March  26,  2003

Dear Shareholder:
It  is with pride that I enclose Islands Bancorp's annual report to shareholders
representing  the  first  full  year  of  operations  for  the  Company  and its
subsidiary,  Islands  Community  Bank,  N.A.

Interest  rates  were  at  unprecedented  low levels during 2002 creating unique
challenges  and  opportunities  for  a  new  financial institution.  We are very
pleased  with  the  operating  numbers and growth achieved during the year.  Our
expectations  are  that  2003  will  be the turnaround year in which the company
achieves  profitability.

The  bank  operated from a temporary facility from its July 2001 inception until
moving  into our new building in November 2002.  The building is truly beautiful
and  is  an  addition to Beaufort for which you can take pride as a shareholder.
If  you have not seen the building, stop by and one of our friendly bankers will
give  you  a  personal  tour.

Your  bank's management looks to the future with great anticipation.  We have an
excellent  team of bankers in a great location.  As the Nation's economic clouds
clear,  we  look  forward  to  positioning  Islands Community Bank as Beaufort's
market  leader.  Please  help  us  by  banking with your Bank and mentioning the
                                                    ----
bank's  services  to  friends.

Welcome  Home!


/s/ D. Martin Goodman

D. Martin Goodman
Chairman of the Board


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The  following  discussion of the Company's financial condition and results
of  operations  should  be  read  in conjunction with the Company's consolidated
financial  statements,  related  notes  and  statistical  information  included
elsewhere  herein.


                              RESULTS OF OPERATIONS


YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     For the year ended December 31, 2002, assets grew by $14.0 million to $24.0
million.  More  specifically,  loans  grew  by  $12.6  million to $18.9 million;
property  and  equipment  grew by $1.3 million to $2.8 million, and other assets
expanded by $.2 million to $.6 million; securities remained unchanged while cash
and  cash  equivalents  declined  by $.1 million.  To fund the growth in assets,
deposits  grew  by  $14.9  million to $18.5 million, while all other obligations
declined  by  $.7  million  to  $.4 million; the capital account declined by $.2
million to $5.1 million.  The Company's main focus during calendar year 2002 was
to  increase  loans  while maintaining quality assets.  This was accomplished as
loans  tripled  in  volume  and, as evidenced by zero charge-offs and below-peer
past-dues,  the  loan  portfolio  is  of  high  quality.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
     For  the  year  ended  December  31,  2001,  net loss amounted to $361,452,
slightly  above  the net loss of $312,865 experienced during calendar year 2000.
Recall, however, that principal banking operations commenced on July 9, 2001 and
that  the results for calendar year 2001 include results from banking operations
as  well  as  results  from pre-operating activities.  The net loss for calendar
year  2000  includes only results from pre-operating activities, mainly expenses
relating  to  the  organization of the business.  Comparing results of a company
that  commenced  principal  operations  with  the  results  obtained  during its
developmental  stage  may  be misleading and confusing.  To eliminate misleading
comparisons,  the  Company  will  only  discuss  2001 results, or those obtained
during  the  calendar  year  in  which  the  company commenced principal banking
operations.

     During  2001,  available-for-sale  securities  grew by $1.3 million to $1.3
million,  and  loans  grew  by  $6.3  million to $6.3 million.  The Company also
purchased  property  and  equipment,  and  as of December 31, 2001, property and
equipment,  net  of  accumulated  depreciation, amounted to $1.5 million.  Other
assets, the majority of which were cash and deferred tax assets, amounted to $.6
million  at  December 31, 2001.  To fund the above assets, the Company increased
its deposits and capital accounts to $3.5 million and $5.4 million, respectively
at  December  31, 2001.  In addition, as of December 31, 2001, the Company was a
net  purchaser  of  Federal  funds  in  the  amount  of  $.8  million.


                                        1
<PAGE>
     For  the  year  ended  December  31,  2001, net interest income amounted to
$318,292,  producing  a  net  yield on earning assets of 3.71%.  During calendar
year  2001,  provision  for  loan  losses amounted to $76,850, none of which was
utilized to charge-down or charge-off loans.  Other income of $22,649 was mainly
from  service  fees on deposit accounts and other operating expenses of $801,049
consisted of typical bank expenses, such as salaries, benefits, data processing,
rent,  depreciation,  professional  fees,  etc.


NET  INTEREST  INCOME

     The  Company's  results  of  operations  are  determined  by its ability to
effectively  manage interest income and expense, to minimize loan and investment
losses,  to  generate  non-interest  income and to control non-interest expense.
Since  interest  rates  are  determined by market forces and economic conditions
beyond  the  control of the Company, the ability to generate net interest income
is  dependent  upon the Company's ability to maintain an adequate spread between
the  rate  earned  on  earning  assets  and  the  rate  paid on interest-bearing
liabilities,  such  as deposits and borrowings. Thus, net interest income is the
key  performance  measure  of  income.

     Presented  below are various components of assets and liabilities, interest
income  and expense as well as their yield/cost for the period indicated.  ($ in
thousands)

<TABLE>
<CAPTION>
                                         Year  Ended                    Year  Ended
                                      December  31,  2002           December  31,  2001
                                ------------------------------  ---------------------------
                                Interest    Interest
                                Average     Income/    Yield/   Average   Income/   Yield/
                                Balance     Expense     Cost    Balance   Expense    Cost
                               ----------  ----------  -------  --------  --------  -------
<S>                            <C>         <C>         <C>      <C>       <C>       <C>

  Federal funds sold           $     944   $      15     1.59%  $  2,007  $     47    2.34%
  Securities                       1,463          68     4.65%     4,614       266    5.76%
  Loans, net                      11,741         981     8.36%     1,941       130    6.70%
                               ----------  ----------  -------  --------  --------  -------
    Total earning assets       $  14,148   $   1,064     7.52%  $  8,562  $    443    5.17%
                               ==========  ==========  -------  ========  ========  -------

  Interest bearing deposits    $   9,772   $     325     3.32%  $  1,334  $     29    2.17%
  Other borrowings                    83           1     1.57%     1,347        96    7.13%
                               ----------  ----------  -------  --------  --------  -------
    Total interest-
      bearing liabilities      $   9,855   $     326     3.31%  $  2,681  $    125    4.66%
                               ==========  ==========  -------  ========  ========  -------

  Net yield on earning assets                            5.22%                        3.71%
                                                       =======                      =======
</TABLE>

     For  the year ended December 31, 2002, the yield on earning assets amounted
to 7.52%, while the cost of funds was 3.31%. Net yield on earning assets for the
year  ended  December  31,  2002  and  2001  amounted  to  5.22%,  and  3.71%,
respectively.  The  Company  was able to increase the yield on earning assets by
shifting  the  asset  mix  from low earning assets (securities and federal funds
sold) to higher earning assets (loans). The cost of funds declined mainly due to
the  general  interest  rate  environment.


                                        2
<PAGE>
NON-INTEREST  INCOME

     Non-interest income for the years ended December 31, 2002 and 2001 amounted
to  $89,697  and  $22,649,  respectively.  As  a  percentage  of average assets,
non-interest  income  amounted  to  .53%  and  .25%,  respectively.

     The  following table summarizes the major components of non-interest income
for  the  years  ended  December  31,  2002  and  2001.

<TABLE>
<CAPTION>
                                    Years Ended  December 31,
                                   ---------------------------
                                       2002          2001
                                   ------------  -------------
<S>                                <C>           <C>
  Service fee on deposit accounts  $     87,348  $      21,978
  Miscellaneous, other                    2,349            671
                                   ------------  -------------
    Total non-interest income      $     89,697  $      22,649
                                   ============  =============
</TABLE>

NON-INTEREST  EXPENSE

     Non-interest  expense  for  the  years  ended  December  31,  2002 and 2001
amounted  to  $1,066,179  and  $801,049, respectively.  As a percentage of total
average  assets,  non-interest expenses amounted to 6.29% for calendar year 2002
and  8.92% for calendar year 2001.  These percentages are still high because the
majority  of  the  expenses are fixed in nature.  As the Company grows, however,
those  fixed  expenses  will not maintain their significant impact on the income
statement.  The reduction in the ratio of non-interest expense to average assets
from  calendar year 2001 results of 8.92% to calendar year 2002 results of 6.92%
is  due  attainment  of  economies  of  scale.

     Below  are the major components of non-interest expenses for the year ended
December  31,  2002  and  2001.

<TABLE>
<CAPTION>
                                      Years Ended December 31,
                                    ---------------------------
                                        2002          2001
                                    ------------  -------------
<S>                                 <C>           <C>
  Salaries and benefits             $    579,046  $     460,562
  Data processing, ATM                   136,599         42,512
  Advertising and public relations        45,500         41,178
  Depreciation                            69,828         28,606
  Other operating expenses               235,206        228,191
                                    ------------  -------------
    Total non-interest income       $  1,066,179  $     801,049
                                    ============  =============
</TABLE>

ALLOWANCE  FOR  POSSIBLE  LOAN  LOSSES

     During  2002,  the allowance for possible loan losses increased to $221,224
and,  as  of  December  31,  2002,  it  amounted to 1.16% of gross loans.  As of
December  31,  2002, management considers the allowance for possible loan losses
to  be  adequate  to  absorb  possible  future losses.  However, there can be no
assurance  that  charge-offs in future periods will not exceed the allowance for
possible  loan losses or that additional provisions to the allowance will not be
required.


                                        3
<PAGE>
INTEREST  RATE  SENSITIVITY

     Net  interest  income, the Company's primary source of earnings, fluctuates
with  significant interest rate movements.  To lessen the impact of these margin
swings,  the  balance sheet should be structured so that repricing opportunities
exist  for  both  assets  and  liabilities  in  roughly  equivalent  amounts  at
approximately  the  same  time  intervals.  Imbalances  in  these  repricing
opportunities  at  any  point  in  time  constitute  interest  rate sensitivity.

     Interest  rate sensitivity refers to the responsiveness of interest-earning
assets  and  interest-bearing  liabilities  to changes in market interest rates.
The  rate  sensitive  position,  or gap, is the difference in the volume of rate
sensitive  assets  and  liabilities  at  a  given  time  interval.  The  general
objective  of  gap management is to manage rate sensitive assets and liabilities
so  as  to  reduce  the impact of interest rate fluctuations on the net interest
margin.  Management  generally  attempts  to  maintain  a  balance  between rate
sensitive  assets  and  liabilities  as  the  exposure  period  is lengthened to
minimize  the  Company's  overall  interest  rate  risk.

     The  asset  mix  of  the balance sheet is continually evaluated in terms of
several  variables:  yield,  credit  quality,  appropriate  funding  sources and
liquidity.  To  effectively manage the liability mix of the balance sheet, there
should  be  a  focus on expanding the various funding sources. The interest rate
sensitivity  position  at December 31, 2002 is presented in the following table.
The  difference between rate sensitive assets and rate sensitive liabilities, or
the  interest  rate  sensitivity gap, is shown at the bottom of the table. Since
all  interest rates and yields do not adjust at the same pace, the gap is only a
general  indicator  of  rate  sensitivity.

<TABLE>
<CAPTION>
                                         After    After    After
                                         3 mos    6 mos    1 yr
                                Within    but      but      but
                                  3     within   within   within   After
                                months   6 mos   1 year    5 yrs   5 yrs    Total
                                ------  -------  -------  -------  ------  -------
<S>                             <C>     <C>      <C>      <C>      <C>     <C>
  Earning assets:
    Loans                       $7,857  $   751  $ 1,511  $ 8,111  $  864  $19,094
    Securities                    -  -     -  -     -  -     -  -   1,335    1,335
                                ------  -------  -------  -------  ------  -------
    Total earning assets        $7,857  $   751  $ 1,511  $ 8,111  $2,199  $20,429
                                ======  =======  =======  =======  ======  =======

  Supporting sources of funds:
    Interest bearing
      demand deposits
      and savings               $3,358  $  -  -  $  -  -  $  -  -  $ -  -  $ 3,358
    Certificates,
      less than $100M            1,304      614    2,622    5,947    -  -   10,487
    Certificates,
      $100M and more               505      762      714    1,100    -  -    3,081
    Federal funds
      purchased                    308     -  -     -  -     -  -    -  -      308
                                ------  -------  -------  -------  ------  -------
      Total interest-
      bearing liabilities       $5,475  $ 1,376  $ 3,336  $ 7,047  $ -  -  $17,234
                                ======  =======  =======  =======  ======  =======
</TABLE>


                                        4
<PAGE>
<TABLE>
<CAPTION>
                                         After    After    After
                                         3 mos    6 mos    1 yr
                                Within    but      but      but
                                  3     within   within   within   After
                                months   6 mos   1 year    5 yrs   5 yrs    Total
                                ------  -------  -------  -------  ------  -------
<S>                             <C>     <C>      <C>      <C>      <C>    <C>
  Interest rate
    sensitivity gap              2,382    (625)  (1,825)    1,064   2,199    3,195
  Cumulative gap                 2,382   1,757      (68)      996   3,195    3,195
  Interest rate
    sensitivity gap ratio         1.44     .55      .45      1.15     N/A     1.19
  Cumulative interest rate
    sensitivity gap ratio         1.44    1.26      .99      1.06    1.19     1.19
</TABLE>

     As  evidenced  by  the  table  above, at December 31, 2002, the Company was
liability  sensitive  between  six and twelve months, and asset sensitive in all
other  time  spans.  In  a  declining  interest  rate  environment,  a liability
sensitive position (a gap ratio of less than 1.0) is generally more advantageous
since  liabilities  are  repriced  sooner  than assets.  Conversely, in a rising
interest rate environment, an asset sensitive position (a gap ratio over 1.0) is
generally  more  advantageous  as  earning  assets  are repriced sooner than the
liabilities.  With  respect  to the Company, an increase in interest rates would
minimally  reduce  income  for  one  year  and  increase  income  thereafter.
Conversely,  a  decline in interest rates would increase income for one year and
decrease  income  thereafter.  This,  however,  assumes  that  all other factors
affecting  income  remain  constant.

     As  the  Company  continues to grow, management will continuously structure
its  rate  sensitivity  position to best hedge against rapidly rising or falling
interest rates.  The Bank's Asset/Liability Committee meets on a quarterly basis
and  develops  management's  strategy  for  the  upcoming period.  Such strategy
includes  anticipations  of  future  interest  rate  movements.


LIQUIDITY

     Liquidity  represents  the  ability  to provide steady sources of funds for
loan  commitments  and  investment activities, as well as to maintain sufficient
funds  to  cover  deposit  withdrawals  and  payment  of  debt  and  operating
obligations.  These  funds  can  be  obtained by converting assets to cash or by
attracting  new  deposits.  The  Company's  primary  source  of liquidity is its
ability  to  maintain  and  increase  deposits  through  the  Bank.

     Below  are the pertinent liquidity balances and ratios at December 31, 2002
and  2001:  ($  in  thousands)

<TABLE>
<CAPTION>
                                               December 31,
                                             ----------------
                                              2002     2001
                                             -------  -------
<S>                                          <C>      <C>
  Cash and cash equivalents                  $  394   $  464
  Securities                                 $1,335   $1,289
  CDs, over $100,000 to total deposit ratio    16.7%    20.1%
  Brokered deposits                               0%       0%
  Loan to deposit ratio                         102%     177%
</TABLE>


                                        5
<PAGE>
     Cash  and cash equivalents are the primary source of liquidity. At December
31,  2002,  cash and cash equivalents amounted to $.4 million, representing 1.6%
of total assets. Securities available for sale which provides a secondary source
of  liquidity  represented  approximately  5.6%  of  total  assets.

     At  December  31, 2002, large denomination certificates accounted for 16.7%
of total deposits. Large denomination CDs are generally more volatile than other
deposits.  As  a  result, management continually monitors the competitiveness of
the  rates  it  pays  on its large denomination CDs and periodically adjusts its
rates  in  accordance  with  market  demands.  Significant  withdrawals of large
denomination  CDs  may  have  a material adverse effect on the Bank's liquidity.
Management  believes  that  since  a  majority  of  the  above certificates were
obtained  from  Bank  customers residing in Beaufort County, South Carolina, the
volatility  of  such  deposits is lower than if such deposits were obtained from
depositors  residing  outside  of  Beaufort  County,  as  outside depositors are
believed  to  be  more  likely  to  be  interest  rate  sensitive.

     Brokered deposits are deposit instruments, such as certificates of deposit,
deposit  notes,  bank  investment  contracts  and  certain  municipal investment
contracts that are issued through brokers and dealers who then offer and/or sell
these  deposit  instruments  to one or more investors.  As of December 31, 2002,
the  Company  had  no  brokered  deposits  in  its  portfolio.

     Management  knows  of  no  trends,  demands,  commitments,  events  or
uncertainties  that  should  result in or are reasonably likely to result in the
Company's  liquidity  increasing  or  decreasing  in  any  material  way  in the
foreseeable  future.


CAPITAL  ADEQUACY

     There  are  now two primary measures of capital adequacy for banks and bank
holding  companies:  (i)  risk-based  capital  guidelines  and (ii) the leverage
ratio.

     Risk-based  capital  guidelines  measure  the  amount  of a bank's required
capital  in  relation  to  the  degree  of  risk perceived in its assets and its
off-balance  sheet  items.  Under  the risk-based capital guidelines, capital is
divided  into  two  "tiers."  Tier  1  capital  consists of common shareholders'
equity,  non-cumulative  and  cumulative (bank holding companies only) perpetual
preferred  stock  and minority interest.  Goodwill is subtracted from the total.
Tier  2  capital  consists  of  the  allowance  for possible loan losses, hybrid
capital  instruments,  term  subordinated  debt  and intermediate term preferred
stock.  Banks  are  required  to  maintain a minimum risk-based capital ratio of
8.0%,  with  at  least  4.0%  consisting  of  Tier  1  capital.

     The  second measure of capital adequacy relates to the leverage ratio.  The
OCC  has  established  a  3.0% minimum leverage ratio requirement.  The leverage
ratio  is  computed  by dividing Tier 1 capital by total assets.  For banks that
are  not  rated  CAMELS 1 by their primary regulator, the minimum leverage ratio
should  be 3.0% plus an additional cushion of at least 1 to 2 percent, depending
upon  risk  profiles  and  other  factors.


                                        6
<PAGE>
     The  table  below  illustrates  the Bank's and Company's regulatory capital
ratios  at  December  31,  2002:

<TABLE>
<CAPTION>
                                                          Minimum
                                                        regulatory
  Bank                              December 31, 2002   requirement
  ----                              ------------------  ------------
<S>                                 <C>                 <C>

  Tier 1 Capital                                 23.0%          4.0%
  Tier 2 Capital                                  1.1%  N/A
                                    ------------------  ------------
    Total risk-based capital ratio               24.1%          8.0%
                                    ==================  ============

  Leverage ratio                                 21.1%          3.0%
                                    ==================  ============

  Company - Consolidated
  ----------------------
  Tier 1 Capital                                 23.2%          4.0%
  Tier 2 Capital                                  1.0%           N/A
                                    ------------------  ------------
    Total risk-based capital ratio               24.2%          8.0%
                                    ==================  ============

  Leverage ratio                                 21.2%          3.0%
                                    ==================  ============
</TABLE>

     The above ratios indicate that the capital positions of the Company and the
Bank  are  sound and that the organization is well positioned for future growth.



                        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,  2002  and  2001.  This
presentation  includes  all  major  categories  of  interest-earning  assets and
interest-bearing  liabilities:  ($  in  thousands)

<TABLE>
<CAPTION>
                           AVERAGE CONSOLIDATED ASSETS

                                   Year Ended December 31,
                                 --------------------------
                                    2002          2001
                                 -----------  -------------
<S>                              <C>          <C>
  Cash and due from banks        $       421  $         221
                                 -----------  -------------

  Taxable securities             $     1,463  $       4,614
  Federal funds sold                     944          2,007
    Net loans                         11,741          1,941
                                 -----------  -------------
  Total interest-earning assets  $    14,148  $       8,262

  Other assets                         2,372            192
                                 -----------  -------------

    Total assets                 $    16,941  $       8,975
                                 ===========  =============
</TABLE>


                                        7
<PAGE>
<TABLE>
<CAPTION>
            AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

                                                Year Ended   December 31,
                                                -----------  -------------
                                                   2002          2001
                                                -----------  -------------
<S>                                             <C>          <C>
  Non-interest-bearing deposits                 $     1,733  $         592
  NOW and money market deposits                       2,278            798
  Savings deposits                                      153             42
  Time deposits                                       7,341            494
  Other borrowings                                       83          1,347
  Other liabilities                                      91             41
                                                -----------  -------------
    Total liabilities                           $    11,679  $       3,314

  Stockholders' equity                                5,262          5,661
                                                -----------  -------------
    Total liabilities and stockholders' equity  $    16,941  $       8,975
                                                ===========  =============
</TABLE>

     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)

<TABLE>
<CAPTION>
                            Year Ended December 31, 2002    Year Ended December 31, 2001
                          --------------------------------  -----------------------------
                           Interest    Average   Interest    Average
                           Average     Earned/    Yield/     Average    Earned/   Yield/
                            Amount      Paid       Rate      Amount      Paid      Rate
                          ----------  ---------  ---------  ---------  ---------  -------
<S>                       <C>         <C>        <C>        <C>        <C>        <C>
         Assets
         ------
  Taxable securities      $   1,463   $     68       4.65%  $  4,614   $    266     5.76%
  Federal funds sold            944         15       1.59%     2,007         47     2.34%
  Net loans                11,741(1)     981(2)      8.36%   1,941(1)     130(2)    6.70%
                          ----------  ---------  ---------  ---------  ---------  -------
  Total earning assets    $  14,148   $  1,064       7.52%  $  8,562   $    443     5.17%
                          ==========  =========  =========  =========  =========  -------

       Liabilities
       -----------
  NOW and
   money market deposits  $   2,278   $     45       1.98%  $    798   $     15     1.88%
  Savings deposits              153          1        .92%        42          1     2.38%
  Time deposits               7,341        279       3.80%       494         13     2.63%
  Other borrowings               83          1       1.57%     1,347         96     7.13%
                          ----------  ---------  ---------  ---------  ---------  -------
  Total interest-
   bearing liabilities    $   9,855   $    326       3.31%  $  2,681   $    125     4.66%
                          ==========  =========  =========  =========  =========  -------

  Net yield on
   earning assets                                    5.22%                          3.71%
                                                 =========                        =======
<FN>
______________________
1     At  December  31,  2002  and  2001,  all  loans  were  accruing  interest.
2     Interest  earned  on  net loans includes $100 and $14 in loan fees and loan service
      fees  for  the  years  ended  December  31,  2002  and  2001,  respectively.
</TABLE>


                                        8
<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)

<TABLE>
<CAPTION>
                                     Year Ended December 31, 2002
                                             Compared to
                                     Year Ended December 31, 2001
                                    ------------------------------

                                       Increase (Decrease) due to

                                       Volume       Rate    Total
                                    -------------  ------  -------
<S>                                 <C>            <C>     <C>
                                             (in thousands)

  Interest earned on:
    Taxable securities              $       (154)  $ (44)  $ (198)
    Federal funds sold                       (20)    (12)     (32)
    Net loans                                811      40      851
                                    -------------  ------  -------
      Total interest income         $        637   $ (16)  $  621
                                    -------------  ------  -------

  Interest paid on:
    NOW and money market deposits   $         29   $   1   $   30
    Savings deposits                           1      (1)       0
    Time deposits                            257       9      266
    Other borrowings                         (52)    (43)     (95)
                                    -------------  ------  -------
      Total interest expense        $        235   $ (34)  $  201
                                    -------------  ------  -------

  Change in net interest income     $        402   $  18   $  420
                                    =============  ======  =======
</TABLE>


                                        9
<PAGE>
<TABLE>
<CAPTION>
                                    Year Ended December 31, 2001
                                            Compared to
                                    Year Ended December 31, 2000
                                    ----------------------------
                                     Increase (Decrease) due to

                                       Volume      Rate   Total
                                    ------------  ------  ------
<S>                                 <C>           <C>     <C>
                                           (in thousands)
  Interest earned on:
    Taxable securities              $        266  $-  -   $  266
    Federal funds sold                        47   -  -       47
    Net loans                                130   -  -      130
                                    ------------  ------  ------
      Total interest income         $        443  $-  -   $  443
                                    ------------  ------  ------

  Interest paid on:
    NOW and money market deposits   $         15  $-  -   $   15
    Savings deposits                           1   -  -        1
    Time deposits                             13   -  -       13
    Other borrowings                          56     (4)      52
                                    ------------  ------  ------
      Total interest expense        $         85  $  (4)  $   81
                                    ------------  ------  ------

  Change in net interest income     $        358  $   4   $  362
                                    ============  ======  ======
</TABLE>

                              INVESTMENT PORTFOLIO

     As of December 31, 2002, investment securities comprised approximately 5.6%
of  the  Bank's assets and net loans comprised approximately 78.6% 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,  2002,  however,  the Bank was a net
purchaser  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, 2002 were categorized
as  available-for-sale.  ($  in  thousands)


                         December 31, 2002
                         -----------------
     U.S. Agencies          $   1,141
     FRB, FHLB stock              194
                            ---------
          Total             $   1,335
                            =========


                                       10
<PAGE>
     The  following  table  indicates  as  of  December  31,  2002 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:

<TABLE>
<CAPTION>
                                               Weighted
                                               Average
                                     Amount     Yield
                                    ---------  --------
<S>                                 <C>        <C>
Obligations of U.S. Agencies:
  0-1 year                          $    -  -      N/A
  Over 1 through 5 years                 -  -      N/A
  Over 5 through 10 years                -  -      N/A
  Over 10 years                         1,141     4.61%
  FRB and FHLB stock (no maturity)        194     5.93%
                                    ---------  --------
  Total                             $   1,335     4.80%
                                    =========  ========
</TABLE>

                                 LOAN PORTFOLIO

     The  Bank  engages  in  a  full complement of lending activities, including
commercial/industrial, consumer and real estate loans.  As of December 31, 2002,
the  Bank had a legal lending limit for unsecured loans of up to $765,000 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.

     Management  of  the Bank intends to originate loans and to participate with
other  banks  with  respect  to  loans  which  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  which  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


                                       11
<PAGE>
     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.


                                 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)

<TABLE>
<CAPTION>
                                                    As of December 31,
                                                 ------------  ----------
               Type of Loan                          2002         2001
               ------------                      ------------  ----------
<S>                                              <C>           <C>

  Domestic:
    Commercial, financial and agricultural       $     6,570   $   1,112
    Real estate - construction                           360         134
    Real estate - mortgage                            11,173       4,331
    Installment and other loans to individuals           991         776
                                                 ------------  ----------
      Subtotal                                   $    19,094   $   6,353
    Less:  Allowance for possible loan losses           (221)        (77)
                                                 ------------  ----------
      Total (net of allowance)                   $    18,873   $   6,276
                                                 ============  ==========
</TABLE>


                                       12
<PAGE>
       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,  2002:  ($  in  thousands)

<TABLE>
<CAPTION>
                              Due in   Due after    Due
                              1 year     1 to      after
       Type of Loan           or less   5 years   5 years  Total
       ------------           -------  ---------  -------  ------
<S>                           <C>      <C>        <C>      <C>
  Commercial, financial,
    and agricultural          $ 1,958  $   3,450  $ 1,162  $6,570
  Real estate - construction       67        293     -  -     360
                              -------  ---------  -------  ------
      Total                   $ 2,025  $   3,743  $ 1,162  $6,930
                              =======  =========  =======  ======
</TABLE>

                                  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, 2002:

<TABLE>
<CAPTION>
                               Due in   Due after    Due
                               1 year     1 to      after
        Type of Loan           or less   5 years   5 years  Total
        ------------           -------  ---------  -------  ------
<S>                            <C>      <C>        <C>      <C>
  Predetermined interest rate  $ 1,511  $   2,572  $ 1,060  $5,143
  Floating interest rate           514      1,171      102   1,787
                               -------  ---------  -------  ------
      Total                    $ 2,025  $   3,743  $ 1,162  $6,930
                               =======  =========  =======  ======
</TABLE>

     The  Bank  recorded  investment  in  impaired  loans  for  which a specific
allowance  was  recognized  was  $591,976  and $0 at December 31, 2002 and 2001,
respectively.  The  specific  allowance  associated with these loans was $29,600
and  $0  at  December  31,  2002  and  2001, respectively.  The average recorded
investment  in  impaired  loans  during  2002  and  2001  was  $316,411  and $0,
respectively.  Interest income recognized on impaired loans approximated $19,718
and  $0,  respectively,  for  the  years  ended  December 31, 2002 and 2001.  At
December  31,  2002  and  2001, all loans were accruing interest and none of the
loans  was  past  due  90  days  or  more.

     As  of  December 31, 2002, there were no loans not disclosed above that are
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.  There
are  no  loans not disclosed above where known information about possible credit
problems of borrowers causes management to have serious doubts as to the ability
of  such  borrowers  to  comply  with  the  present  loan  repayment  terms.

     Accrual  of  interest is discontinued on a loan when management of the Bank
determines  upon  consideration  of  economic  and  business  factors  affecting
collection  efforts  that  collection  of interest is doubtful.  At December 31,
2002,  all  loans  were  accruing  interest.


                                       13
<PAGE>
                         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
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    -----------------------------
               Type of Loan                             2002            2001
               ------------                         -------------  --------------
<S>                                                 <C>            <C>
  Balance at beginning of period                    $         77   $        -  -

  Charge-offs:
  Real estate loans                                         -  -            -  -
  Installment and other loans to individuals                -  -            -  -
  Commercial loans                                          -  -            -  -
  Recoveries                                                -  -            -  -
                                                    -------------  --------------
  Net charge-offs                                           -  -            -  -
                                                    -------------  --------------

  Additions charged to operations                            144              77
                                                    -------------  --------------
  Balance at end of period                          $        221   $          77
                                                    =============  ==============

  Ratio of net charge-offs during the period
    to average loans outstanding during the period             0%              0%
                                                    =============  ==============
</TABLE>

     At  December  31, 2002 and 2001, the allowance was allocated as follows: ($
in  thousands)

<TABLE>
<CAPTION>
                                                                Percent of              Percent of
                                                              loans in each            loans in each
                                                               category to              category to
                                                  Amount       total loans    Amount    total loans
                                              --------------  --------------  -------  ------------
<S>                                           <C>             <C>             <C>      <C>

  Commercial, financial and agricultural      $          102           34.4%  $    19         17.5%
  Real estate - construction                               6            1.9%        3          2.1%
  Real estate - mortgage                                  90           58.5%       39         68.2%
  Installment and other loans to individuals              11            5.2%       11         12.2%
  Unallocated                                             12            N/A         6          N/A
                                              --------------  --------------  -------  ------------
    Total                                     $          221          100.0%  $    77        100.0%
                                              ==============  ==============  =======  ============
</TABLE>

     In  considering  the  adequacy of the Company's allowance for possible loan
losses,  management  has focused on the fact that as of December 31, 2002, 34.4%
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, 94.0% of these commercial loans at
December  31,  2002  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.


                                       14
<PAGE>
     The  Company's  consumer  loan portfolio is also well secured.  At December
31,  2002,  89.3%  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  58.5%  of  outstanding loans at
December  31,  2002.  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 report is approved by the Board and management of the Bank.  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.


                                    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.


                                       15
<PAGE>
     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)

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                        ------------------------------------------
                                                2002                 2001
                                        --------------------  --------------------
                                        Average    Average    Average    Average
Deposit Category                         Amount   Rate Paid    Amount   Rate Paid
                                        --------  ----------  --------  ----------
<S>                                     <C>       <C>         <C>       <C>
  Non interest-bearing demand deposits  $  1,733        N/A   $    592        N/A
  NOW and money market deposits            2,278       1.98%       798       1.88%
  Savings deposits                           153        .92%        42       2.38%
  Time deposits                            7,341       3.80%       494       2.63%
</TABLE>

     The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities at December 31, 2002:  ($
in thousands)

<TABLE>
<CAPTION>
                                         At
                                    December 31,
      Time Certificates of Deposit      2002
      ----------------------------  -------------
<S>                                 <C>

      3 months or less              $         505
      3-6 months                              762
      6-12 months                             714
      Over 12 months                        1,100
                                    -------------
        Total                       $       3,081
                                    =============
</TABLE>

                           RETURN ON EQUITY AND ASSETS

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

<TABLE>
<CAPTION>
                                                  Year Ended
                                              December 31, 2002
                                              ------------------
<S>                                           <C>

      Return on average assets                       (1.4)%
      Return on average equity                       (4.5)%
      Average equity to average assets ratio          31.1%
  Dividend payout ratio                                -- %
</TABLE>

                              COMPANY SHARES PRICE

     There is no public market for the Company's shares of stock.  Management is
aware  of  very few trades during calendar years 2002 and 2001.  All trades that
management  is  aware  of  were  at  $10.00  per  share.


                                    DIVIDENDS

     The Company did not pay dividends during calendar years 2002 and 2001.


                                       16
<PAGE>
     The following are directors and officers of the Company:

<TABLE>
<CAPTION>
                                     DIRECTOR                 POSITION WITH THE COMPANY
        NAME (AGE)                    SINCE                    AND BUSINESS EXPERIENCE
-----------------------------------  --------  -------------------------------------------------------
<S>                                  <C>       <C>

CLASS I NOMINATED DIRECTORS:
(For Three-Year Term Expiring 2006)

William B. Gossett (59)                  1999  President and Chief Executive Officer of Islands
                                               Bancorp

Louis O. Dore (57)                       1999  Attorney, Louis O. Dore, P.A., Beaufort, South
                                               Carolina.

Martha B. Fender (57)                    1999  Vice President of Islands Bancorp; President and
                                               Owner of Coastal Carolina Realty, Inc.; Beaufort,
                                               South Carolina

D. Martin Goodman (56)                   1999  Chairman of the Board of Islands Bancorp; Area
                                               Manager of the University of South Carolina Small
                                               Business Development Center in Beaufort, South
                                               Carolina

Carl E. Lipscomb (65)                    2002  Vice President of Argus Corp. (custom home
                                               construction and home renovation)

Dr. Narayan Shenoy (64)                  2002  Anesthesiologist; Partner in Critical Health Systems,
                                               Inc., Columbia, South Carolina.

J. Frank Ward (56)                       1999  Realtor with Coastal Carolina Realty

Bruce K. Wyles (48)                      1999  Dentist, Beaufort, South Carolina

Daryl A. Ferguson (64)                   2002  Co-Chairman of Hungarian Telephone Company,
                                               Budapest, Hungary and Stamford, Connecticut

Stancel E. Kirkland, Sr. (62)            2002  Managing Member of Bull Point Plantation,
                                               Seabrook, South Carolina (developer of residential
                                               communities)

Paul M. Dunnavant, III (39)              1999  Treasurer of Islands Bancorp;  Chief Financial Officer
                                               of Holmes Timber, Inc. (timber acquisition and
                                               harvesting)

Edward J. McNeil, Jr. (48)               1999  Secretary of Islands Bancorp; Physician; Internal
                                               Medicine Healthcare, P.A. Beaufort, SC

Frances K. Nicholson (48)                1999  Managing Partner of Nicholson Investments LLC (real
                                               estate leasing and securities portfolio company);
</TABLE>

           COPIES OF FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2002

     Copies of the Company's Form 10-KSB for the year ended December 31, 2002,
can be obtained from the Securities and Exchange Commission's website at
www.sec.gov.  In addition, copies can be obtained from the Bank; please call Ms.
Patsy Masters at 841-521-1968.


                                       17
<PAGE>



                        Report of Independent Accountants
                        ---------------------------------


Board of Directors and Shareholders
Islands Bancorp
Beaufort, South Carolina

     We  have  audited  the  accompanying consolidated balance sheets of Islands
Bancorp,  (the  "Company"), and subsidiary as of December 31, 2002 and 2001, and
the  related  consolidated  statements  of  operations, changes in shareholders'
equity  and  cash flows for each of the three years in the period ended December
31, 2002.  These consolidated financial statements are the responsibility of the
Company's  management.  Our  responsibility  is  to  express an opinion on these
consolidated  financial  statements  based  on  our  audits.

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

     In  our  opinion,  the  consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Islands  Bancorp,  and  subsidiary  at  December  31,  2002  and  2001,  and the
consolidated  results  of  their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles  generally  accepted  in  the  United  States.



/s/  FRANCIS  &  CO.,  CPAs
Atlanta,  Georgia
March  10,  2003



                                       18
<PAGE>
<TABLE>
<CAPTION>

                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
                                     ------
                                                    As of December 31,
                                                -------------------------
                                                    2002         2001
                                                ------------  -----------
<S>                                             <C>           <C>
Cash and due from banks                         $   394,484   $  209,139
Federal funds sold, net                                -  -      255,000
                                                ------------  -----------
  Total cash and cash equivalents               $   394,484   $  464,139
Securities:
 Available-for-sale at fair value                 1,334,763    1,288,942
Loans, net                                       18,872,582    6,276,469
Property and equipment, net                       2,858,610    1,533,326
Other assets                                        559,591      400,578
                                                ------------  -----------
  Total Assets                                  $24,020,030   $9,963,454
                                                ============  ===========

                    LIABILITIES AND SHAREHOLDERS' EQUITY
                    ------------------------------------

Liabilities:
------------
 Deposits
  Non-interest bearing deposits                 $ 1,563,515   $  837,439
  Interest bearing deposits                      16,926,102    2,695,873
                                                ------------  -----------
       Total deposits                           $18,489,617   $3,533,312
Federal funds purchased                             308,000    1,000,000
Other liabilities                                    88,529       66,168
                                                ------------  -----------
  Total Liabilities                             $18,886,146   $4,599,480
                                                ------------  -----------

Commitments and Contingencies
-----------------------------

Shareholders' Equity:
---------------------
Common stock, zero par value, 10,000,000
 shares authorized; 652,705 shares issued
 and outstanding                                $ 6,213,061   $6,213,061
Retained (deficit)                               (1,086,429)    (848,572)
Accumulated other comprehensive income                7,252         (515)
                                                ------------  -----------
   Total Shareholders' Equity                   $ 5,133,884   $5,363,974
                                                ------------  -----------
   Total Liabilities and Shareholders' Equity   $24,020,030   $9,963,454
                                                ============  ===========
<FN>

            Refer to notes to the consolidated financial statements.
</TABLE>


                                       19
<PAGE>
<TABLE>
<CAPTION>
                                   ISLANDS BANCORP
                              BEAUFORT, SOUTH CAROLINA
                        CONSOLIDATED STATEMENTS OF OPERATIONS


                                                   For the Years Ended December 31,
                                                 -----------------------------------
Interest Income:                                    2002         2001        2000
----------------                                 -----------  ----------  ----------
<S>                                              <C>          <C>         <C>

 Interest and fees on loans                      $  981,216   $ 129,811   $    -  -
 Interest on investment securities                   68,450     266,363        -  -
 Interest on federal funds sold                      14,627      46,772        -  -
                                                 -----------  ----------  ----------
    Total interest income                        $1,064,293   $ 442,946   $    -  -

Interest Expense:
-----------------
 Interest on deposits and borrowings                325,888     124,654      44,159
                                                 -----------  ----------  ----------
Net interest income                              $  738,405   $ 318,292   $ (44,159)
Provision for possible loan losses                  144,374      76,850        -  -
                                                 -----------  ----------  ----------
Net interest income after provision for
  possible loan losses                           $  594,031   $ 241,442   $ (44,159)
                                                 -----------  ----------  ----------

Other Income:
-------------
 Service fees on deposit accounts                $   87,348   $  21,978   $    -  -
 Miscellaneous, other                                 2,349         671        -  -
                                                 -----------  ----------  ----------
     Total other income                          $   89,697   $  22,649   $    -  -
                                                 -----------  ----------  ----------

Other Expenses:
---------------
  Salaries and benefits                          $  579,046   $ 460,562   $ 178,639
  Data processing and ATM                           136,599      42,512        -  -
  Advertising and public relations                   45,500      41,178        -  -
  Depreciation                                       69,828      28,606       9,340
  Professional fees                                  49,800      44,202      13,205
  Rent expense                                       42,750      50,260      14,798
  Other operating expenses                          142,656     133,729      52,724
                                                 -----------  ----------  ----------
     Total other expenses                        $1,066,179   $ 801,049   $ 268,706
                                                 -----------  ----------  ----------

Loss before income tax (benefit)                 $ (382,451)  $(536,958)  $(312,865)
Income tax (benefit)                               (144,594)   (175,506)       -  -
                                                 -----------  ----------  ----------

Net (loss)                                       $ (237,857)  $(361,452)  $(312,865)
                                                 ===========  ==========  ----------

Basic (loss) per share                           $     (.36)  $    (.66)  $     N.A
                                                 ===========  ==========  ==========
Diluted (loss) per share                         $     (.36)  $    (.66)  $     N.A.
                                                 ===========  ==========  ==========

Weighted average number of shares outstanding:
Basic                                               652,705     543,926         N.A.
                                                 ===========  ==========  ==========
Diluted                                             652,705     543,926         N.A.
                                                 ===========  ==========  ==========
<FN>


              Refer to notes to the consolidated financial statements.
</TABLE>


                                       20
<PAGE>
<TABLE>
<CAPTION>
                                            ISLANDS BANCORP
                                        BEAUFORT, SOUTH CAROLINA
                       CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                         FOR THE YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002


                                        Common Stock                         Accumulated
                                  -------------------------                     Other
                                     No. of       Common       Retained     Comprehensive
                                     Shares        Stock      (Deficit)        (Loss)          Total
                                  ------------  -----------  ------------  ---------------  -----------
<S>                               <C>           <C>          <C>           <C>              <C>

Balance, December 31, 1999                 550  $    5,500   $  (174,255)  $         -  -   $ (168,755)
                                  ------------  -----------  ------------  ---------------  -----------

Comprehensive income:
 Net loss, 2000                           -  -        -  -      (312,865)            -  -     (312,865)
                                  ------------  -----------  ------------  ---------------  -----------
 Total comprehensive income               -  -        -  -      (312,865)            -  -     (312,865)
                                  ------------  -----------  ------------  ---------------  -----------

Balance, December 31, 2000                 550  $    5,500   $  (487,120)  $         -  -   $ (481,620)
                                  ------------  -----------  ------------  ---------------  -----------

Comprehensive income:
 Net loss, 2001                           -  -        -  -      (361,452)            -  -     (361,452)
 Net unrealized loss, securities          -  -        -  -          -  -             (515)        (515)
                                  ------------  -----------  ------------  ---------------  -----------
Total comprehensive income                -  -        -  -      (361,452)            (515)    (361,967)

Sale of common stock                   652,155   6,521,550          -  -             -  -    6,521,550

Selling expenses                          -  -    (313,989)         -  -             -  -     (313,989)
                                  ------------  -----------  ------------  ---------------  -----------

Balance, December 31, 2001             652,705  $6,213,061   $  (848,572)  $         (515)  $5,363,974
                                  ------------  -----------  ------------  ---------------  -----------

Comprehensive income:
 Net loss, 2002                           -  -        -  -      (237,857)            -  -     (237,857)
 Net unrealized gain, securities          -  -        -  -          -  -            7,767        7,767
                                  ------------  -----------  ------------  ---------------  -----------
Total comprehensive income                -  -        -  -      (237,857)           7,767     (230,090)
                                  ------------  -----------  ------------  ---------------  -----------

Balance, December 31, 2002             652,705  $6,213,061   $(1,086,429)  $        7,252   $5,133,884
                                  ============  ===========  ============  ===============  ===========

<FN>
                        Refer to notes to the consolidated financial statements.
</TABLE>


                                       21
<PAGE>
<TABLE>
<CAPTION>

                                    ISLANDS BANCORP
                               BEAUFORT, SOUTH CAROLINA
                         CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                  For the Years Ended December 31,
                                              ----------------------------------------
Cash flows from operating activities:             2002           2001         2000
-------------------------------------         -------------  ------------  -----------
<S>                                           <C>            <C>           <C>

  Net loss                                    $   (237,857)  $  (361,452)  $ (312,865)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Provision for possible loan losses           144,374   $    76,850   $     -  -
      Depreciation                                  69,828        28,606        9,340
      Net amortization on securities                   181         4,470         -  -
  (Increase) in receivables and other assets      (159,013)     (102,203)    (251,032)
  Increase in payables and other liabilities        22,361        49,684       (5,123)
                                              -------------  ------------  -----------
Net cash used in operating activities         $   (160,126)  $  (304,045)  $ (559,680)
                                              -------------  ------------  -----------

Cash flows from investing activities:
-------------------------------------
   Principal reduction, securities, AFS       $    501,098   $      -  -   $     -  -
   Purchase of securities, AFS                    (539,333)   (1,293,927)        -  -
   (Increase) in loans, net                    (12,740,487)   (6,353,319)        -  -
   Purchase of property and equipment           (1,395,112)     (993,819)    (548,623)
                                              -------------  ------------  -----------
Net cash used in investing activities         $(14,173,834)  $(8,641,065)  $ (548,623)
                                              -------------  ------------  -----------

Cash flows from financing activities:
-------------------------------------
   Issuance of common stock, net              $       -  -   $ 6,207,561   $     -  -
   Increase in deposits                         14,956,305     3,533,312         -  -
   (Decrease) in borrowed funds                   (692,000)     (371,856)   1,124,474
                                              -------------  ------------  -----------
Net cash provided by financing activities     $ 14,264,305   $ 9,369,017   $1,124,474
                                              -------------  ------------  -----------

Net (decrease) in cash and cash equivalents   $    (69,655)  $   423,907   $   16,171
Cash and cash equivalents, beginning of year       464,139        40,232       24,061
                                              -------------  ------------  -----------
Cash and cash equivalents, end of year        $    394,484   $   464,139   $   40,232
                                              =============  ============  ===========

SUPPLEMENTAL INFORMATION:

Income taxes paid                             $       -  -   $      -  -   $     -  -
                                              =============  ============  ===========

Interest paid                                 $    306,260   $   123,310   $   38,443
                                              =============  ============  ===========
<FN>
Refer to notes to the consolidated financial statements.
</TABLE>


                                       22
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE 1 - ORGANIZATION OF THE BUSINESS

     Islands  Bancorp (the "Company") is a one bank holding company with respect
to  Islands  Community  Bank, N.A., Beaufort, South Carolina, (the "Bank").  The
Company was incorporated on July 23, 1999, and principal operations commenced on
July  9,  2001,  when  the  Bank  opened  for business.  The Bank engages in the
business  of  obtaining  deposits  and  providing  commercial, consumer and real
estate  loans  to  the  general  public.

     The  Company  is  authorized to issue up to 10.0 million shares of its zero
par  value per share common stock. In the public offering which was completed in
early  2001,  652,155 shares of the Company's common stock were sold and issued.
Proceeds  from  the  offering,  net of selling expenses, amounted to $6,207,561.

     The  Company  is  also  authorized  to issue of up to 2.0 million shares of
preferred stock. The Company's Board of Directors may, without further action by
the  shareholders,  direct  the  issuance  of  preferred  stock  for  any proper
corporate  purpose  with  preferences,  voting  powers,  conversion  rights,
qualifications,  special or relative rights and privileges which could adversely
affect  the  voting power or other rights of shareholders of common stock. As of
December  31, 2002, there were no shares of the Company's preferred stock issued
or  outstanding.

     The  Company's  Articles  of  Incorporation  and  Bylaws  contain  certain
provisions  that  might  be  deemed  to have potential defensive "anti takeover"
effects.  These  certain provisions include: (i) provisions relating to meetings
of shareholders which limit who may call meetings and what matters will be voted
upon;  (ii)  the ability of the Board of Directors to issue additional shares of
authorized  preferred  stock  without  shareholder  approval, thus retaining the
ability  to  dilute  any  potential  acquirer  attempting  to  gain  control  by
purchasing  Company  stock;  (iii)  a staggered Board of Directors, limiting the
ability  to  change  the  members  of  the  Board in a timely manner, and (iv) a
provision  that  requires  two-thirds of the shareholders to approve mergers and
similar  transactions,  and  amendments  to  the  articles  of  incorporation.

     The  Company  ceased  to be a development stage enterprise on July 9, 2001,
when  the  Bank  commenced  operations.


                                       23
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE  2  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

     Basis  of  Presentation  and  Reclassification.  The consolidated financial
     -----------------------------------------------
statements  include  the  accounts  of  the  Company  and  its  subsidiary.  All
significant  intercompany  accounts  and  transactions  have  been eliminated in
consolidation.  Certain  prior  years' amounts have been reclassified to conform
to  the  current year presentation.  Such reclassifications had no impact on net
loss  or  shareholders'  equity.

     Basis  of Accounting.  The accounting and reporting policies of the Company
     ---------------------
conform  to generally accepted accounting principles and to general practices in
the  banking  industry.  In  preparing  the  financial statements, management is
required  to  make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and income and
expenses  during  the  reporting  periods.  Actual  results  could  differ
significantly  from  those  estimates.  Material estimates that are particularly
susceptible  to  significant change in the near term relate to the determination
of  the  allowance  for loan losses and the valuation of real estate acquired in
connection  with  foreclosure  proceedings.

     Cash  and Due from Banks.  The Company maintains deposit relationships with
     -------------------------
other  banks  which  deposits  amounts,  at  times, may exceed federally insured
limits.  The  Company  has not experienced any material losses from such deposit
relationships.

     Investment  Securities.  Investment  securities  that  the  Company has the
     -----------------------
positive  intent  and  ability  to  hold  to  maturity  are  classified  as
held-to-maturity and are reported at amortized cost.  Investment securities held
for current resale are classified as trading securities and are reported at fair
value,  with  unrealized  gains  and  losses  included  in earnings.  Investment
securities  not  classified  either  as  securities  held-to-maturity or trading
securities  are  classified  as  available-for-sale.  Generally,  in  the
available-for-sale  category  are  securities  that  are held to meet investment
objectives  such as interest rate risk, liquidity management and asset-liability
management  strategies among others.  Available-for-sale securities are reported
at  fair  market with unrealized holding gains and losses reported in a separate
component  of accumulated other comprehensive income, net of applicable deferred
income  taxes.  The classification of investment securities as held-to-maturity,
trading  or  available-for-sale  is  determined  at  the  date  of  purchase.

     Realized  gains  and  losses  from  sales  of  investment  securities  are
determined based upon the specific identification method. Premiums and discounts
are  recognized  in interest income using the level-yield method over the period
to  maturity.

     Management  periodically  evaluates  investment  securities  for other than
temporary declines in value and records losses, if any, through an adjustment to
earnings.


                                       24
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     Loans,  Interest  and  Fee  Income  on  Loans.  Loans are reported at their
     ----------------------------------------------
outstanding  principal  balance  adjusted  for  charge-off,  unearned  discount,
unamortized  loan  fees  and  the  allowance for possible loan losses.  Interest
income  is  recognized  over  the term of the loan based on the principal amount
outstanding.  Non-refundable  loan fees are taken into income to the extent they
represent  the  direct cost of initiating a loan; the amount in excess of direct
costs  is  deferred  and  amortized  over  the  expected  life  of  the  loan.

     Accrual  of  interest  on  loans is discontinued either when (i) reasonable
doubt  exists  as  to  the full or timely collection of interest or principal or
when  (ii) a loan becomes contractually past due by 90 days or more with respect
to  interest  or  principal.  When  a  loan is placed on non-accrual status, all
interest previously accrued but not collected is reversed against current period
interest  income,  and  the  loan  is accounted for on the cash or cost recovery
method.  Loans  are returned to accruing status only when they are brought fully
current  with  respect  to  interest  and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal
and  interest.

     Impaired  loans are loans that based upon current information, it is deemed
probable that the Company will be unable to collect all amounts due according to
the  contractual  terms of the agreement. Impaired loans may include accruing as
well  as  non-accruing  loans. Accounting standards require impaired loans to be
measured  based  on:  (a)  the  present  value  of  expected  future  cash flows
discounted  at  the  loan's  original effective interest rate; or (b) the loan's
observable  market price; or (c) the fair value of the collateral if the loan is
collateral  dependent.

     Allowance  for  Possible  Loan  Losses.   The  allowance  for possible loan
     ---------------------------------------
losses  (the  "Allowance")  represents  management's estimate of probable losses
inherent in the loan portfolio.  The Allowance is established through provisions
charged to operations.  Loans deemed to be uncollectible are charged against the
Allowance,  and  subsequent  recoveries,  if any, are credited to the Allowance.
The  adequacy  of  the Allowance is based on management's evaluation of the loan
portfolio under current economic conditions, past loan loss experience, adequacy
of  underlying  collateral,  changes  in  the  nature  and  volume  of  the loan
portfolio,  review  of  specific problem loans, and such other factors which, in
management's  judgment,  deserve  recognition  in  estimating  loan losses.  The
evaluation  for  the  adequacy  of  the Allowance is inherently subjective as it
requires  material  estimates,  including  the amounts and timing of future cash
flows  expected  to  be  received  on  impaired loans that may be susceptible to
significant  change.  Various  regulatory agencies, as an integral part of their
examination process, periodically review the Company's Allowance.  Such agencies
may  require  the Company to recognize additions to the Allowance based on their
judgments  about information available to them at the time of their examination.


                                       25
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     Property  and  Equipment.  Building, furniture, and equipment are stated at
     -------------------------
cost,  net  of accumulated depreciation.  Land is carried at cost.  Depreciation
is  computed  using  the straight line method over the estimated useful lives of
the  related  assets.  Maintenance  and repairs are charged to operations, while
major  improvements are capitalized.  Upon retirement, sale or other disposition
of  property and equipment, the cost and accumulated depreciation are eliminated
from  the accounts, and gain or loss is included in operations.  The Company had
no  capitalized  lease  obligations  at  December  31,  2002  and  2001.

     Other  Real  Estate.  Other real estate represents property acquired by the
     --------------------
Company in satisfaction of a loan. Other real estate is carried at the lower of:
(i)  cost;  or  (ii)  fair  value  less  estimated  selling costs. Fair value is
determined  on  the  basis  of  current  appraisals,  comparable sales and other
estimates  of value obtained principally from independent sources. Any excess of
the  loan  balance  at  the  time of foreclosure over the fair value of the real
estate  held  as  collateral  is  treated as a loan loss and charged against the
allowance  for  loan  losses.  Gain  or loss on the sale of the property and any
subsequent  adjustments  to  reflect  changes  in fair value of the property are
reflected in the income statement. Recoverable costs relating to the development
and  improvement  of  the property are capitalized whereas routine holding costs
are  charged  to  expense.

     Income  Taxes.  Deferred  income  taxes  (included  in  other  assets)  are
     --------------
provided  for  temporary  differences  between  the  tax  basis  of  an asset or
liability  and  its reported amount in the financial statements at the statutory
tax  rate.  The  components  of  other  comprehensive  income  included  in  the
consolidated  statements of shareholders' equity have been computed based upon a
34%  effective  tax  rate.

     Cash  and Cash Equivalents.  For purposes of reporting cash flows, cash and
     ---------------------------
cash  equivalents include cash on hand, amounts due from banks and federal funds
sold.  Generally,  federal funds are purchased or sold for one day periods.  The
cash  equivalents  are  readily convertible to known amounts of cash and present
insignificant risk of changes in value due to maturity dates of 90 days or less.

     Operating  Segments.  The  Company's  business  activities  are  currently
     --------------------
confined  to  one  segment  which  is community banking.  As a community banking
entity,  the  Company offers its customers a full range of products and services
through  various  delivery  channels.

     Income/(Loss)  Per  Share.  Basic  income/(loss) per share is determined by
     --------------------------
dividing  net  income/(loss)  by  the  weighted-average  number of common shares
outstanding.  Diluted  income/(loss)  per  share  is  determined by dividing net
income/(loss)  by  the  weighted  average  number  of  common shares outstanding
increased  by  the  number  of  common  shares that would be issued assuming the
exercise  of  stock  options  and  warrants.  This  also  assumes  that  only


                                       26
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


options/warrants  with an exercise price below the existing market price will be
exercised.  In  computing  net  income/(loss)  per  share,  the Company uses the
treasury  stock  method.

     Stock-Based  Compensation.  The  Company  has  elected to follow Accounting
     --------------------------
Principles  Board  Opinion  No.  25,  "Accounting for Stock Issued to Employees"
("APB  No.  25"),  and  related  interpretations, in accounting for its employee
stock  options rather than the alternative fair value accounting allowed by SFAS
No.  123,  "Accounting  for Stock-Based Compensation."  APB No. 25 provides that
the  compensation  expense  relative  to the Company's employee stock options is
measured  based  on  the  intrinsic  value  of  the  stock option.  SFAS No. 123
requires  companies  that  continue  to follow APB No. 25 to provide a pro-forma
disclosure  of  the  impact  of  applying the fair value method of SFAS No. 123.

     The  following  is  a  reconciliation  of  reported  and  pro-forma  net
income/(loss)  and  net  income/(loss)  per  share  for  the  periods  below:

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                            ----------------------------
                                                2002           2001
                                            ------------  --------------
<S>                                         <C>           <C>
  Net income/(loss), as reported            $  (237,857)  $    (361,452)
  Stock-based compensation expense               58,392          52,261
                                            ------------  --------------
  Pro-forma (fair value) net income/(loss)  $  (296,249)  $    (413,713)
                                            ============  ==============

  Basic income/(loss) per share:
  As reported                               $      (.36)  $        (.66)
                                            ============  ==============
  Pro-forma                                 $      (.45)  $        (.76)
                                            ============  ==============

  Diluted income/(loss) per share:
  As reported                               $      (.36)  $        (.66)
                                            ============  ==============
  Pro-forma                                 $      (.45)  $        (.79)
                                            ============  ==============

  Pro-forma value of warrant/option         $      3.25   $        3.77
                                            ============  ==============
</TABLE>


     The  pro-forma  (fair  value)  was estimated at the date of grant using the
Black-Scholes  option  pricing  model  ("BLSC  Model").  BLSC Model requires the
input  of  highly  subjective  assumptions,  including  the expected stock price
volatility,  and  risk-free  interest  rates.  Since  changes  in the subjective
assumptions  can  materially  affect  the  fair  value estimate, in management's
opinion,  existing  models (such as the BLSC Model) do not necessarily provide a
reliable single measure of the fair value of the Company's options and warrants.


                                       27
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     Below  are details concerning the input assumptions utilized in conjunction
with  BLSC  Model  to  produce  the  estimates  for  pro-forma  (fair  value)
income/(loss)  for  the  periods  below.

<TABLE>
<CAPTION>
                                    Year Ended December 31,
                                   -------------------------
                                      2002          2001
                                   -----------  ------------
<S>                                <C>          <C>
  Risk-free interest rate                3.93%         4.73%
  Dividend yield
  Volatility factor                       1.6%          0.0%
  Weighted average life of option      10 yrs        10 yrs
</TABLE>

     Recent Accounting Pronouncements.  In December 2001, the American Institute
     ---------------------------------
of  Certified  Public  Accountants  issued  Statement  of Position ("SOP") 01-6,
"Accounting by Certain Entities (Including Entities With Trade Receivables) That
Lend  to  or  Finance  the  Activities  of  Others."  SOP  01-6  reconciles  the
specialized  accounting  and  financial reporting guidance in the existing Banks
and  Savings  Institutions  Guide,  Audits of Credit Unions Guide, and Audits of
Finance  Companies  Guide.  The  SOP  eliminates  differences  in accounting and
disclosure  established  by the respective guides and carries forward accounting
guidance  for  transactions  determined  to  be  unique  to  certain  financial
institutions.  Adoption  of  this pronouncement has not had a material impact on
the  Company's  results  of  operations  or  financial  position.

     In  October  2002, the Financial Accounting Standards Board ("FASB") issued
SFAS  No. 147, "Acquisitions of Certain Financial Institutions," which addresses
accounting  for  the  acquisition  of  certain  financial  institutions.  The
provisions  of  SFAS  No.  147  rescind  the  specialized accounting guidance in
paragraph 5 of SFAS No. 72 and would require unidentifiable intangible assets to
be reclassified to goodwill if certain criteria are met.  Financial institutions
meeting  the  conditions  outlined  in  SFAS No. 147 will be required to restate
previously  issued  financial statements after September 30, 2002.  The adoption
of  SFAS  No.  147  has  had  no  material  impact  on  the Company's results of
operations  or  financial  position.

     In  December  2002,  FASB  issued SFAS No. 148, "Accounting for Stock-Based
Compensation  -  Transition  and  Disclosure,"  which  amended  SFAS  No.  123,
"Accounting  for  Stock-Based  Compensation"  to  provide alternative methods of
transition  for  a voluntary change to the fair value based method of accounting
for  stock-based  compensation.  In  addition,  this  statement  amended  the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual  and  interim  financial  statements  about  the method of accounting for
stock-based  employee  compensation  and  the  effect  of  the  chosen method on
reporting  results.  The  provisions  of  SFAS  No. 148 are effective for annual
periods  ending  December  15,  2002,  and  for  interim periods beginning after
December  15,  2002.


                                       28
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     In  November  2002,  FASB  issued  Interpretation  No.  45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of  Others."  It  addresses the accounting for the
stand-ready obligation under guarantees.  A guarantor is required to recognize a
liability with respect to its stand-ready obligation under the guarantee even if
the  probability  of future payments under the guarantee is remote.  The initial
liability  will  be  measured  as  the fair value of the stand-ready obligation.
Additionally,  the  Interpretation  addresses  the  disclosure  requirements for
guarantees  including  the nature and terms of the guarantees, maximum potential
for  future  amounts and the carrying amount of the liabilities.  The disclosure
requirements  are  effective  for interim and annual financial statements ending
after December 15, 2002.  The initial recognition and measurement provisions are
effective  for  all  guarantees  within the scope of Interpretation 45 issued or
modified  after  December 31, 2002.  Commercial letters of credit and other loan
commitments,  which  are  commonly  thought  of  as guarantees of funds were not
included  in  the  scope  of  interpretation.  The  Company  has  made  relevant
disclosures  in  the  current  year  financial statements.  The Company does not
expect  the  adoption  of Interpretation No. 45 to have a material impact on its
financials.


NOTE  3  -  FEDERAL  FUNDS  SOLD/PURCHASED

       The Bank is required to maintain legal cash reserves computed by applying
prescribed  percentages  to its various types of deposits.  When the Bank's cash
reserves  are  in excess of the required amount, the Bank may lend the excess to
other banks on a daily basis.  At December 31, 2002 and 2001, the Bank was a net
purchaser  in  the  federal  funds  market.  Below  is  pertinent  information:

<TABLE>
<CAPTION>
                                     December  31,
                                ------------------------
                                   2002         2001
                                ----------  ------------
<S>                             <C>         <C>
  Federal funds sold            $    -  -   $   255,000
  Federal funds purchased        (308,000)   (1,000,000)
                                ----------  ------------
  Federal funds purchased, net  $(308,000)  $  (745,000)
                                ==========  ============
</TABLE>


                                       29
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE 4 - SECURITIES AVAILABLE-FOR-SALE

     The amortized costs and estimated market values of securities
available-for-sale as of December 31, 2002 follow:

<TABLE>
<CAPTION>
                                            Gross
                                         Unrealized
                       Amortized  ------------------------    Estimated
Description             Costs        Gains        Losses    Market Values
--------------------  ----------  ------------  ----------  --------------
<S>                   <C>         <C>           <C>         <C>
U.S. Agency pool      $1,129,474  $     10,989  $     -  -  $    1,140,463
Other securities         194,300          -  -        -  -         194,300
                      ----------  ------------  ----------  --------------
    Total securities  $1,323,774  $     10,989  $     -  -  $    1,334,763
                      ==========  ============  ==========  ==============
</TABLE>


     Other  securities  include FRB and FHLB stock. Since no ready market exists
for  these  securities,  FRB  and  FHLB  stock  are  reported  at  cost.

     The  amortized  costs  and  estimated  market  values  of  securities
available-for-sale  as  of  December  31,  2001  follow:

<TABLE>
<CAPTION>
                                            Gross
                                         Unrealized
                       Amortized  ------------------------    Estimated
Description             Costs        Gains        Losses    Market Values
--------------------  ----------  ------------  ----------  --------------
<S>                   <C>         <C>          <C>          <C>
U.S. Agency pool      $1,109,721  $      -  -  $     (779)  $    1,108,942
FRB stock                180,000         -  -        -  -          180,000
                      ----------  -----------  -----------  --------------
  Total securities    $1,289,721  $      -  -  $     (779)  $    1,288,942
                      ==========  ===========  ===========  ==============
</TABLE>

     The  amortized  costs  and  estimated  market  values  of  securities
available-for-sale  at  December 31, 2002, by contractual maturity, are shown in
the following chart.  Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call  or  prepayment  penalties.

<TABLE>
<CAPTION>
                                  Amortized     Estimated
                                    Costs     Market Values
                                  ----------  --------------
<S>                               <C>         <C>
  Due in ten years or more        $1,129,474  $    1,140,463
  FRB & FHLB stock (no maturity)     194,300         194,300
                                  ----------  --------------
    Total securities              $1,323,774  $    1,334,763
                                  ==========  ==============
</TABLE>

     No  securities  were  sold  by  the Company in either calendar year 2002 or
2001,  and  none of the securities was pledged as of December 31, 2002 and 2001.



                                       30
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE  5  -  LOANS

     The  composition  of  net  loans by major loan category, as of December 31,
2002  and  2001,  follows:

<TABLE>
<CAPTION>
                                            December  31,
                                     -------------------------
                                         2002          2001
                                     -----------  ------------
<S>                                  <C>           <C>
Commercial, financial, agricultural  $ 6,569,562   $1,111,807
Real estate - construction               360,245      134,389
Real estate - mortgage                11,172,747    4,331,284
Installment                              991,252      775,839
                                     ------------  -----------
Loans, gross                         $19,093,806   $6,353,319
Deduct:
 Allowance for loan losses              (221,224)     (76,850)
                                     ------------  -----------
    Loans, net                       $18,872,582   $6,276,469
                                     ============  ===========
</TABLE>

     The  Bank  recorded  investment  in  impaired  loans  for  which a specific
allowance  was  recognized  was  $591,976  and $0 at December 31, 2002 and 2001,
respectively.  The  specific  allowance  associated with these loans was $29,600
and  $0  at  December  31,  2002  and  2001, respectively.  The average recorded
investment  in  impaired  loans  during  2002  and  2001  was  $316,411  and $0,
respectively.  Interest income recognized on impaired loans approximated $19,718
and  $0,  respectively,  for  the  years  ended  December 31, 2002 and 2001.  At
December  31,  2002  and  2001, all loans were accruing interest and none of the
loans  was  past  due  90  days  or  more.


NOTE  6  -  ALLOWANCE  FOR  POSSIBLE  LOAN  LOSSES

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

     Individual consumer loans are predominantly undersecured, and the allowance
for  possible  losses  associated  with  these  loans  has  been  established
accordingly.  The  majority  of  the  non-consumer loan categories are generally
secured  by  real-estate,  receivables,  inventory,  machinery,  equipment,  or
financial  instruments.  The  amount  of  collateral  obtained  is  based  upon
management's  evaluation  of  the  borrower.


                                       31
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     Activity  within  the  Allowance  account  for the years ended December 31,
2002,  2001,  and  2000  follows:


<TABLE>
<CAPTION>
                                        Years ended December 31,
                                        ------------------------
                                          2002     2001    2000
                                        --------  -------  -----
<S>                                     <C>       <C>      <C>
Balance, beginning of year              $ 76,850  $  -  -  $-  -
Add:  Provision for loan losses          144,374   76,850   -  -
Add:  Recoveries of previously charged
         off amounts                        -  -     -  -   -  -
                                        --------  -------  -----
   Total                                $221,224  $76,850  $-  -
Deduct: Amount charged-off                  -  -     -  -   -  -
                                        --------  -------  -----
Balance, end of year                    $221,224  $76,850  $   0
                                        ========  =======  =====
</TABLE>

NOTE 7 - PROPERTY AND EQUIPMENT

     Components  of  property and equipment included in the consolidated balance
sheets  at  December  31,  2002  and  2001  follow:

<TABLE>
<CAPTION>
                                         December  31,
                                   ------------------------
                                      2002         2001
                                   -----------  -----------
<S>                                <C>          <C>
  Land                             $  750,614   $  750,614
  Building                          1,662,411      461,609
  Furniture, equipment                557,768      303,959
  Construction in progress                - -       59,499
                                   -----------  -----------
   Property and equipment, gross   $2,970,793   $1,575,681
  Deduct:
   Accumulated depreciation          (112,183)     (42,355)
                                   -----------  -----------
      Property and equipment, net  $2,858,610   $1,533,326
                                   ===========  ===========
</TABLE>

     Depreciation  expense  for the years ended December 31, 2002, 2001 and 2000
amounted  to $69,828, $28,606 and $9,340, respectively.  Depreciation is charged
to  operations  over  the  estimated  useful lives of the assets.  The estimated
useful  lives  and  methods  of  depreciation  for  the  principal items follow:

  Type of Asset            Life in Years  Depreciation Method
  -----------------------  -------------  -------------------
  Furniture and equipment      3 to 7        Straight-line
  Building                     5 o 40        Straight-line


                                       32
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE  8  -  COMMITMENTS  AND  CONTINGENCIES

     In the normal course of business, there are various outstanding commitments
to  extend  credit in the form of unused loan commitments and standby letters of
credit  that  are not reflected in the consolidated financial statements.  Since
commitments may expire without being exercised, these amounts do not necessarily
represent  future  funding  requirements.  The  Company uses the same credit and
collateral  policies  in  making  commitments  as those it uses in making loans.

     At  December  31, 2002 and 2001, the Company had unused loan commitments of
approximately  $2,103,992  and  $594,459,  respectively.  Additionally,  standby
letters  of  credit  of  approximately  $80,162 and $134,462 were outstanding at
December  31,  2002  and  2001, respectively.  The majority of these commitments
are  collateralized  by various assets.  No material losses are anticipated as a
result  of  these  transactions.

     The  Company  and  its  subsidiary are subject to claims and lawsuits which
arise  primarily  in  the  ordinary  course  of  business.  It is the opinion of
management  that  the  disposition  or  ultimate  resolution  of such claims and
lawsuits  will  not have a material adverse effect on the consolidated financial
position of the Company and its subsidiary.  At December 31, 2002 and 2001 there
were  no  claims  or  lawsuits  against  the  Company  or  the  Bank.

     On July 27, 1999, the Company entered into a five-year employment agreement
(the  "Agreement")  with its President and CEO (the "CEO").  In exchange for his
services,  the  CEO  will  receive an annual pay and possibly a bonus if certain
criteria  are  met.  The Agreement provides for other customary benefits such as
health  and  life  insurance, retirement benefits, club dues, etc.  If the CEO's
employment  is  terminated  by  the Company/Bank without cause or for any reason
following  a  change  in  control  of the Company, the CEO will be entitled to a
severance  payment  equal  to  two-times  his annual pay plus any accrued bonus.

     Please refer to Note 13 concerning warrants and options earned by directors
and  Bank  personnel.



                                       33
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE  9  -  DEPOSITS

     The  following  details  deposit  accounts  at  December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                             December  31,
                                        -----------------------
                                           2002         2001
                                        -----------  ----------
<S>                                     <C>          <C>
  Non-interest bearing deposits         $ 1,563,515  $  837,439
                                        -----------  ----------
  Interest bearing deposits:
     NOW accounts                           925,533     276,100
     Money market accounts                2,207,093     974,902
     Savings                                225,769      41,135
     Time, less than $100,000            10,486,624     692,244
     Time, $100,000 and over              3,081,083     711,492
                                        -----------  ----------
       Total interest bearing deposits   16,926,102   2,695,873
                                        -----------  ----------

     Total deposits                     $18,489,617  $3,533,312
                                        ===========  ==========
</TABLE>

     At  December  31,  2002,  the  scheduled  maturities of all certificates of
deposit  were  as  follows:

<TABLE>
<CAPTION>
Year Ending
December 31,    Amount
------------  -----------
<S>           <C>
    2003      $ 6,520,871
    2004        2,853,619
    2005        2,757,362
    2006          541,723
    2007          894,132
              -----------
Total         $13,567,707
              ===========
</TABLE>


                                       34
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE 10 - INTEREST ON DEPOSITS AND BORROWINGS

     A summary of interest expense for the years ended December 31, 2002 and
2001 follows:

<TABLE>
<CAPTION>
                                   December  31,
                                ------------------
                                  2002      2001
                                --------  --------
<S>                             <C>       <C>
  NOW accounts                  $  7,170  $  3,239
  Money market accounts           37,475    11,828
  Savings                          1,425       343
  Time, less than $100,000       202,504     6,665
  Time, $100,000 and over         76,015     6,749
  Other borrowings                 1,299    95,830
                                --------  --------
    Total interest on deposits
      and other borrowings      $325,888  $124,654
                                ========  ========
</TABLE>

     During  calendar  year  2000, the Company incurred interest expense, solely
from  borrowings,  in  the  amount  of  $44,159.


NOTE  11  -  OTHER  OPERATING  EXPENSES

     A  summary  of  other  operating  expenses for the years ended December 31,
2002,  2001  and  2000  follows:

<TABLE>
<CAPTION>
                                                   December  31,
                                            ---------------------------
                                              2002      2001     2000
                                            --------  --------  -------
<S>                                         <C>       <C>       <C>
Relocation expense                          $   -  -  $   -  -  $24,161
Postage and delivery                          14,511     7,345    1,548
Supplies and printing                         31,172    38,114    6,623
Taxes and insurance                           35,571    21,115      952
Utilities and telephone                       18,527    16,894    6,122
Repairs, maintenance and service contracts    22,917    27,627      927
All other                                     19,958    22,634   12,391
                                            --------  --------  -------
  Total other operating expenses            $142,656  $133,729  $52,724
                                            ========  ========  =======
</TABLE>


                                       35
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


NOTE 12 - INCOME TAXES

     As  of December 31, 2002, 2001 and 2000, the Company's provision for income
taxes  consisted  of  the  following:

<TABLE>
<CAPTION>
                                        December 31,
                             ------------------------------
                                 2002        2001     2000
                              ----------  ----------  -----
<S>                           <C>         <C>         <C>
Current                       $    -  -   $    -  -   $-  -
Deferred                       (144,594)   (175,506)   -  -
                              ----------  ----------  -----
Federal income tax (benefit)  $(144,594)  $(175,506)  $   0
                              ==========  ==========  =====
</TABLE>

     The  Company's provision for income taxes differs from the amounts computed
by  applying  the  federal  income  tax  statutory rates to income before income
taxes.  A  reconciliation  of  federal  statutory  income taxes to the Company's
actual  income  tax  provision  follows:

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                    ----------------------------------
                                       2002        2001        2000
                                    ----------  ----------  ----------
<S>                                 <C>         <C>         <C>

Income taxes at statutory rate      $(130,033)  $(182,565)  $(106,374)
State tax, net of Federal benefits    (15,298)     (6,114)     (4,490)
Change in valuation allowance            -  -       2,569     110,864
Other                                     737      10,604        -  -
                                    ----------  ----------  ----------
   Total                            $(144,594)  $(175,506)  $       0
                                    ==========  ==========  ==========
</TABLE>



     The tax effects of the temporary differences that comprise the net deferred
tax  assets  at  December  31,  2002,  and  2001  are  presented  below:

<TABLE>
<CAPTION>
                                                    2002        2001
                                                 ----------  ----------
<S>                                              <C>         <C>
  Deferred tax assets:
    Allowance for loan losses                    $  75,216   $  26,129
    Net operating loss carryforward                212,027      98,147
   Organization costs                              131,730     164,663
   Available for sale securities                      -  -         264
                                                 ----------  ----------
Gross deferred tax assets                        $ 418,973   $ 289,203
Less, deferred tax liabilities:
   Available for sale securities                    (3,736)       -  -
   Accumulated depreciation                           (310)     (1,244)
                                                 ----------  ----------
Deferred tax assets net of deferred liabilities  $ 414,927   $ 287,959
Less, valuation allowance                         (113,433)   (113,433)
                                                 ----------  ----------
      Net deferred tax assets                    $ 301,494   $ 174,526
                                                 ==========  ==========
</TABLE>

                                       36
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     There  was  a  net  change in the valuation allowance during calendar years
2001  and  2000.  In  assessing  the  realizability  of  deferred  tax  assets,
management considers whether it is more likely than not that some portion or all
of  the  deferred  tax assets will not be realized.  The ultimate realization of
deferred  tax  assets  is dependent upon the generation of future taxable income
during  the  periods  in  which  those  temporary differences become deductible.
Management  considers  the  scheduled  reversal  of  deferred  tax  liabilities,
projected  future  taxable  income  and  tax  planning strategies in making this
assessment.  Based  upon  the  projection  for  future  taxable  income over the
periods which the temporary differences resulting in the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize  the  benefits  of  those  deductible  differences,  net of the existing
valuation  allowance  at  December  31,  2002.  Note  that  net  operating  loss
carryforwards  expire  fifteen  years  from  the  year  originated.


NOTE  13  -  RELATED  PARTY  TRANSACTIONS

     Directors'  Warrants.  The  Directors  of the Company received an aggregate
     ---------------------
total of 210,115 stock warrants, or approximately one stock warrant for each one
share  of  the  Company's common stock purchased by the directors in the initial
public  offering.  Each warrant entitles its holder to purchase one share of the
Company's  common stock for $10.00.  These warrants will vest equally on July 9,
2002,  2003,  and  2004.  All  unexercised warrants will expire on July 8, 2011.
For  the years ended December 31, 2002 and 2001, none of the warrants was either
exercised  or  forfeited

     Employee  Options.  The Company has a stock options plan with 97,905 shares
     ------------------
of options authorized.  During calendar year 2002, 28,581 shares of options were
granted  at  an exercise price of $10.00, an amount equal to the Company's share
price at the date of grant.  The options' vesting period range from one-to-three
years  with  expiration  dates of ten years from the date of grant.  None of the
options  were  either exercised or forfeited during calendar year 2002, and , as
of  December  31,  2002,  69,324  options  were  still  available  for  grant.

     Borrowings  and  Deposits  by  Directors  and  Executive Officers.  Certain
     ------------------------------------------------------------------
directors,  principal  officers and companies with which they are affiliated are
customers  of and have banking transactions with the Bank in the ordinary course
of  business.  As of December 31, 2002 and 2001, loans outstanding to directors,
their related interests and executive officers aggregated $230,325 and $230,275,
respectively.  These  loans were made on substantially the same terms, including
interest  rates  and  collateral,  as  those  prevailing  at  the  same time for
comparable  transactions  with unrelated parties.  In the opinion of management,
loans to related parties did not involve more than normal credit risk or present
other  unfavorable  features.


                                       37
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     A summary of the related party loan transactions during the calendar years
2002 and 2001 follows:

<TABLE>
<CAPTION>
                                  Insider Loan Transactions
                               ------------------------------
                                    2002            2001
                               --------------  --------------
<S>                            <C>             <C>
  Balance, beginning of year   $     230,275   $        -  -
  New loans                           24,111         233,553
  Less:  Principal reductions        (24,061)         (3,278)
                               --------------  --------------
  Balance, end of year         $     230,325   $     230,275
                               ==============  ==============
</TABLE>

     Deposits  by directors and their related interests, as of December 31, 2002
and  2001  approximated  $735,465  and  $669,421,  respectively.


NOTE 14 - CONCENTRATIONS OF CREDIT

     The  Company  originates  primarily  commercial,  residential, and consumer
loans to customers in Beaufort County, South Carolina, and surrounding counties.
The  ability  of  the  majority  of  the  Company's  customers  to  honor  their
contractual  loan  obligations is dependent on economic conditions prevailing at
the  time  in  Beaufort  County  and  the  surrounding  counties.

     Approximately  eighty-one  percent  of  the  Company's  loan  portfolio  is
concentrated  in loans secured by real estate, of which a substantial portion is
secured  by  real estate in the Company's primary market area.  Accordingly, the
ultimate  collectibility  of  the  loan  portfolio  is susceptible to changes in
market  conditions  in the Company's primary market area.  The other significant
concentrations  of  credit  by  type  of  loan  are  set  forth  under  Note  5.

     The Company, as a matter of policy, does not generally extend credit to any
single  borrower  or  group  of related borrowers in excess of 15% of the Bank's
statutory  capital,  or  approximately  $765,000.


NOTE 15 - REGULATORY MATTERS

     The  Company  is  governed  by  various  regulatory agencies.  Bank holding
companies  and their nonbanking subsidiaries are regulated by the FRB.  National
banks  are primarily regulated by the OCC.  All federally-insured banks are also
regulated  by  the  FDIC.  The  Company's banking subsidiary includes a national
bank,  which  is  insured  by  the  FDIC.

     Various requirements and restrictions under federal and state laws regulate
the  operations  of  the  Company.  These  laws, among other things, require the


                                       38
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


maintenance  of  reserves  against  deposits, impose certain restrictions on the
nature  and  terms  of the loans, restrict investments and other activities, and
regulate  mergers and the establishment of branches and related operations.  The
ability  of  the  parent  company  to pay cash dividends to its shareholders and
service debt may be dependent upon cash dividends from its subsidiary bank.  The
subsidiary  bank  is  subject  to limitations under federal law in the amount of
dividends  it  may declare.  At December 31, 2002, none of the subsidiary bank's
capital accounts was available for dividend declaration without prior regulatory
approval.

     The  banking  industry is also affected by the monetary and fiscal policies
of  regulatory  authorities,  including the FRB.  Through open market securities
transactions,  variations  in  the  discount  rate, the establishment of reserve
requirements  and  the  regulation  of  certain interest rates payable by member
banks,  the  FRB exerts considerable influence over the cost and availability of
funds  obtained  for  lending and investing.  Changes in interest rates, deposit
levels and loan demand are influenced by the changing conditions in the national
economy  and  in the money markets, as well as the effect of actions by monetary
and  fiscal  authorities.  Pursuant  to the FRB's reserve requirements, the Bank
was  not  required  to  maintain  certain cash reserve balances with the Federal
Reserve  System  at  December  31,  2002.

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

     Qualitative  measures  established by regulation to ensure capital adequacy
require  the  Company  and  the Bank to maintain minimum amounts and ratios (set
forth  in  the  table  below)  of  total  and  Tier 1 capital (as defined in the
regulations)  to  risk-weighted  assets  (as  defined), and of Tier 1 capital to
average assets (as defined).  Management believes that the Company and the Bank,
as  of  December  31, 2002, meet all capital adequacy requirements to which they
are  subject.


                                       39
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


     As  of  December  31, 2002, the Bank was considered to be Well Capitalized.
There  are  no  conditions  or  events  since  December 31, 2002 that management
believes  have  changed the Bank's Well Capitalized category.  To be categorized
as  Adequately  Capitalized  or  Well  Capitalized,  the  Bank must maintain the
following  capital  ratios:

<TABLE>
<CAPTION>
                                  Adequately       Well
                                 Capitalized   Capitalized
                                 ------------  ------------
<S>                              <C>           <C>
Total risk-based capital ratio           8.0%         10.0%
Tier 1 risk-based capital ratio          4.0%          6.0%
Tier 1 leverage ratio                    4.0%          5.0%
</TABLE>

     The  Company's  and  the  Bank's  actual  capital  amounts  and  ratios are
presented  in  the  following  table:

<TABLE>
<CAPTION>
                                                Minimum Regulatory Capital
                                                   Guidelines for Banks
                                             -------------------------------
                                               Adequately        Well
(Dollars  in  thousands)        Actual         Capitalized    Capitalized
                            ---------------  ---------------  --------------
                            AMOUNT   RATIO   AMOUNT   RATIO   AMOUNT   RATIO
<S>                         <C>      <C>     <C>      <C>     <C>      <C>
AS OF DECEMBER 31, 2002:
Total capital-risk-based
(to risk-weighted assets):
   Bank                     $ 5,008   24.1%  $ 1,663  >=  8%  $ 2,078  >= 10%
   Consolidated               5,035   24.2%    1,633  >=  8%      N/A    N/A

Tier 1 capital-risk-based
(to risk-weighted assets):
   Bank                     $ 4,787   23.0%  $   831  >=  4%  $ 1,247  >=  6%
   Consolidated               4,814   23.2%      831  >=  4%      N/A    N/A

Tier 1 capital-leverage
(to average assets):
   Bank                     $ 4,787   21.1%  $   906  >=  4%  $ 1,132  >=  5%
   Consolidated               4,814   21.2%      907  >=  4%      N/A    N/A
</TABLE>


                                       40
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


<TABLE>
<CAPTION>
                                                 Minimum Regulatory Capital
                                                    Guidelines for Banks
                                             --------------------------------
                                               Adequately          Well
(Dollars  in  thousands)         Actual        Capitalized     Capitalized
                            ---------------  ---------------  ---------------
                            AMOUNT   RATIO   AMOUNT   RATIO   AMOUNT   RATIO
<S>                         <C>      <C>     <C>      <C>     <C>      <C>
AS OF DECEMBER 31, 2001:
Total capital-risk-based
(to risk-weighted assets):
   Bank                     $ 5,420   68.6%  $   632  >=  8%  $   791  >= 10%
   Consolidated               5,440   68.8%      633  >=  8%      N/A     N/A

Tier 1 capital-risk-based
(to risk-weighted assets):
   Bank                     $ 5,343   67.6%  $   316  >=  4%  $   474  >=  6%
   Consolidated               5,363   67.8%      316  >=  4%      N/A     N/A

Tier 1 capital-leverage
(to average assets):
   Bank                     $ 5,343   58.7%  $   364  >=  4%  $   455  >=  5%
   Consolidated               5,363   58.8%      365  >=  4%      N/A     N/A
</TABLE>


NOTE  16  -  DIVIDENDS

     The  primary source of funds available to the Company to pay cash dividends
and  other  expenses  is  from  the  Bank.  Bank  regulatory  authorities impose
restrictions  on the amounts of dividends that may be declared by the Bank.  For
example,  the  Bank  may  not  pay  cash  dividends  until  it  is  cumulatively
profitable.  Cash dividends to shareholders are not expected for the foreseeable
future.


                                       41
<PAGE>
NOTE  17  -  PARENT  COMPANY  FINANCIAL  INFORMATION

     This  information should be read in conjunction with the other notes to the
consolidated  financial  statements.

<TABLE>
<CAPTION>
                      Parent Company Balance Sheets
                      -----------------------------

                                                      December  31,
                                                -------------------------
Assets:                                             2002         2001
-------                                         ------------  -----------
<S>                                             <C>           <C>
Cash                                            $    27,127   $   27,094
Investment in Bank                                5,106,757    5,342,880
                                                ------------  -----------
   Total Assets                                 $ 5,133,884   $5,369,974
                                                ============  ===========

Liabilities and Shareholders' Equity:
-------------------------------------
Accounts payable                                $      -  -   $    6,000
                                                ------------  -----------
   Total Liabilities                            $      -  -   $    6,000
                                                ------------  -----------

Common stock                                    $ 6,213,061   $6,213,061
Retained (deficit)                               (1,086,429)    (848,572)
Accumulated other comprehensive income                7,252         (515)
                                                ------------  -----------
   Total Shareholders' equity                   $ 5,133,884   $5,363,974
                                                ------------  -----------
   Total Liabilities and Shareholders' equity   $ 5,133,884   $5,369,974
                                                ============  ===========
</TABLE>


                                       42
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


<TABLE>
<CAPTION>
                     Parent Company Statements of Operations
                     ---------------------------------------

                                           Years  Ended  December  31,
                                        ----------------------------------
Revenues:                                  2002        2001        2000
---------                               ----------  ----------  ----------
<S>                                     <C>         <C>         <C>
Interest income                         $     532   $  17,062   $    -  -
Other                                       5,500        -  -        -  -
                                        ----------  ----------  ----------
     Total revenues                     $   6,032   $  17,062   $    -  -
                                        ----------  ----------  ----------

Expenses:
---------
  Interest expense                      $    -  -   $  20,480   $  44,159
  Depreciation and amortization              -  -        -  -       9,340
  Other expenses                             -  -      46,021     259,366
                                        ----------  ----------  ----------
     Total expenses                     $    -  -   $  66,501   $ 312,865
                                        ----------  ----------  ----------

Income before equity in undistributed
  (loss) of Bank                        $   6,032   $ (49,439)  $(312,865)
Equity in undistributed (loss)
  of Bank                                (243,889)   (312,013)       -  -
                                        ----------  ----------  ----------

Net (loss)                              $(237,857)  $(361,452)  $(312,865)
                                        ==========  ==========  ==========
</TABLE>


                                       43
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001


<TABLE>
<CAPTION>
                         Parent Company Statements of Cash Flows
                         ---------------------------------------


                                                        Years  Ended  December  31,
                                                   -------------------------------------
                                                      2002         2001         2000
                                                   ----------  ------------  -----------
<S>                                                <C>         <C>           <C>
Cash flows from operating activities:
-------------------------------------
  Net (loss)                                       $(237,857)  $  (361,452)  $ (312,865)
  Adjustments to reconcile net loss to net cash
     Provided by (used in) operating activities:
     Equity in undistributed loss of the Bank        243,890       312,013         -  -
  Depreciation                                          -  -          -  -        9,340
 Decrease in other assets                               -  -       866,488     (251,032)
 (Decrease) in payables                               (6,000)      (10,484)      (5,123)
                                                   ----------  ------------  -----------
Net cash provided by operating activities          $      33   $   806,565   $ (559,680)
                                                   ----------  ------------  -----------

Cash flows from investing activities:
-------------------------------------
 Purchase of property and equipment                $    -  -   $      -  -   $ (548,623)
 Investment in Bank                                     -  -    (5,655,408)        -  -
                                                   ----------  ------------  -----------
Net cash used in financing activities              $    -  -   $(5,655,408)  $ (548,623)
                                                   ----------  ------------  -----------

Cash flows from financing activities:
-------------------------------------
 Issuance of stock, net                            $    -  -   $ 6,207,561   $     -  -
 (Decrease) in borrowings                               -  -    (1,371,856)   1,124,474
                                                   ----------  ------------  -----------
Net cash provided by financing activities          $    -  -   $ 4,835,705   $1,124,474
                                                   ----------  ------------  -----------

Net increase in cash and cash equivalents          $      33   $   (13,138)  $   16,171
Cash and cash equivalents, beginning of the year      27,094        40,232       24,061
                                                   ----------  ------------  -----------
Cash and cash equivalents, end of year             $  27,127   $    27,094   $   40,232
                                                   ==========  ============  ===========
</TABLE>


                                       44
<PAGE>