            
            3.69
            %
            
            2.26
            %Average
                balance - certificates of deposit
            
            $
            168,784,000
            
            $
            139,039,000
            
            $
            162,281,000
            
            $
            139,945,000Average
                rate
            
            
            4.56
            %
            
            3.26
            %
            
            4.18
            %
            
            3.04
            %Average
                balance - borrowings
            
            $
            43,573,000
            
            $
            54,120,000
            
            $
            45,260,000
            
            $
            47,560,000Average
                rate
            
            
            4.88
            %
            
            4.30
            %
            
            4.66
            %
            
            4.59
            %





Net
      interest income increased approximately $997,000 or 21.42% for the third quarter
      of 2006 as compared to the third quarter of 2005 and increased approximately
      $3,529,000 or 28.44% for the first nine months of 2006 as compared to the first
      nine months of 2005, as a result of the items discussed above.




The
      net
      interest margin, which is net interest income divided by average earning assets,
      was 5.32% for the third quarter of 2006 compared to 4.82% for the third quarter
      of 2005, and was 5.11% for the first nine months of 2006 compared to 4.52%
      for
      the first nine months of 2005. In a rising interest rate environment, Habersham
      Bank was able to manage its net interest margin to benefit from the rate
      increases occurring in the variable rate loan portfolios at a faster pace than
      the increases occurring in the deposit portfolios.




Noninterest
      income decreased $108,000 or 10.07% for the third quarter of 2006 over the
      same
      period in 2005 and increased $174,000 or 6.66% for the first nine months of
      2006
      over the same period in 2005. Decreases in mortgage origination income of
      approximately $159,000 for the third quarter of 2006 and $151,000 for the first
      nine months of 2006 resulted from decreases in origination fees and gain on
      sale
      of mortgage loans. Increases in service charges on deposits of approximately
      $51,000 for the third quarter of 2006 and $145,000 for the first nine months
      of
      2006 when compared to the same periods in 2005 resulted from increases in
      deposit balances from internal growth and the addition of deposit accounts
      resulting from the acquisition of Liberty Bank and Trust (“LB&T”) during the
      third quarter of 2005. Increases occurred in other service charges and
      commissions of approximately $25,000 for the third quarter of 2006 and $82,000
      for the first nine months of 2006 when compared to the same periods in 2005
      for
      the same reasons noted above.  Increases
      in other income for the third quarter and the nine month period of 2006 totaled
      approximately $9,000 and approximately $48,000, respectively, when compared
      to
      the same periods in 2005. These increases primarily occurred as a result of
      increased activity in trust fees, master money income and data processing
      income. Habersham Bank began providing data processing services to another
      institution during the second quarter of 2005.





Noninterest
      expense increased $432,000 or 11.05% for the three months ended September 30,
      2006 over the same period in 2005. Noninterest expense increased $1,846,000
      or
      17.06% for the first nine months of 2006 over the same period in 2005. The
      addition of the Toccoa and Eastanollee offices during the third quarter of
      2005
      resulted in increased salary and employee benefits, occupancy expense and
      computer expense when comparing the third quarter and the first nine months
      of
      2006 to the same periods in 2005. The other expense increased $44,000 for the
      third quarter of 2006 and $471,000 for the nine month period ended September
      30,
      2006 when compared to the same periods in 2005. Other expenses include outside
      services, office supplies and equipment, advertising and marketing expenses,
      intangible expense and general and administrative expenses. The increases for
      the third quarter comparison occurred primarily in outside services, office
      supplies and equipment, and other general expenses of approximately $28,000,
      $6,000 and $104,000, respectively, offset by decreases in advertising and
      marketing expenses of approximately $36,000. Marketing expenses for the third
      quarter of 2005 were related to the opening of the Toccoa and Eastanollee
      Office. The increases for the nine month period comparison occurred primarily
      in
      outside services, advertising and marketing expenses, office supplies and
      equipment, and other general expenses of approximately $89,000, $65,000, $69,000
      and $244,000, respectively. Outside services include FDIC insurance, legal
      and
      professional services, insurance, director fees and State of Georgia Department
      of Banking fees.


11


Income
      tax expense for the three months ended September 30, 2006 and 2005 was $741,000
      and $550,000, respectively. Income tax expense for the first nine months ended
      September 30, 2006 and 2005 was $1,929,000 and $1,137,000, respectively. The
      effective tax rate for the third quarter of 2006 and 2005 was 32.59% and 31.85%,
      respectively. The effective tax rate for the nine months ended September 30,
      2006 and 2005 was 31.85% and 29.37%, respectively. Tax-exempt income on
      investment securities in municipal bonds was 11.79% of pre-tax income for the
      first nine months of 2006 when compared to 15.58% for the first nine months
      of
      2005.





**Asset
      Quality**





The
      allowance for loan losses represents a reserve for probable losses in the loan
      portfolio. The adequacy of the allowance for loan losses is evaluated
      periodically based on a review of all significant loans, with particular
      emphasis on impaired, non-accruing, past due, and other loans that management
      believes require special attention. The determination of the allowance for
      loan
      losses is subjective and based on consideration of a number of factors and
      assumptions. As such, the accounting policy followed in the determination of
      the
      allowance is considered a critical accounting policy.





The
      risk
      associated with lending varies with the creditworthiness of the borrower, the
      type of loan (consumer, commercial, or real estate) and its maturity. Cash
      flows
      adequate to support a repayment schedule are an element considered for all
      loans. Real estate loans are impacted by market conditions regarding the value
      of the underlying property used as collateral. Commercial loans are also
      impacted by the management of the business as well as economic conditions.
      The
      Company also makes unsecured loans from time to time. The risk to the Company
      is
      greater for unsecured loans as the ultimate repayment of the loan is only
      dependent on the borrower’s ability to pay. The balance of unsecured loans at
      September 30, 2006 was $7.8 million which does not pose a significant risk
      to
      the Company.




No
      provision for loan losses was charged to expense for the third quarter and
      the
      first nine months of 2006 compared to $90,000 for the quarter and $330,000
      for
      the first nine months of 2005. The net charge-offs the first nine months of
      2006
      totaled $455,177 compared to net charge-offs of $199,779 for the first nine
      months of 2005. During the first nine months of 2006, charge-offs of real
      estate, commercial and consumer loans totaled $165,721, $254,672 and $178,764,
      respectively, offset by recoveries of real estate, commercial and consumer
      loans
      of $15,099, $21,567 and $107,314, respectively. At September 30, 2006 and
      December 31, 2005, the ratio of the allowance for loan losses to total loans
      was
      1.01% and 1.23%, respectively.





Nonperforming
      assets consist of non-accrual loans, accruing loans 90 days past due,
      restructured loans and other real estate owned. The following summarizes
      non-performing assets:





September
                30, 2006
            
            December
                31, 2005Accruing
                loans 90 days past due
            
            $
            451,172
            
            $
            799,128Non-accrual
                loans
            
            
            381,969
            
            
            363,003Other
                real estate
            
            
            539,250
            
            
            2,773,662Restructured
                loans
            
            
            53,042
            
            
            130,613Total
                non-performing assets
            
            $
            1,425,433
            
            $
            4,066,406





Nonperforming
      assets decreased approximately $2.6 million or 64.95% from December 31, 2005
      to
      September 30, 2006.


12


Loans
      classified as 90 days past due decreased  $348,000
      or 43.54% from December 31, 2005 to September 30, 2006. The decrease is the
      net
      result of the following changes:





Balance
                at December 31, 2005
            
            $
            799,128New
                loans classified to 90 days past due status
            
            
            649,67290
                days past due loans charged-off
            
            
            (112,818
            )Payments
                received
            
            
            (884,810
            )Balance
                at September 30, 2006
            
            $
            451,172The
                following summarizes accruing loans 90 days past due:Unimproved
                commercial use land loan
            
            $
            430,934Residential
                loan
            
            
            20,238Total
                accruing loans 90 days past due
            
            $
            451,172





Impaired
      loans consist of loans on non-accrual status. The increase is the net result
      of
      the following changes:





Balance
                at December 31, 2005
            
            $
            363,003Loans
                reclassified to non-accrual status in 2006
            
            
            1,207,599Payments
                received on non-accrual loans during 2006
            
            
            (144,925
            )Non-accrual
                loans charged-off during 2006
            
            
            (292,019
            )Non-accrual
                loans reclassified to other real estate
            
            
            (679,750
            )Non-accrual
                loans reclassified to accrual status in 2006
            
            
            (71,939
            )Balance
                at September 30, 2006
            
            $
            381,969





Additions
      to loans on non-accrual status consisted of fifteen real estate secured loans
      totaling approximately $1,058,509, four commercial loans totaling approximately
      $112,773 and eleven consumer loans totaling approximately $36,317. The interest
      income recognized on such loans for the nine-month periods ended September
      30,
      2006 and 2005 was not material.





At
      September 30, 2006, the Company’s other real estate owned consisted of the
      following:





Commercial
                Properties
            
            $
            399,5001-4
                Family Residential Properties
            
            
            72,550Lot
            
            
            67,200Total
            
            $
            539,250





The
      decrease in other real estate owned during the first nine months of 2006 was
      the
      result of sales of a multi-family residential property and other residential
      properties totaling approximately $2,470,498 and $762,986, respectively, and
      write downs of $16,500. A gain of approximately $13,000 was recognized on the
      sale on the multi-family residential property. These sales were offset by
      additional foreclosures totaling $1,015,572.





Our
      Other
      Real Estate Owned (“OREO”) procedures provide that a foreclosure appraisal be
      obtained which provides a fair market value and a disposition (quick sale)
      value. The disposition value is the valuation used to place the property into
      OREO. Any difference between the disposition value and the loan balance is
      recommended for charge off. Once the property is in OREO, the property is listed
      with a realtor to begin sales efforts.





**Liquidity
      and Capital Resources**





Liquidity
      management involves the matching of the cash flow requirements of customers,
      either depositors withdrawing funds or borrowers needing loans, and the ability
      of the Company to meet those requirements.





The
      Company's liquidity program is designed and intended to provide guidance in
      funding the credit and investment activities of the Company while at the same
      time ensuring that the deposit obligations of the Company are met on a timely
      basis. In order to permit active and timely management of assets and
      liabilities, these accounts are monitored regularly in regard to volume, mix,
      and maturity.


13


The
      Company’s liquidity position depends primarily upon the liquidity of its assets
      relative to its need to respond to short-term demand for funds caused by
      withdrawals from deposit accounts and loan funding commitments. Primary sources
      of liquidity are scheduled repayments on the Company’s loans and interest on and
      maturities of its investment securities. Sales of investment securities
      available for sale represent another source of liquidity to the Company. The
      Company may also utilize its cash and due from banks and federal funds sold
      to
      meet liquidity requirements as needed.





The
      Company also has the ability, on a short-term basis, to purchase federal funds
      from other financial institutions up to $30 million. At September 30, 2006,
      the
      Company had federal funds purchased totaling $3.0 million. Presently, the
      Company has made arrangements with commercial banks for short-term advances
      under a repurchase agreement line of credit of which none was advanced at
      September 30, 2006. The Company has approximately $4.6 million outstanding
      in
      commercial sweep accounts at September 30, 2006. In addition, the Company has
      a
      total available line of $42.6 million, subject to available collateral, from
      the
      Federal Home Loan Bank. The Company has $38 million in advances on this line
      at
      September 30, 2006.





Habersham
      Bank's liquidity policy requires that the ratio of cash and certain short-term
      investments to net withdrawable deposit accounts be at least 20%. The Bank’s
      liquidity ratios at September 30, 2006 and 2005 were 22.57% and 20.01%,
      respectively.





At
      September 30, 2006 Habersham Bancorp and Habersham Bank were required to have
      minimum Tier 1 and total capital ratios of 4% and 8%, respectively.
      Additionally, the Company and the Bank are required to maintain a leverage
      ratio
      (Tier 1 capital to average assets) of at least 4%. The Company’s and the Bank’s
      ratios at September 30, 2006 follow:





Habersham
            
            HabershamBank
            
            BancorpTier
                1
            
            
            12.64
            %
            
            13.50
            %Total
                Capital
            
            
            13.57
            %
            
            14.42
            %Leverage
            
            
            10.25
            %
            
            10.95
            %





Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk.





As
      of
      September 30, 2006, there were no substantial changes in the composition of
      the
      Company’s market-sensitive assets and liabilities or their related market values
      from that reported as of December 31, 2005. The foregoing disclosures related
      to
      the market risk of the Company should be read in conjunction with the Company’s
      audited consolidated financial statements, related notes and management’s
      discussion and analysis of financial condition and results of operations for
      the
      year ended December 31, 2005 included in the Company’s 2005 Annual Report on
      Form 10K.





Item
                4.
            Controls
                and Procedures





As
      of the
      end of the period covered by this report, the Company’s management, including
      the Company’s Chief Executive Officer and Chief Financial Officer, reviewed and
      evaluated the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
      upon that evaluation, the Company’s Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures are
      effective in timely alerting them to material information relating to the
      Company, (including its consolidated subsidiaries) that is required to be
      included in the Company’s periodic filings with the Securities and Exchange
      Commission.





There
      have not been any changes in the Company’s internal control over financial
      reporting or, to the Company’s knowledge, in other factors, during the fiscal
      quarter to which this report relates that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.


14


PART
      II





OTHER
      INFORMATION





Item
                1.
            Legal
                proceedings.


None





Item
                1.A.
            Risk
                Factors.





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I. “Item 1.A. Risk Factors” in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which
      could materially affect its business, financial condition or future results.
      The
      risks described in the Annual Report of Form 10-K are not the only risks facing
      the Company. Additional risks and uncertainties not currently known to
      management or that management currently deems to be immaterial also may
      materially adversely affect the Company’s business, financial condition and/or
      operating results.




Item
                2.
            Changes
                in securities, use of proceeds and issuer purchases of equity securities.





Issuer
      Purchases of Equity Securities





The
      following table sets forth information regarding the Company's purchases of
      its
      common stock on a monthly basis during the third quarter of 2006.





Period
            
            Total
                Number of Shares Purchased
            
            Average
                Price Paid Per Share
            
            Total
                Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans
                or Programs1
            
            Maximum
                Number (or Appropriate Dollar Value) of Shares (or Units) that May
                Yet Be
                Purchased Under the Plans or ProgramsJuly
                1 through July 31, 2006
            
            0
            
            0
            
            0
            
            0August
                1 through August 31, 2006
            
            0
            
            0
            
            0
            
            0September
                1 throught September 30, 2006
            
            0
            
            0
            
            0
            
            0Total
            
            0
            
            0
            
            0
            
            0





The
      Company does not have a publicly announced stock repurchase plan and did not
      otherwise repurchase any of its shares of common stock during the period covered
      by this report. The Company did not terminate an existing stock repurchase
      plan
      during the period covered by this report.





Item
                3.
            Defaults
                upon senior securities.


None


15


Item
                4.
            Submission
                of matters to a vote of security holders.


None





Item
                5.
            Other
                information.


None





Item
                6.
            Exhibits





(a)
      The
      registrant submits herewith as exhibits to this report on Form 10-Q the exhibits
      required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the
      Securities Exchange Act of 1934.





31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.





31.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.





32
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002.


16


SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant has caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





HABERSHAM
      BANCORP


(Registrant)








Date
                November 1, 2006
            /S/
                Annette BanksChief
                Financial Officer(for
                the Registrant and as the
              Registrant’s
                principal financial
              and
                accounting officer)






17