U.S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                FORM 10-KSB

(Mark One)

  X   Annual report under Section 13 or 15(d) of the Securities Exchange Act
----  of 1934
      For fiscal year ended DECEMBER 31, 2004
                            -----------------

      Transition report under Section 13 or 15(d) of the Securities Exchange
----  Act of 1934
      For the transition period from _____________ to _______________

                        Commission File Number 000-29267

                                 ISLANDS BANCORP
                  ----------------------------------------------
                  (Name of small business issuer in its charter)

       SOUTH CAROLINA                                     57-1082388
-------------------------------               ---------------------------------
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

   2348 BOUNDARY STREET, BEAUFORT, SC                       29902
----------------------------------------                --------------
(Address of Principal Executive Offices)                  (Zip Code)

Securities registered pursuant to Section 12(b) of the Act:   NONE.

Securities registered pursuant to Section 12(g) of the Act:   COMMON STOCK, NO
                                                              PAR VALUE PER
                                                              SHARE.

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 registrant was required to file such reports) and (2) has been
subject to such filing requirements for past 90 days.   Yes  X  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.
                  ----

State issuer's revenue for its most recent fiscal year:  $2,745,427

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days:  THE AGGREGATE NUMBER OF SHARES OF THE
                                         -------------------------------------
COMPANY'S COMMON STOCK HELD BY NON-AFFILIATES AS OF MARCH 25, 2005 WAS 431,185.
-------------------------------------------------------------------------------
THERE IS NO PUBLIC TRADING MARKET FOR THE COMPANY'S COMMON STOCK.  BASED ON THE
-------------------------------------------------------------------------------
LAST SALE OF THE COMPANY'S COMMON STOCK KNOWN TO MANAGEMENT, WHICH OCCURRED ON
------------------------------------------------------------------------------
FEBRUARY 18, 2005 AT $10.00 PER SHARE, THE AGGREGATE MARKET VALUE OF THE
------------------------------------------------------------------------
COMPANY'S COMMON STOCK HELD BY NON-AFFILIATES IS $4,311,850.
------------------------------------------------------------

                      APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.  652,705 SHARES OF COMMON STOCK WERE
                                            -----------------------------------
OUTSTANDING AS OF MARCH 25, 2005.
---------------------------------

                        DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 2004 are incorporated by reference into Parts I and II.  Portions of the
Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on
April 26, 2005, are incorporated by reference into Part III.

Transitional Small Business Disclosure format (check one):   Yes      No  X
                                                                 ----    ----


<PAGE>
                                 TABLE OF CONTENTS

                                                                          PAGE
                                                                         NUMBER

PART I                                                                      3

  ITEM 1.    DESCRIPTION OF BUSINESS                                        3

  ITEM 2.    DESCRIPTION OF PROPERTIES                                     25

  ITEM 3.    LEGAL PROCEEDINGS                                             25

  ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS           25

PART II                                                                    25

  ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY
             AND RELATED STOCKHOLDER MATTERS                               25

  ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS                          26

  ITEM 7.    FINANCIAL STATEMENTS                                          26

  ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
             ON ACCOUNTING AND FINANCIAL DISCLOSURE                        26

  ITEM 8A.   CONTROLS AND PROCEDURES                                       26

  ITEM 8B.   OTHER INFORMATION                                             27

PART III                                                                   27

  ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
             AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
             OF THE EXCHANGE ACT                                           27

  ITEM 10.   EXECUTIVE COMPENSATION                                        27

  ITEM 11.   SECURITY OWNERSHIP OF CERTAIN
             BENEFICIAL OWNERS AND MANAGEMENT                              27

  ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                28

  ITEM 13.   EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB                    28

  ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES                        29


<PAGE>
                                     PART I


ITEM 1.   DESCRIPTION OF BUSINESS
-------   -----------------------

                CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

      Various matters discussed in this Annual Report on Form 10-KSB may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act.  Forward-looking statements may involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Islands Bancorp (the "Company") or
Islands Community Bank, N.A. ("Islands Community" or the "Bank") to be
materially different from the results described in such forward-looking
statements.

      Actual results may differ materially from the results anticipated in
these forward-looking statements due to a variety of factors, including, without
limitation:

     *  Lack of sustained growth in the economy of Beaufort County;

     *  The inability of the Bank to achieve and maintain regulatory capital
        standards;

     *  Changes in the legislative and regulatory environment;

     *  The effects of changes in interest rates on the level and composition
        of deposits, loan demand, the value of loan collateral, and interest
        rate risks; and

     *  The effects of competition from commercial banks, thrifts, consumer
        finance companies, and other financial institutions operating in our
        market area and elsewhere.

      All forward-looking statements attributable to the Company or the Bank
are expressly qualified in their entirety by these cautionary statements.  Both
the Company and the Bank disclaim any intent or obligation to update these
forward-looking statements, whether as a result of new information, future
events or otherwise.

                                    ISLANDS BANCORP

      Islands Bancorp is a South Carolina corporation that was incorporated on
July 23, 1999 to organize and serve as the holding company for Islands
Community, a national bank.  The Bank began operations as a community bank on
July 9, 2001.  The Bank emphasizes prompt, personalized customer service to the
individuals and businesses located in Beaufort County, South Carolina, including
the City of Beaufort, and its neighboring islands and communities.

      The Company was organized because we believe it provides flexibility that
would otherwise not be available to the Bank.  For example, the holding company
structure makes it easier to raise capital for the Bank because the Company is
able to issue securities without the need for prior banking regulatory approval,
and the proceeds of debt securities issued by the Company can be invested in the
Bank as primary capital.


                                           3
<PAGE>
                                    ISLANDS COMMUNITY

GENERAL

      Islands Community operates as a full-service commercial bank.  The Bank
offers personal and business checking accounts, money market accounts, savings
accounts and various certificates of deposit and individual retirement accounts.
The Bank also offers commercial, real estate, installment and other consumer
loans.  The Bank's real estate loans include commercial real estate,
construction and development and residential real estate loans.  In addition,
the Bank provides such services as cashier's checks, safe-deposit boxes,
traveler's checks, banking by mail, direct deposit and U.S. Savings Bonds.
The Bank also offers MasterCard(r) and Visa(r) credit card services through a
correspondent bank as an agent.

PHILOSOPHY

      Through our localized management and ownership we believe we are uniquely
situated to provide responsive service and quality financial products that are
tailored to meet the needs of the individuals and small- to medium-sized
businesses located throughout our market area.  We believe that local ownership
and control allows the Bank to serve its customers more efficiently, helping us
to grow both our deposit base and loan portfolio.  We have adopted this
philosophy in order to attract customers and acquire market share now controlled
by other financial institutions operating in our market area.

MARKET AREA AND COMPETITION

      Our primary market area consists of a large portion of Beaufort County,
which includes the City of Beaufort and the adjacent communities of Port Royal
and Burton.  It also includes the islands that are northeast of the Broad River
and south of the Coosaw River.  Some of the major islands in our market area are
Lady's Island, Fripp Island, Parris Island, St. Helena Island, Hunting Island,
Port Royal Island, Dataw Island and Harbor Island.  The City of Beaufort serves
as the commercial and retail center for communities in the southern corner of
South Carolina and is considered a key economic focal point of the Beaufort
County area.

      We believe an attractive opportunity exists in our primary market area for
a locally headquartered community bank that focuses on personalized service to
individuals and businesses.  The banking industry in our primary market area has
experienced significant consolidation in recent years principally as the result
of the liberalization of interstate banking and branching laws.  Consequently,
many of our area's former community banks have been acquired by large regional
financial institutions headquartered outside our market area.

      The Bank competes with other commercial banks, savings and loan
associations, credit unions, money market mutual funds and other financial
institutions conducting business in the Beaufort County market and elsewhere.
Many of the Bank's competitors have equal or greater financial or banking
related resources than the Company and the Bank.  According to information
provided by the Federal Deposit Insurance Corporation (the "FDIC"), as of June
30, 2004, the Beaufort County area was served by 18 banking and savings
institutions with 59 offices.  These competitors offer the same or similar
products and services as the Bank.  Currently, the Bank's three largest
competitors in terms of market share are SunTrust Bank, Bank of America, N.A.,
and Wachovia Bank, N.A.

      The Bank operates a loan production office near the Citadel Mall in
Charleston, South Carolina.  This limited service office does not accept
deposits and offers small business loans guaranteed by the U.S. Small Business
Administration.  The Charleston market was selected because of the size of the
market and the close proximity to our home office.  The Charleston loan
production office is not expected to cause a material impact on the Bank's
overall operation or safety and soundness while providing an opportunity to
generate fee income.


                                           4
<PAGE>
LENDING SERVICES

      LENDING POLICY.  The Bank offers a full range of lending products,
including commercial, real estate and consumer loans to individuals and small-
and medium-sized businesses and professional concerns.  The Bank generally
intends to allocate its loan portfolio as follows:

          LOAN CLASSIFICATION             PERCENTAGE
          -------------------             ----------
           Real estate loans                 40%
           Consumer loans                    17%
           Commercial loans                  43%

      LOAN APPROVAL AND REVIEW.  The Bank has established loan approval policies
that provide for various levels of officer lending authority. When the amount of
total loans to a single borrower exceeds that individual officer's lending
authority, an officer with a higher lending limit or the Bank's Loan Committee
determines whether to approve the loan request.  The Bank does not make any
loans to any of its directors or executive officers unless its board of
directors approves the loan, and the terms of the loan are no more favorable
than would be available to any other applicant.

      LENDING LIMITS.  The Bank's lending activities are subject to a variety of
lending limits imposed by federal law.  Different limits apply in certain
circumstances based on the type of loan or the nature of the borrower, including
the borrower's relationship to the Bank.  In general, however, the Bank may loan
any one borrower a maximum amount equal to either of the following:

      *  15% of the Bank's capital and surplus; or

      *  25% of its capital and surplus if the amount that exceeds 15% is
         fully secured by readily marketable collateral.

      Islands Community has not yet established any minimum or maximum loan
limits other than the statutory lending limits described above.  The Bank may
sell loan participations to other financial institutions in order to meet the
lending needs of loan customers requiring extensions of credit above the Bank's
limits.

      CREDIT RISKS.  The principal economic risk associated with each category
of loans that the Bank makes is the creditworthiness of the borrower.  Borrower
creditworthiness is affected by general economic conditions and the strength of
the relevant business market segment.  General economic factors affecting a
borrower's ability to repay include interest, inflation and employment rates, as
well as other factors affecting a borrower's customers, suppliers and employees.

      REAL ESTATE LOANS.  The Bank makes commercial real estate loans,
construction and development loans, and residential real estate loans.  These
loans include commercial loans where the Bank takes a security interest in real
estate out of an abundance of caution and not as the principal collateral for
the loan, but excludes home equity loans, which are classified as consumer
loans.  The Bank competes for real estate loans with competitors who are well
established in the Beaufort County area and have greater resources and lending
limits.  As a result, we may have to charge lower interest rates to attract
borrowers.

      *   COMMERCIAL REAL ESTATE.  The Bank offers commercial real estate loans
          to developers of both commercial and residential properties.  The Bank
          manages its credit risk by actively monitoring such measures as
          advance rate, cash flow, collateral value and other appropriate credit
          factors.  Risks associated with commercial real estate loans include
          the general risk of the failure of each commercial borrower, which
          will be different for each type of business and commercial entity.
          We evaluate each business on an individual basis and attempt to
          determine its business risks and credit profile.  Management attempts
          to reduce credit risks in the commercial real estate portfolio by
          emphasizing loans on owner-occupied office and retail buildings where
          the loan-to-value ratio, established by independent appraisals, does
          not exceed 80 percent.  In addition, we may also require personal
          guarantees of the principal owners.


                                           5
<PAGE>
      *   CONSTRUCTION AND DEVELOPMENT LOANS.  Construction and development
          loans are made both on a pre-sold and speculative basis.  If the
          borrower has entered into an arrangement to sell the property prior
          to beginning construction, the loan is considered to be on a pre-sold
          basis.  If the borrower has not entered into an agreement to sell the
          property prior to beginning construction, the loan is considered to
          be on a speculative basis.  Residential and commercial construction
          loans are made to builders and developers and to consumers who wish
          to build their own home.  The term of construction and development
          loans generally are limited to 18 months, although payments may be
          structured on a longer amortization basis.  The ratio of the loan
          principal to the value of the collateral as established by independent
          appraisal do not exceed 75 percent.  Speculative loans are based on
          the borrower's financial strength and cash flow position.  Loan
          proceeds are disbursed based on the percentage of completion and only
          after the project has been inspected by an experienced construction
          lender or appraiser.  These loans generally command higher rates and
          fees commensurate with the risks warranted in the construction lending
          field.  The risk in construction lending depends upon the performance
          of the builder in building the project to the plans and specifications
          of the borrower and the Bank's ability to administer and control all
          phases of the construction disbursements.  Upon completion of the
          construction, management anticipates that the mortgage will be
          converted to a permanent loan and may be sold to an investor in the
          secondary mortgage market.

      *   RESIDENTIAL REAL ESTATE LOANS.  Residential real estate loans are made
          to qualified individuals for the purchase of existing single-family
          residences in our primary market area.  These loans conform to the
          Bank's appraisal policy and real estate lending policy which detail
          maximum loan-to-value ratios and maturities.  We believe these loan-
          to-value ratios are sufficient to compensate for fluctuations in real
          estate market value and to minimize losses that could result from a
          downturn in the residential real estate market.  Mortgage loans that
          do not conform to the Bank's policies are sold in the secondary
          markets.  The risk of these loans depends on the salability of the
          loan to national investors and on interest rate changes.  The Bank
          limits interest rate risk and credit risk on these loans by locking
          in the interest rate for each loan with the secondary market investor
          and receiving the investor's underwriting approval before originating
          the loan.  The Bank retains loans for its portfolio when it has
          sufficient liquidity to fund the needs of the established customers
          and when rates are favorable to retain the loans.  The loan
          underwriting standards and policies are generally the same for both
          loans sold in the secondary market and those retained in the Bank's
          portfolio.

      CONSUMER AND INSTALLMENT LOANS.  Consumer loans include lines of credit
and term loans secured by second mortgages on the residences of borrowers for
a variety of purposes including home improvements, education and other personal
expenditures.  Consumer loans also include installment loans to individuals for
personal, family and household purposes, including automobile loans to
individuals and pre-approved lines of credit.  Consumer loans generally involve
more risk than first mortgage loans because the collateral for a defaulted loan
may not provide an adequate source of repayment of the principal due to damage
to the collateral or other loss of value while the remaining deficiency often
does not warrant further collection efforts.  In addition, consumer loan
performance depends upon the borrower's continued financial stability and is,
therefore, more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy.  Various federal and state laws also limit the amount
that can be recovered.


                                           6
<PAGE>
      COMMERCIAL LOANS.  Commercial lending activities are directed principally
toward businesses whose demand for funds falls within the Bank's anticipated
lending limits.  This category of loans includes loans made to individuals,
partnerships, and corporate borrowers.  The loans are obtained for a variety of
business purposes.   Particular emphasis is placed on loans to small to medium-
sized professional firms, retail and wholesale businesses, light industry and
manufacturing concerns operating in and around the primary market area.  The
Bank considers "small businesses" to include commercial, professional and retail
businesses with annual gross sales of less than $15 million or annual operating
costs of less than $3 million.  Within small business lending, the Bank focuses
on niches in the market and offers small business loans utilizing government
enhancements, such as the Small Business Administration's 7(a) program.  The
types of commercial and small business loans provided include principally term
loans with variable interest rates secured by equipment, inventory, receivables
and real estate, as well as secured and unsecured working capital lines of
credit.  Risks of these types of loans depend on the general business conditions
of the local economy and the local business borrower's ability to sell its
products and services in order to generate sufficient business profits to repay
the loan under the agreed upon terms and conditions.  Personal guarantees may
be obtained from the principals of business borrowers and third parties to
further support the borrower's ability to service the debt and reduce the risk
of nonpayment.

      INVESTMENTS.  In addition to loans, the Bank makes other investments,
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States and other taxable securities.  No
investment held by the Bank exceeds any applicable limitation imposed by law
or regulation.  Our asset and liability management committee reviews the
investment portfolio on an ongoing basis to ascertain investment profitability
and to verify compliance with the Bank's investment policies.

      DEPOSITS.  The Bank offers a full range of interest bearing and non-
interest bearing accounts, including commercial and retail checking accounts,
money market accounts, individual retirement accounts, savings accounts, and
other time deposits of various types, ranging from daily money market accounts
to longer-term certificates of deposits.  All deposit accounts are insured by
the FDIC up to the maximum amount permitted by law.  The Bank's transaction
accounts and time certificates are tailored to its principal market area at
competitive rates.  The sources of deposits are residents, businesses and
employees of businesses within the Bank's primary market area.  These deposits
are obtained through personal solicitation by the Bank's officers and directors,
direct mail solicitations, and advertisements published in the local media.

      ASSET AND LIABILITY MANAGEMENT.  The Bank's primary assets consists of
its loan portfolio and its investment accounts.  Its liabilities consist
primarily of its deposits.  Our objective is to support asset growth primarily
through growth of core deposits, which include deposits of all categories made
by individuals, partnerships, corporations and other entities.  Consistent with
the requirements of prudent banking necessary to maintain liquidity, we seek to
match maturities and rates of loans and the investment portfolio with those of
deposits, although exact matching is not always possible.  Management seeks to
invest the largest portion of the Bank's assets in real estate, consumer and
commercial loans.  Loans are limited to less than 75 percent of deposits and
capital funds.  This ratio may be exceeded, however, in the initial period of
operation.  The Bank's investment account consists primarily of marketable
securities of the United States Government, federal agencies and state and
municipal governments, generally with varied maturities.

      The Bank's asset/liability mix is monitored on a regular basis with a
monthly report detailing interest-sensitive assets and interest-sensitive
liabilities prepared and presented to the board of directors.  The objective
of this policy is to control interest-sensitive assets and liabilities so as
to minimize the impact of substantial movements in interest rates on the Bank's
earnings.


                                           7
<PAGE>
EMPLOYEES

      At December 31, 2004, the Company and the Bank employed 15 full-time
employees and three part-time employees.  Islands Bancorp does not have any
employees other than its officers who are also employees of the Bank.  The
Company considers its relationship with its employees to be excellent.

SUPERVISION AND REGULATION

      Both the Company and the 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 are generally intended
to protect depositors and not shareholders.  The following discussion describes
the material elements of the regulatory framework that applies to us.

                                  ISLANDS BANCORP

      Since the Company owns all of the capital stock of the Bank, it is a bank
holding company under the federal Bank Holding Company Act of 1956 (the "BHC
Act") and the South Carolina Banking and Branching Efficiency Act.  As a result,
the Company is primarily subject to the supervision, examination, and reporting
requirements of the BHC Act and the regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve").

      ACQUISITIONS OF BANKS.  The BHC Act requires every bank holding company to
obtain the Federal Reserve's prior approval before doing any of the following:

      *   Acquiring direct or indirect ownership or control of any voting shares
          of any bank if, after the acquisition, the bank holding company will
          directly or indirectly own or control more than 5% of the Bank's
          voting shares;

      *   Acquiring all or substantially all of the assets of any bank; or

      *   Merging or consolidating with any other bank holding company.

      Additionally, the BHC Act provides that the Federal Reserve may not
approve any of these transactions if it would result in or tend to create a
monopoly or, substantially lessen competition or otherwise function as a
restraint of trade, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served.  The Federal Reserve is
also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned and the convenience
and needs of the community to be served.  The Federal Reserve's consideration
of financial resources generally focuses on capital adequacy, which is discussed
below.

      Under the BHC Act, if adequately capitalized and adequately managed, the
Company or any other bank holding company located in South Carolina may purchase
a bank located outside of South Carolina.  Conversely, an adequately capitalized
and adequately managed bank holding company located outside of South Carolina
may purchase a bank located inside South Carolina.  In each case, however,
restrictions may be placed on the acquisition of a bank that has only been in
existence for a limited amount of time or will result in specified
concentrations of deposits.  For example, South Carolina law prohibits a bank
holding company from acquiring control of a financial institution until the
target financial institution has been in existence and has had continuous
operations for five years.  As a result, no bank holding company may acquire
control of the Company or the Bank until after the fifth anniversary of the
date that the Bank began business.

      CHANGE IN BANK CONTROL.  Subject to various exceptions, the BHC Act and
the Change in Bank Control Act, together with related regulations, require
Federal Reserve approval prior to any person or company acquiring "control" of
a 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 the bank holding company.  Control is rebuttably presumed to exist if a
person or company acquires 10% or more, but less than 25%, of any class of
voting securities and either of the following:


                                           8
<PAGE>
      *  The bank holding company has registered securities under Section 12
         of the Securities 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 registered under Section 12 the Securities Exchange
Act of 1934 (the "Exchange Act").  The regulations provide a procedure for
challenging the rebuttable presumption of control.

      PERMITTED ACTIVITIES.  Bank holding companies are generally prohibited
under the BHC Act, from engaging in or acquiring direct or indirect control of
more than 5% of the voting shares of any company engaged in any activity other
than the following:

      *  Banking or managing or controlling banks; and

      *  An 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;

      *  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.

      Despite prior approval, the Federal Reserve may 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.

      Generally, if the Company qualifies and elects to become a financial
holding company, it may engage in activities that are financial in nature or
incidental or complementary to financial activity.  The BHC Act expressly
lists the following activities as financial in nature:


                                           9
<PAGE>
      *  Lending, trust and other banking activities;

      *  Insuring, guaranteeing, or indemnifying against loss or harm, or
         providing and issuing annuities, and acting as principal, agent, or
         broker for these purposes, in any state;

      *  Providing financial, investment, or advisory services;

      *  Issuing or selling instruments representing interests in pools of
         assets permissible for a bank to hold directly;

      *  Underwriting, dealing in or making a market in securities;

      *  Other activities that the Federal Reserve may determine to be so
         closely related to banking or managing or controlling banks as to
         be a proper incident to managing or controlling banks;

      *  Foreign activities permitted outside of the United States if the
         Federal Reserve has determined them to be usual in connection with
         banking operations abroad;

      *  Merchant banking through securities or insurance affiliates; and

      *  Insurance company portfolio investments.

      To qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least
satisfactory.  Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days written notice prior to engaging in a permitted financial
activity.  We currently have no plans to elect to become a financial holding
company.

      SUPPORT OF SUBSIDIARY INSTITUTIONS.  Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for the Bank and
to commit resources to support the Bank.  This support may be required at times
when, without this Federal Reserve policy, the Company might not be inclined to
provide it.  In addition, any capital loans made by the Company to the Bank will
be repaid only after its deposits and various other obligations are repaid in
full.  In the unlikely event of the Company's bankruptcy, any commitment by it
to a federal bank regulatory agency to maintain the capital of the Bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.

      SOUTH CAROLINA STATE REGULATION.  As a bank holding company registered
under the South Carolina Banking and Branching Efficiency Act, the Company is
subject to limitations on sale or merger and to regulation by the South Carolina
Board of Financial Institutions. Prior to acquiring the capital stock of a
national bank, we are not required to obtain the approval of the Board, but we
must notify them at least 15 days prior to doing so.  Prior to engaging in the
acquisition of nonbanking institutions or state chartered banks, we must receive
the Board's approval, and we must file periodic reports with respect to our
financial condition and operations, management and intercompany relationships
between Islands Bancorp and its subsidiaries.

                               ISLANDS COMMUNITY

      As a national bank, the Bank is primarily subject to the supervision,
examination and reporting requirements of the National Bank Act and the
regulations of the Office of the Comptroller of the Currency (the "OCC").  The
OCC regularly examines the Bank's operations and has the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions.
The OCC also has the power to prevent the continuance or development of unsafe
or unsound banking practices or other violations of law.  Additionally, the
Bank's deposits are insured by the FDIC to the maximum extent provided by law.
The Bank is also subject to numerous state and federal statutes and regulations
that affect its business, activities and operations.


                                           10
<PAGE>
      BRANCHING.  National banks are required by the National Bank Act to adhere
to branching laws applicable to state banks in the states in which they are
located.  Under current South Carolina law, the Bank may open branch offices
throughout South Carolina with the prior approval of the OCC.  In addition, with
prior regulatory approval, the Bank may acquire branches of existing banks
located in South Carolina.  The Bank and any other national or state-chartered
bank generally may branch across state lines by merging with banks in other
states if allowed by the applicable states' laws.  South Carolina law, with
limited exceptions, currently permits branching across state lines through
interstate mergers.

      Under the Federal Deposit Insurance Act, states may "opt-in" and allow
out-of-state banks to branch into their state by establishing a new start-up
branch in the state.  Currently, South Carolina has not opted-in to this
provision.  Therefore, interstate merger is the only method through which a
bank located outside of South Carolina may branch into South Carolina.  This
provides a limited barrier of entry into the South Carolina banking market,
which protects us from an important segment of potential competition.  However,
because South Carolina has elected not to opt-in, our ability to establish a new
start-up branch in another state may be limited.  Many states that have elected
to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank
may establish a new start-up branch only if their home state has also elected
to opt-in.

      PROMPT CORRECTIVE ACTION.  The FDIC Improvement Act of 1991 establishes
a system of prompt corrective action to resolve the problems of undercapitalized
financial institutions.  Under this system, the federal banking regulators have
established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) in which all institutions are placed.  Federal banking
regulators are required to take various mandatory supervisory actions and are
authorized to take other discretionary actions with respect to institutions in
the three undercapitalized categories.  The severity of the action depends upon
the capital category in which the institution is placed.  Generally, subject to
a narrow exception, the banking regulator must appoint a receiver or conservator
for an institution that is critically undercapitalized.  The federal banking
agencies have specified by regulation the relevant capital level for each
category.

      An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to various limitations.  The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary's assets at the
time it became undercapitalized or the amount required to meet regulatory
capital requirements.  An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval.  The regulations
also establish procedures for downgrading an institution to a lower capital
category based on supervisory factors other than capital.

      FDIC INSURANCE ASSESSMENTS.  The FDIC has adopted a risk-based assessment
system for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities.  The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized.  These three categories are substantially similar to the
prompt corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes.  The FDIC also assigns an institution to one of three supervisory
subgroups based on a supervisory evaluation that the institution's primary
federal regulator provides to the FDIC and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds.  Assessments range from 0 to 27 cents per $100 of
deposits, depending on the institution's capital group and supervisory subgroup.
In addition, the FDIC imposes assessments to help pay off the $780 million in
annual interest payments on the $8 billion Financing Corporation bonds issued
in the late 1980s as part of the government rescue of the thrift industry.  This
assessment rate is adjusted quarterly and is set at 1.44 cents per $100 of
deposits for the first quarter of 2005.


                                           11
<PAGE>
      The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.

      COMMUNITY REINVESTMENT ACT.  The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, or the OCC shall
evaluate the record of each financial institution in meeting the credit needs of
its local community, including low and moderate-income neighborhoods.  These
facts 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 the Bank.  Since the Bank's
aggregate assets do not exceed $250 million, under the Gramm-Leach-Bliley Act,
we are subject to a Community Reinvestment Act examination only once every 60
months if we receive an outstanding rating, once every 48 months if we receive
a satisfactory rating and as needed if our rating is less than satisfactory.
Additionally, we must publicly disclose the terms of various Community
Reinvestment Act-related agreements.

      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.  For example, under the Soldiers' and Sailors' Civil Relief Act
of 1940, a lender is generally prohibited from charging an annual interest rate
in excess of 6% on any obligation for which the borrower is a person on active
duty with the United States military.

      The Bank's loan operations are also subject to federal laws applicable to
credit transactions, such as the following:

      *  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, governing the use and provision
         of information to credit reporting agencies;

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

      *  Soldiers' and Sailors' Civil Relief Act of 1940, governing the
         repayment terms of, and property rights underlying, secured obligations
         of persons in military service; and

      *  The rules and regulations of the various federal agencies charged with
         the responsibility of implementing these federal laws.

      In addition to the federal laws noted above, South Carolina has adopted,
effective January 1, 2004, laws imposing restrictions and procedural
requirements on mortgage loans classified as "high-cost home loans" and on the
"flipping" of consumer home loans.  As drafted, these laws generally apply to
most mortgage loans made in South Carolina.  On January 13, 2004, however, the
OCC published final regulations clarifying the ability of a national bank to
preempt state lending laws.  Under these regulations, which became effective on
February 2, 2004, the Bank is exempt from the foregoing South Carolina laws.


                                           12
<PAGE>
      The deposit operations of the Bank are subject to the following:

      *   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 to implement that act, which govern 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.

CAPITAL ADEQUACY

      The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve (in the case of the Company) and
the OCC (in the case of the Bank).  The Federal Reserve has established a risk-
based and a leverage measure of capital adequacy for bank holding companies.
Since the Company's consolidated total assets do not exceed $150 million, under
the Federal Reserve's capital guidelines, its capital adequacy is measured on a
bank-only basis, as opposed to a consolidated basis.  The Bank is also subject
to risk-based and leverage capital requirements adopted by the OCC, which are
substantially similar to those adopted by the Federal Reserve for bank holding
companies.

      The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets.  Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights.  The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and off-
balance-sheet items.

      The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%.  Total capital consists of two components, Tier 1 Capital and
Tier 2 Capital.  Tier 1 Capital generally consists of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of qualifying cumulative
perpetual preferred stock, less goodwill and other specified intangible assets.
Tier 1 Capital must equal at least 4% of risk-weighted assets.  Tier 2 Capital
generally consists of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves.  The total amount of Tier 2 Capital is limited
to 100% of Tier 1 Capital.  At December 31, 2004, our ratio of total capital to
risk-weighted assets was 13.54% and our ratio of Tier 1 Capital to risk-weighted
assets was 12.38%.

      In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies.  These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk.  All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%.  At December 31, 2004, our leverage ratio was 10.90%.  The guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without reliance on intangible assets.  The
Federal Reserve considers the leverage ratio and other indicators of capital
strength in evaluating proposals for expansion or new activities.


                                           13
<PAGE>
      Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting brokered deposits, and certain other restrictions on its business.
As described above, significant additional restrictions can be imposed on FDIC-
insured depository institutions that fail to meet applicable capital
requirements.  See "-Prompt Corrective Action."

PAYMENT OF DIVIDENDS

      The Company is a legal entity separate and distinct from the Bank.  The
principal source of the Company's cash flow, including cash flow to pay
dividends to its shareholders, are dividends that the Bank pays to the Company
as its sole shareholder.  Statutory and regulatory limitations apply to the
Bank's payment of dividends to the Company, as well as to the Company's payment
of dividends to its shareholders.

      The Bank is required by federal law to obtain prior approval of the OCC
for payments of dividends if the total of all dividends declared by our board
of directors in any year will exceed (1) the total of the Bank's net profits for
that year, plus (2) the Bank's retained net profits of the preceding two years,
less any required transfers to surplus.

      The payment of dividends by the Company and the Bank may also be affected
by other factors, such as the requirement to maintain adequate capital above
regulatory guidelines.  If, in the opinion of the OCC, the Bank were engaged in
or about to engage in an unsafe or unsound practice, the OCC could require,
after notice and a hearing, that the Bank stop or refrain engaging in the
practice.  The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice.  Under the FDIC Improvement Act
of 1991, a depository institution may not pay any dividend if payment would
cause it to become undercapitalized or if it already is undercapitalized.
Moreover, the federal agencies have issued policy statements that provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings.  See "-Prompt Corrective Action."

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

      The Company and the Bank are subject to the provisions of Section 23A of
the Federal Reserve Act.  Section 23A places limits on the amount of the
following:

      *  A bank's loans or extensions of credit to affiliates;

      *  A bank's investment in affiliates;

      *  Assets a bank may purchase from affiliates, except for real and
         personal property exempted by the Federal Reserve;

      *  Loans or extensions of credit to third parties collateralized by
         the securities or obligations of affiliates; and

      *  A bank's guarantee, acceptance or letter of credit issued on behalf
         of an affiliate.

      The total amount of the above transactions is limited in amount, as to
any one affiliate, to 10% of a bank's capital and surplus and, as to all
affiliates combined, to 20% of a bank's capital and surplus.  In addition to
the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements.  The Bank must
also comply with other provisions designed to avoid the taking of low-quality
assets.

      The Company and the Bank are also subject to the provisions of Section
23B of the Federal Reserve Act which, among other things, prohibit an
institution from engaging in the above transactions with affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to the institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.


                                           14
<PAGE>
      The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related
interests.  These extensions of credit (1) 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 (2) must not involve
more than the normal risk of repayment or present other unfavorable features.

PRIVACY

      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.

CONSUMER CREDIT REPORTING

      On December 4, 2003, President Bush signed the Fair and Accurate Credit
Transactions Act (the "FAIR Act"), amending the federal Fair Credit Reporting
Act (the "FCRA").  These amendments to the FCRA (the "FCRA Amendments") became
effective in 2004.

      The FCRA Amendments include, among other things:

      *  requirements for financial institutions to develop policies and
         procedures to identify potential identity theft and, upon the request
         of a consumer, place a fraud alert in the consumer's credit file
         stating that the consumer may be the victim of identity theft or other
         fraud;

      *  for entities that furnish information to consumer reporting agencies
         (which would include the Bank), requirements to implement procedures
         and policies regarding the accuracy and integrity of the furnished
         information, and regarding the correction of previously furnished
         information that is later determined to be inaccurate; and

      *  a requirement for mortgage lenders to disclose credit scores to
         consumers.

      The FCRA Amendments also prohibit a business that receives consumer
information from an affiliate from using that information for marketing purposes
unless the consumer is first provided a notice and an opportunity to direct the
business not to use the information for such marketing purposes (the "opt-out"),
subject to certain exceptions.  We do not share consumer information among our
affiliated companies for marketing purposes, except as may be allowed under
exceptions to the notice and opt-out requirements.  Because no affiliate of the
Company is currently sharing consumer information with any other affiliate of
the Company for marketing purposes, the limitations on sharing of information
for marketing purposes do not have a significant impact on the Company.

ANTI-TERRORISM LEGISLATION

      The Bank is subject to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "USA
PATRIOT Act"), the Bank Secrecy Act, and rules and regulations of the Office
of Foreign Assets Control (the "OFAC").  These statutes and related rules and
regulations impose requirements and limitations on specified financial
transactions and account relationships and are intended to guard against money
laundering and terrorism financing.  The Bank has established a customer
identification program pursuant to Section 326 of the USA PATRIOT Act and the
Bank Secrecy Act and otherwise has implemented policies and procedures to comply
with the foregoing rules.


                                           15
<PAGE>
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 financial institutions operating and doing business in the
United States.  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.

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'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 affect the levels of bank loans, investments and deposits through its
control over the issuance of United States government securities, its regulation
of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject.  We cannot predict the nature
or impact of future changes in monetary and fiscal policies.


                           SELECTED STATISTICAL INFORMATION

             DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
                      INTEREST RATES AND INTEREST DIFFERENTIAL

      The following is a presentation of the average consolidated balance sheet
of the Company for the years ended December 31, 2004 and 2003.  This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:  ($ in thousands)

                              AVERAGE CONSOLIDATED ASSETS

                                           Year Ended December 31,
                                          2004                 2003
                                        --------             --------
Cash and due from banks                 $    726             $    503
                                         -------              -------
Taxable securities                      $  2,199             $  2,280
Federal funds sold                         1,130                  752
Net loans                                 33,335               22,507
                                         -------              -------
   Total interest-earning assets        $ 36,664             $ 25,539
Other assets                               3,400                3,272
                                         -------              -------
Total assets                            $ 40,790             $ 29,314
                                         =======              =======


                                           16
<PAGE>
         AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

Non-interest-bearing deposits           $  3,996             $  2,638
NOW and money market deposits              6,685                4,430
Savings deposits                             657                  406
Time deposits                             22,473               16,422
Other borrowings                           1,790                  386
Other liabilities                             68                   59
                                         -------              -------
Total liabilities                       $ 35,669             $ 24,341
Stockholders' equity                       5,121                4,973
                                         -------              -------
Total liabilities
 and stockholders' equity               $ 40,790             $ 29,314
                                         =======              =======

      The following is a presentation of an analysis of the net interest
earnings of the Company for the period indicated with respect to each major
category of interest-earning asset and each major category of interest-bearing
liability: ($ in thousands)

                    Year Ended December 31, 2004    Year Ended December 31, 2003
                    -----------------------------    ---------------------------
                               Interest  Average              Interest  Average
                    Average    Earned/   Yield/     Average   Earned/   Yield/
                     Amount     Paid      Rate       Amount    Paid      Rate
                     ------     ----      ----       ------    ----      ----
     Assets
     ------
Taxable securities $  2,199   $    58     2.64%    $  2,280  $    75     3.29%
Federal funds sold    1,130        16     1.42%         752        8     1.06%
Net loans            33,335(1)  2,254(2)  6.76%      22,507(1) 1,563(2)  6.94%
                    -------    ------               -------   ------
Total
 earning assets    $ 36,664   $ 2,328     6.35%    $ 25,539  $ 1,646     6.45%
                    =======    ======               =======   ======
   Liabilities
   -----------
NOW and money
 market deposits   $  6,685   $    82     1.23%    $  4,430  $    62     1.40%
Savings deposits        657         6      .91%         406        4      .99%
Time deposits        22,473       631     2.81%      16,422      504     3.07%
Other borrowings      1,790        57     3.18%         386        9     2.33%
                    -------    ------               -------   ------
Total interest
 bearing
 liabilities       $ 31,605   $   776     2.46%    $ 21,644  $   579     2.67%
                    =======    ======               =======   ======
Net yield on
 earning assets                           4.45%                          4.18%
______________________

1   At December 31, 2004 and 2003, loans on non-accrual status amounted to $249
    and $39.
2   Interest earned on net loans includes $141 and $102 in loan fees and loan
    service fees for the years ended December 31, 2004 and 2003, respectively.


                                           17
<PAGE>
                   RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

      The effect on interest income, interest expense and net interest income
in the period indicated, of changes in average balance and rate from the
corresponding prior period is shown below.  The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period.  Changes resulting from average balance/rate variances are
included in changes resulting from rate.  The balance of the change in interest
income or expense and net interest income has been attributed to a change in
average rate.  ($ in thousands)

                                         Year Ended December 31, 2004
                                                 Compared to
                                         Year Ended December 31, 2003
                                         ----------------------------
                                          Increase (Decrease) due to
                                           Volume     Rate     Total
                                           ------     ----     -----
                                                (in thousands)
      Interest earned on:
        Taxable securities                  $  (3)   $ (14)    $ (17)
        Federal funds sold                      5        3         8
        Net loans                             731      (40)      691
                                             ----     ----      ----
          Total interest income             $ 733    $ (51)    $ 682
                                             ----     ----      ----

      Interest paid on:
        NOW and money market deposits       $  27    $  (7)    $  20
        Savings deposits                        2      --          2
        Time deposits                         166      (38)      128
        Other borrowings                       44        4        48
                                             ----     ----      ----
          Total interest expense            $ 239    $ (41)    $ 198
                                             ----     ----      ----

      Change in net interest income         $ 494    $ (10)    $ 484
                                             ====     ====      ====

                                         Year Ended December 31, 2003
                                                 Compared to
                                         Year Ended December 31, 2002
                                         ----------------------------
                                          Increase (Decrease) due to
                                           Volume     Rate     Total
                                           ------     ----     -----
                                                (in thousands)
      Interest earned on:
        Taxable securities                  $  15    $  (8)    $   7
        Federal funds sold                     (3)      (4)       (7)
        Net loans                             714     (132)      582
                                             ----     ----      ----
          Total interest income             $ 726    $(144)    $ 582
                                             ----     ----      ----

      Interest paid on:
        NOW and money market deposits       $  24    $  (7)    $  17
        Savings deposits                        3      --          3
        Time deposits                         267      (42)      225
        Other borrowings                        7        1         8
                                             ----     ----      ----
          Total interest expense            $ 301    $ (48)    $ 253
                                             ----     ----      ----

      Change in net interest income         $ 425    $ (96)    $ 329
                                             ====     ====      ====


                                           18
<PAGE>
                           INVESTMENT PORTFOLIO

      As of December 31, 2004, investment securities comprised approximately
4.5% of the Bank's assets and net loans comprised approximately 85.3% of the
Bank's assets.  The Bank invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and certificates of deposit
issued by commercial banks.  In addition, the Bank enters into Federal Funds
transactions with its principal correspondent banks, and generally acts as a
net seller of such funds.  At December 31, 2004, the Bank was a net seller of
funds in the Federal funds market.  The sale of Federal Funds amounts to a
short-term loan from the Bank to another bank.

      The following table presents, for the date indicated, the book value of
the Bank's investments.  All securities held at December 31, 2004 and 2003 were
categorized as available-for-sale.  ($ in thousands)

                                             December 31,
                                        -------------------
                                         2004        2003
                                        -------     -------
       U.S.Agency                       $   503     $ -  -
       U.S. Agency Pools                  1,339       2,096
       FRB, FHLB stock                      316         227
                                         ------      ------
          Total                         $ 2,158     $ 2,323
                                         ======      ======

      The following table indicates as of December 31, 2004 the amount of
investments due in (i) one year or less, (ii) one to five years, (iii) five
to ten years, and (iv) over ten years:

                                                    Weighted
                                                    Average
                                         Amount      Yield
                                         ------      -----
    Obligations of U.S. Agencies:
      0-1 year                          $ -  -        N/A
      Over 1 through 5 years                503      3.98%
      Over 5 through 10 years             -  -        N/A
      Over 10 years                       1,339      3.55%
      FRB and FHLB stock (no maturity)      316      4.70%
                                         ------      -----
        Total                           $ 2,158      3.82%


                                         ======      =====


                                 LOAN PORTFOLIO


      The Bank engages in a full complement of lending activities, including
commercial/industrial, consumer and real estate loans.  As of December 31, 2004,
the Bank had a legal lending limit for unsecured loans of up to $866,000 to any
one person.

      While risk of loss in the Bank's loan portfolio is primarily tied to the
credit quality of its various borrowers, risk of loss may also increase due to
factors beyond the Bank's control, such as local, regional and/or national
economic downturns.  General conditions in the real estate market may also
impact the relative risk in the Bank's real estate portfolio.  Of the Bank's
target areas of lending activities, commercial loans are generally considered
to have greater risk than real estate loans or consumer installment loans.


                                           19
<PAGE>
      Management of the Bank intends to originate loans and to participate
with other banks with respect to loans that exceed the Bank's lending limits.
Management of the Bank does not believe that loan participations necessarily
pose any greater risk of loss than loans that the Bank originates.

      The following is a description of each of the major categories of loans
in the Bank's loan portfolio:

                  COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS

      Commercial lending is directed principally towards businesses whose
demands for funds fall within the Bank's legal lending limits and which are
potential deposit customers of the Bank.  This category of loans includes loans
made to individual, partnership or corporate borrowers, and obtained for a
variety of business purposes.  Particular emphasis is placed on loans to small-
and medium-sized businesses.  The primary repayment risk for commercial loans
is the failure of the business due to economic or financial factors.  Although
the Bank typically looks to a commercial borrower's cash flow as the principal
source of repayment for such loans, many commercial loans are secured by
inventory, equipment, accounts receivable, and other assets.

                                CONSUMER LOANS

      The Bank's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including automobile
loans to individuals and pre-approved lines of credit.  This category of loans
also includes lines of credit and term loans secured by second mortgages on the
residences of borrowers for a variety of purposes, including home improvements,
education and other personal expenditures.  In evaluating these loans the Bank
reviews the borrower's level and stability of income and past credit history and
the impact of these factors on the ability of the borrower to repay the loan in
a timely manner.  In addition, the Bank maintains a proper margin between the
loan amount and collateral value.

                              REAL ESTATE LOANS

      The Bank's real estate loans consist of residential first and second
mortgage loans, residential construction loans and commercial real estate loans
to a limited degree.  These loans are made consistent with the Bank's appraisal
policy and real estate lending policy which detail maximum loan-to-value ratios
and maturities.  These loan-to-value ratios are sufficient to compensate for
fluctuations in the real estate market to minimize the risk of loss to the Bank.


                                           20
<PAGE>
                                TYPES OF LOANS


      The following table presents various categories of loans contained in the
Bank's loan portfolio as of the date indicated and the total amount of all loans
for such period:  ($ in thousands)

                                                    As of December 31,
                                                  ---------------------
               Type of Loan                         2004         2003
               ------------                       --------     --------
   Domestic:
     Commercial, financial and agricultural       $  6,390     $  4,288
     Real estate - construction                     11,085        5,806
     Real estate - mortgage                         18,974       13,641
     Installment and other loans to individuals      4,974        2,938
                                                   -------      -------
        Subtotal                                  $ 41,423     $ 26,673
     Less:  Allowance for possible loan losses        (488)        (326)
                                                   -------      -------
        Total (net of allowance)                  $ 40,935     $ 26,347
                                                   =======      =======

        MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

      The following is a presentation of an analysis of maturities of certain
loans as of December 31, 2004:  ($ in thousands)

                                                    Due         Due
                                    Due 1       After 1 to     After
   Type of Loan                  Year or Less     5 Years     5 Years     Total
   ------------                  ------------     -------     -------     -----
Commercial, financial
 and agricultural                  $ 4,645       $ 1,697      $   48     $ 6,390
Real Estate - construction          10,332           753        --        11,085
                                    ------        ------       -----      ------
     Total                         $14,977       $ 2,450      $   48     $17,475
                                    ======        ======       =====      ======

                                    RISK ELEMENTS

      For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates as of December 31, 2004:  ($ in
thousands)

                                                    Due         Due
                                    Due 1       After 1 to     After
   Type of Loan                  Year or Less     5 Years     5 Years     Total
   ------------                  ------------     -------     -------     -----
Predetermined interest rate        $ 5,494       $ 1,335      $   48     $ 6,877
Floating interest rate               9,483         1,115        --        10,598
                                    ------        ------       -----      ------
     Total                         $14,977       $ 2,450      $   48     $17,475
                                    ======        ======       =====      ======

      The Company considers impaired loans to include all restructured loans,
loans on which the accrual of interest has been discontinued, loans that are
not performing in accordance with agreed upon terms, and all other loans that
are performing according to the loan agreement but may have substantive
indication of potential credit weakness.  At December 31, 2004 and 2003, the
total recorded investment in impaired loans, all of which had allowances
determined in accordance with FASB Statements No. 114 and No. 118, amounted to
approximately $816,137 and $565,396, respectively.  The average recorded
investment in impaired loans amounted to approximately $663,119 and $570,412,
respectively, for the years ended December 31, 2004 and 2003.  The allowance
for loan losses related to impaired loans amounted to approximately $169,648
and $32,150 at December 31, 2004 and 2003, respectively.  Interest income
recognized on impaired loans for the years ended December 31, 2004 and 2003
amounted to $39,597 and $32,242, respectively.  The amount of interest
recognized on impaired loans using the cash method of accounting was not
material for the years ended December 31, 2004 and 2003.  Loans on non-accrual
status at December 31, 2004 and 2003 had outstanding balances of $249,202 and
$38,803, respectively.  Interest recognized on non-accruing loans at December
31, 2004 and 2003 was $3,347 and $1,422 respectively.  The Company has no
commitments to lend additional funds to borrowers whose loans have been
modified.


                                           21
<PAGE>
      As of December 31, 2004, there were no loans not disclosed above that
were classified for regulatory purposes as doubtful, substandard or special
mention which (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.

      Accrual of interest is discounted on a loan when management determines
upon consideration of economic and business factors affecting collection efforts
that collection of interest is doubtful.  At December 31, 2004, two loans with
an aggregate principal of approximately $28,000 were over 90 days past due but
still accruing interest, compared with two such loans with an aggregate
principal of $140,000 at December 31, 2003.  As of December 31, 2004, no loans
were considered to be "troubled-debt restructured."  As of December 31, 2004,
one loan with an aggregate balance of approximately $249,000 was on non-accrual
status, compared to one such loan with an aggregate principal of approximately
$38,803 as of December 31, 2003.

                       SUMMARY OF LOAN LOSS EXPERIENCE

      An analysis of the Bank's loss experience is furnished in the following
table for the period indicated, as well as a breakdown of the allowance for
possible loan losses:  ($ in thousands)

            ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES

                                      Year Ended December 31,
                                      -----------------------
                                         2004          2003
                                        ------        ------
  Balance at beginning of period        $  326        $  221
                                         -----        -----
  Charge-offs:
     Real estate loans                     --            --
     Installments and
      other loans to individuals           (30)          (16)
     Commercial loans                      --            --
  Recoveries                                 1           --
                                         -----         -----
  Net charge-offs                          (29)          (16)
                                         -----         -----
  Additions charged to operations          191           121
                                         -----         -----
  Balance at end of period              $  488        $  326
                                         =====         =====

  Ratio of net charge-offs during
   the period to average loans
   outstanding during the period          0.09%        0.07%
                                          =====        =====


                                           22
<PAGE>
      At December 31, 2004 and 2003, the allowance was allocated as follows:
($ in thousands)

                                     December 31, 2004     December 31, 2003
                                    --------------------  --------------------
                                                Percent               Percent
                                                of loans              of loans
                                                in each               in each
                                                category              category
                                                 to total              to total
                                      Amount     loans       Amount    loans
                                      ------     --------    ------    --------
Commercial, Financial
 and Agricultural                     $   80       15.4%     $   60      16.1%
Real Estate - Construction               150       26.8%        103      21.8%
Real Estate - Mortgage                   145       45.8%        113      51.1%
Installment and Other
 Loans to Individuals                     75       12.0%         36      11.0%
Unallocated                               33        N/A          14       N/A
                                       -----      -----       -----     -----
Total                                 $  488      100.0%     $  326     100.0%
                                       =====      =====       =====     =====

      In considering the adequacy of the Company's allowance for possible loan
losses, management has focused on the fact that as of December 31, 2004, 15.4%
outstanding loans are in the category of commercial loans, which includes
commercial, industrial and agricultural loans.  Commercial loans are generally
considered by management as having greater risk than other categories of loans
in the Company's loan portfolio.  However, 96.5% of these commercial loans at
December 31, 2004 were made on a secured basis.  Management believes that the
secured condition of the preponderant portion of its commercial loan portfolio
greatly reduces any risk of loss inherently present in commercial loans.

      The Company's consumer loan portfolio is also well secured.  At December
31, 2004, 93.0% of the Company's consumer loans were secured by collateral
primarily consisting of automobiles, boats and other personal property.
Management believes that these loans involve less risk than commercial loans.

      Real estate mortgage loans constituted 45.8% of outstanding loans at
December 31, 2004.  The loans in this category represent residential and
commercial real estate mortgages where the amount of the original loan generally
does not exceed 85% of the appraised value of the collateral.  These loans are
considered by management to be well secured with a low risk of loss.

      A review of the loan portfolio by an independent firm is conducted
annually.  The purpose of this review is to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses.  The
review includes analyses of historical performance, the level of non-conforming
and rated loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent information.  Upon
completion, the Board and management of the Bank approve the report.  In
addition to the above review, the Bank's primary regulator, the Office of the
Comptroller of the Currency (the "OCC"), also conducts an annual examination
of the loan portfolio.  Upon completion, the OCC presents its report of findings
to the Board and management of the Bank.  Information provided from the above
two independent sources, together with information provided by the management
of the Bank and other information known to members of the Board, are utilized
by the Board to monitor, on a quarterly basis, the loan portfolio.
Specifically, the Board attempts to identify risks inherent in the loan
portfolio (e.g., problem loans, potential problem loans and loans to be charged
off), assess the overall quality and collectibility of the loan portfolio, and
determine amounts of the allowance for loan losses and the provision for loan
losses to be reported based on the results of their review.



                                           23
<PAGE>
                                   DEPOSITS

      The Bank offers a full range of interest-bearing and non-interest-bearing
accounts, including commercial and retail checking accounts, money market
accounts, individual retirement and Keogh accounts, regular interest-bearing
statement savings accounts and certificates of deposit with a range of maturity
date options.  The sources of deposits are residents, businesses and employees
of businesses within the Bank's market area, obtained through the personal
solicitation of the Bank's officers and directors, and advertisements published
in the local media.  In addition, the Bank uses the internet to obtain deposits
from institutions located elsewhere.  The Bank pays competitive interest rates
on time and savings deposits up to the maximum permitted by law or regulation.
In addition, the Bank has implemented a service charge fee schedule competitive
with other financial institutions in the Bank's market area, covering such
matters as maintenance fees on checking accounts, per item processing fees on
checking accounts and returned check charges.

      The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
($ in thousands)

                                           Year Ended December 31,
                              ------------------------------------------------
                                      2004                        2003
                                 -----------------           -----------------
                               Average      Average       Average     Average
Deposit Category               Amount      Rate Paid      Amount     Rate Paid
----------------               ------      ---------      ------     ---------
Non-interest-bearing
 demand deposits              $ 3,996         N/A        $ 2,638        N/A
NOW and money market deposits   6,685        1.23%         4,430       1.40%
Savings deposits                  657         .91%           406        .99%
Time deposits                  22,473        2.81%        16,422       3.07%


      The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities at December 31, 2004:
($ in thousands)


   Time Certificates of Deposit             At December 31, 2004
   ----------------------------             --------------------
      3 months or less                           $ 1,309
      3-6 months                                   1,407
      6-12 months                                  1,994
      over 12 months                               4,320
                                                  ------
           Total                                 $ 9,030
                                                  ======


                       RETURN ON EQUITY AND ASSETS

      Returns on average consolidated assets and average consolidated equity
for the period indicated were as follows:

                                                     Year Ended
                                                    December 31,
                                                --------------------
                                                 2004          2003
                                                 ----          ----
     Return on average assets                     .37%          .03%
     Return on average equity                    2.91%          .20%
     Average equity to average assets ratio     12.50%        17.00%
     Dividend payout ratio                       --  %         --  %


                                           24
<PAGE>
ITEM 2.   DESCRIPTION OF PROPERTIES

      Our main office is located adjacent to Beaufort Plaza at 2348 Boundary
Street, Beaufort, South Carolina.  We purchased a former Wachovia Bank office
located at this site.  The office is a one-story banking facility with
approximately 7,600 square feet.  We completed renovations of the main office
building in November 2002.  The total cost of the renovations was approximately
$1,350,000.

      In addition, we purchased approximately 2.3 acres of land at 131 Sea
Island Parkway on Lady's Island, South Carolina.  Initially, we planned to
construct our main office on this site.  However, we decided to locate the main
office at the Boundary Street location because we believe it provides the Bank
with greater visibility and is more accessible to our customers.  We intend to
keep the Lady's Island location as a future branch site.  The Bank will be
required to seek regulatory approval prior to establishing a branch at this
location.

      Our Charleston loan production office is located in a 500-square-foot
leased office at 3 Southpark Circle, Suite 260, Charleston, South Carolina.
Rent for the office is $667 per month under a lease that is cancelable with 30
days' prior notice.


ITEM 3.   LEGAL PROCEEDINGS

      There are no material pending legal proceedings to which the Company is
a party or of which any of its properties are subject, nor are there material
proceedings known to the Company to be contemplated by any governmental
authority.   Additionally, the Company is unaware of any material proceedings,
pending or contemplated, in which any existing or proposed director, officer
or affiliate, or any principal security holder of the Company or any associate
of any of the foregoing, is a party or has an interest adverse to the Company.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.


                                       PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

      The response to this Item is partially included in the Company's 2004
Annual Report to Shareholders at page 42 and is incorporated herein by
reference.

      The Company issued no unregistered securities during the fiscal year
ended December 31, 2004 and did not repurchase any of its shares of common
stock during the fourth quarter of 2004.


                                           25
<PAGE>
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS

      The response to this Item is included in the Company's 2004 Annual Report
to Shareholders under the heading "Management's Discussion and Analysis of
financial Condition and Results of Operations" at pages 1 through 9 and is
incorporated herein by reference.


ITEM 7.   FINANCIAL STATEMENTS

      The following financial statements are included in the Company's 2004
Annual Report to Shareholders at pages 10 through 40 and are incorporated herein
by reference.

      *  Report of Independent Certified Public Accountants

      *  Consolidated Balance Sheets as of December 31, 2004 and 2003

      *  Consolidated Statements of Earnings for the Years Ended December 31,
         2004 and 2003

      *  Consolidated Statements of Comprehensive Income for the Years Ended
         December 31, 2004 and 2003

      *  Consolidated Statements of Changes in Shareholders' Equity for the
         Years Ended December 31, 2004 and 2003

      *  Consolidated Statements of Cash Flows for the Years Ended December 31,
         2004 and 2003

      *  Notes to Consolidated Financial Statements


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

      None.


ITEM 8A.  CONTROLS AND PROCEDURES

      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and as the
date of this report, our management, including our Chief Executive Officer and
Principal Financial and Accounting Officer, reviewed the effectiveness and
design of our disclosure controls and procedures under Exchange Act Rule 13a-
15(b).  Based upon that evaluation, our Chief Executive Officer and Principal
Financial and Accounting Officer, concluded that such disclosure controls and
procedures are adequate to ensure that material information relating to the
Company, including its consolidated subsidiary, that is required to be included
in its periodic filings with the Securities and Exchange Commission, is timely
made known to them.  During the quarter ended December 31, 2004, there were no
changes in the Company's internal controls that materially affected, or are
reasonably likely to materially affect, the Company's control over financial
reporting.


ITEM 8B.  OTHER INFORMATION

      None.


                                           26
<PAGE>
                                       PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

      The responses to this Item are included in the Company's Proxy Statement
for the 2005 Annual Meeting of Shareholders under the following headings and
are incorporated herein by reference:

      "Proposal 1:  Election of Directors-Class I Nominated Directors," "-Class
III Continuing Directors" and  "-Class II Continuing Directors" at pages 3
through 5.

      "Executive Officers" at page 6.

      "Section 16(a) Beneficial Ownership Reporting Compliance" at page 10.

      The Company has a Code of Ethics that applies to the Company's Chief
Executive Officer and Principal Financial and Accounting Officer.  The Company
will provide a copy of the Code of Ethics free of charge to any shareholder
upon written request to the Company.


ITEM 10.  EXECUTIVE COMPENSATION

      The responses to this Item are included in the Company's Proxy Statement
for the 2005 Annual Meeting of Shareholders, under the heading "Compensation"
at pages 7 through 8, and are incorporated herein by reference.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The responses to this Item are partially included in the Company's Proxy
Statement for the 2005 Annual Meeting of Shareholders, under the heading
"Security Ownership of Certain Beneficial Owners and Management" at pages 9
through 10, and are incorporated herein by reference.

      The following table sets forth information regarding the number of shares
subject to options issued and reserved for future issuance under the Islands
Bancorp 2002 Stock Incentive Plan and warrants issued to the Company's
directors.  The Stock Incentive Plan was approved by the Board of Directors of
the Company on March 19, 2002 and was approved by the shareholders of the
Company on April 23, 2002.  The Company does not maintain any other equity
compensation plans.


                                           27
<PAGE>
                                                                    Number of
                                                                      shares
                                                                     remaining
                                   Number of                         available
                                  securities         Weighted-      for future
                                     to be            average        issuance
                                  issued upon         exercise    under the Plan
                                  exercise of         price of      (excludes
                                  outstanding        outstanding    outstanding
         Plan Category              options            options        options
         -------------              -------            -------        -------
Equity compensation plans
 approved by security holders       48,500             $10.00          49,405

Employee compensation plans not
 approved by security holders      200,105(1)          $10.00             0

Total                              248,605             $10.00          49,405

____________________

1  Represents warrants issued to the Company's directors on July 6, 2001.  The
   warrants became exercisable in equal one-third (1/3) annual increments
   beginning on July 6, 2002 and are now fully exercisable.  Exercisable
   warrants will remain exercisable for the ten-year period following the date
   of issuance or for 90 days after the warrant holder ceases to be a director
   of the Company, whichever is shorter.  The exercise price of each warrant is
   subject to adjustment for stock splits, recapitalizations or other similar
   events.  Additionally, if the Bank's capital falls below the minimum level,
   as determined by the OCC, the Company may be directed to require the
   directors to exercise or forfeit their warrants.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The responses to this Item are included in the Company's Proxy Statement
for the 2005 Annual Meeting of Shareholders, under the headings "Certain
Relationships and Related Transactions" at page 10 and "Compensation" at pages 7
through 8, and are incorporated herein by reference.


ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a)     Exhibits

Exhibit
Number                                     Exhibit
-------                                    -------

 3.1         Articles of Incorporation(1)

 3.2         Bylaws(1)

 4.1         Specimen Stock Certificate(1)

 4.2         See Exhibits 3.1 and 3.2 for provisions of the Articles of
             Incorporation and Bylaws defining rights of holders of the common
             stock

10.1*        Employment Agreement dated as of July 27, 1999 between the Islands
             Bancorp and William B. Gossett(1)

10.2         Form of Organizers Warrant Agreement(1)


                                           28
<PAGE>
10.3         Assignment and Assumption Agreement dated August 25, 1999, between
             Islands Bancorp and NBB General Partnership(1)

10.4         Reserved.

10.5         Escrow Agreement dated November 23, 1999 between Islands Bancorp
             and The Bankers Bank(1)

10.6         Loan Agreement dated September 7, 1999 between Islands Bancorp and
             GrandSouth Bank, as extended on December 7, 1999, and form of
             Guaranty Agreement issued to GrandSouth Bank by various organizers
             of Islands Bancorp(1)

10.7         Promissory Note dated November 15, 2000 by Islands Bancorp in favor
             of The Bankers Bank and form of Commercial Guaranty issued to The
             Bankers Bank by various organizers of Islands Bancorp(2)

10.8         Promissory Note dated December 26, 2000 by Islands Bancorp in favor
             of The Bankers Bank and form of Commercial Guaranty issued to The
             Bankers Bank by various organizers of Islands Bancorp(2)

10.9         Agreement between Islands Community Bank and Patterson
             Construction, Inc. for the main office renovation of Islands
             Community Bank, dated November 6, 2001(3)

13.1         Islands Bancorp 2004 Annual Report to Shareholders.  Except with
             respect to those portions specifically incorporated by reference
             into this Report, the Company's 2004 Annual Report to Shareholders
             is not deemed to be filed as part of this Report

22.1         Subsidiaries of Islands Bancorp

24.1         Power of Attorney (appears on the signature pages to this Annual
             Report on Form 10-KSB

31.1         Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
             of 2002

32.1         Certification Pursuant to 18 U.S.C. Section 1350 as adopted
             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_________________________
* Compensatory plan or arrangement.

(1)  Incorporated herein by reference to exhibit of same number to the Company's
     Registration Statement on Form SB-2, Registration No. 333-92653, filed
     December 13, 1999, as amended.
(2)  Incorporated herein by reference to exhibit of same number to the Company's
     Annual Report on Form 10-KSB filed March 30, 2001.
(3)  Incorporated herein by reference to exhibit of same number to the Company's
     Annual Report on Form 10-KSB filed April 1, 2002.

(b)  Reports on Form 8-K filed in the fourth quarter of 2004:  None.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The responses to this Item are included in the Company's Proxy Statement
for the 2005 Annual Meeting of Shareholders under the heading "Independent
Public Accountant" at pages 10 through 11.


                                           29
<PAGE>
                                    SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Islands Bancorp has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.


                                 ISLANDS BANCORP


                                 By: /s/ William B. Gossett
                                     -------------------------------
                                     William B. Gossett
                                     President and Chief Executive Officer

                                 Date:  March 28, 2005


                                  POWER OF ATTORNEY

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Report constitutes and appoints William B. Gossett
and D. Martin Goodman, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits hereto, and
other documents in connection herewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
they might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Islands
Bancorp and in the capacities and on the dates indicated.

          Signature               Title                        Date

/s/ Louis O. Dore            Director                             March 28, 2005
--------------------------
Louis O. Dore

/s/ Paul M. Dunnavant, III   Treasurer and Director               March 28, 2005
--------------------------
Paul M. Dunnavant, III

/s/ Martha B. Fender         Vice President and Director          March 28, 2005
--------------------------
Martha B. Fender

/s/ Daryl A. Ferguson        Director                             March 28, 2005
--------------------------
Daryl A. Ferguson


<PAGE>
/s/ D. Martin Goodman        Chairman of the Board of Directors   March 28, 2005
--------------------------
D. Martin Goodman

/s/ William B. Gossett       President, Chief Executive Officer
--------------------------   and Director*
William B. Gossett

/s/ Stancel E. Kirkland, Sr. Director                             March 28, 2005
--------------------------
Stancel E. Kirkland, Sr.

/s/ Carl E. Lipscomb         Director                             March 28, 2005
--------------------------
Carl E. Lipscomb

/s/ Edward J. McNeil, Jr.    Secretary and Director               March 28, 2005
--------------------------
Edward J. McNeil, Jr.

/s/ Frances K. Nicholson     Director                             March 28, 2005
--------------------------
Frances K. Nicholson

/s/ Narayan Shenoy           Director                             March 28, 2005
--------------------------
Dr. Narayan Shenoy

/s/ J. Frank Ward            Director                             March 28, 2005
--------------------------
J. Frank Ward

/s/ Bruce K. Wyles           Director                             March 28, 2005
--------------------------
Bruce K. Wyles

_____________________________
*  Principal Executive, Financial and Accounting Officer.


<PAGE>
                                     EXHIBIT INDEX
                                     -------------

Exhibit
Number                                 Exhibit
-------                                -------

 3.1         Articles of Incorporation(1)

 3.2         Bylaws(1)

 4.1         Specimen Stock Certificate(1)

 4.2         See Exhibits 3.1 and 3.2 for provisions of the Articles of
             Incorporation and Bylaws defining rights of holders of the common
             stock

10.1*        Employment Agreement dated as of July 27, 1999 between the Islands
             Bancorp and William B. Gossett(1)

10.2         Form of Organizers Warrant Agreement(1)

10.3         Assignment and Assumption Agreement dated August 25, 1999, between
             Islands Bancorp and NBB General Partnership(1)

10.4         Reserved.

10.5         Escrow Agreement dated November 23, 1999 between Islands Bancorp
             and The Bankers Bank(1)

10.6         Loan Agreement dated September 7, 1999 between Islands Bancorp and
             GrandSouth Bank, as extended on December 7, 1999, and form of
             Guaranty Agreement issued to GrandSouth Bank by various organizers
             of Islands Bancorp(1)

10.7         Promissory Note dated November 15, 2000 by Islands Bancorp in favor
             of The Bankers Bank and form of Commercial Guaranty issued to The
             Bankers Bank by various organizers of Islands Bancorp(2)

10.8         Promissory Note dated December 26, 2000 by Islands Bancorp in favor
             of The Bankers Bank and form of Commercial Guaranty issued to The
             Bankers Bank by various organizers of Islands Bancorp(2)

10.9         Agreement between Islands Community Bank and Patterson
             Construction, Inc. for the main office renovation of Islands
             Community Bank, dated November 6, 2001(3)

13.1         Islands Bancorp 2004 Annual Report to Shareholders.  Except with
             respect to those portions specifically incorporated by reference
             into this Report, the Company's 2004 Annual Report to Shareholders
             is not deemed to be filed as part of this Report

22.1         Subsidiaries of Islands Bancorp

24.1         Power of Attorney (appears on the signature pages to this Annual
             Report on Form 10-KSB

31.1         Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
             of 2002

32.1         Certification Pursuant to 18 U.S.C. Section 1350 as adopted
             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_________________________
*  Compensatory plan or arrangement.

(1)  Incorporated herein by reference to exhibit of same number to the Company's
     Registration Statement on Form SB-2, Registration No. 333-92653, filed
     December 13, 1999, as amended.
(2)  Incorporated herein by reference to exhibit of same number to the Company's
     Annual Report on Form 10-KSB filed March 30, 2001.
(3)  Incorporated herein by reference to exhibit of same number to the Company's
     Annual Report on Form 10-KSB filed April 1, 2002.