March  26,  2004

Dear Shareholder:

Enclosed  is  Islands  Bancorp's  annual report to shareholders representing the
second  full  year  of  operation  for  the  Company and its subsidiary, Islands
Community  Bank, N.A.  We are pleased with the bank's results and trust that you
will  share  our  enthusiasm.

We  met  expectations  to  achieve profitability for the year ended December 31,
2003.  Thanks  to  a  strong and unique local Beaufort market, growth and income
projections  were  met  although  the past year saw Interest rates continuing at
40-year  lows  coupled  with  a  sagging  national  economy  faced  with  the
uncertainties  of  war.

During  the  fourth  quarter  last  year  Islands  Community  Bank opened a loan
production  office  near  the Citadel Mall.  The Charleston office will generate
business  loans  through  the U.S. Small Business Administration programs.  This
SBA  loan  activity  is expected to provide opportunity for significant loan and
fee  income.

Your  company's  management will strive to continue to build a quality bank that
will exceed customer expectations.  Please help us by banking with your Bank and
                                                                   ----
mentioning  the  bank's  services to friends.  We cordially invite you to attend
the  April  27th  annual  meeting  of  stockholders.

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

CRITICAL ACCOUNTING POLICIES

     Critical  accounting  policies  are defined as those that are reflective of
significant  judgments  and  uncertainties,  and  could  potentially  result  in
materially  different  results  under  different assumptions and conditions.  We
believe  that  our  most  critical  accounting  policy  upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments  is  as  follows:

     Allowance  for  Loan Losses:  Arriving at an appropriate level of allowance
for loan losses involves a high degree of judgment.  The Company's allowance for
loan  losses  provides  for  probable losses based upon evaluations of known and
inherent risks in the loan portfolio.  Management uses historical information to
assess  the  adequacy of the allowance for loan losses as well as the prevailing
business  environment;  as  it  is  affected by changing economic conditions and
various  external  factors,  which  may  impact  the portfolio in ways currently
unforeseen.  The  allowance  is  increased  by provisions for loan losses and by
recoveries of loans previously charge-off and reduced by loans charged-off.  For
a  full discussion of the Company's methodology of assessing the adequacy of the
allowance  for  loan  losses,  see the Allowance for Loss and Provision for Loan
Loss  section  within  the  Management's  Discussion  and  Analysis of Financial
Condition  and  Results  of  Operations  below.


OVERVIEW

     The  Company's  results  of  operations  are  largely dependent on interest
income,  which  is  the  difference  between  the  interest  earned on loans and
securities  and  interest  paid  on  deposits  and  borrowings.  The  results of
operations  are  also affected by the level of income/fees from loans, deposits,
borrowings,  as  well  as operating expenses, the provision for loan losses, the
impact  of  federal  and state income taxes, and the relative levels of interest
rates  and  economic  activity.

     For  calendar  year  2003,  the  Company  anticipated a higher net interest
income  as  the  Bank  continued to expand its asset base.  While it was evident
early  on  that interest rates would not increase, management was confident that
the  increase  in  earning  assets will more than compensate for the anticipated
compression  in  the  net  yield  on  earning  assets.

     To  mitigate  the  impact  of  a  declining  interest rate environment, the
Company focused on non-interest income opportunities, especially fee income from
SBA  loans.  The  Company  also  focused  on reducing its cost of funds as rates
continued  to  decline.  Management  believes  that  it


                                        1
<PAGE>
was  able  to  control  its  operating  expenses despite the fact that operating
expenses  grew  by  15.2%;  however,  note  that  total  assets  grew  by 35.0%.

     Lower  loan  loss  provision  also  contributed to the Company's success in
2003.  In  2003,  the  Company  was  able  to  reduce  the  level  of  loan loss
provisioning  as  compared  to  2002  due  to continued strong asset quality and
generally  stable  economic  condition  in  Beaufort,  South  Carolina.

     Looking ahead to 2004, the Company expects continued compression in the net
yield  on  earning  assets,  however  at  a  slower rate than in 2003, as assets
continue  to re-price to current interest rates without the capacity to re-price
deposits  in  correlation to assets.  Management plans to mitigate the impact of
the  continued compression with prudent asset growth, non-interest income growth
generation,  and  expense  control.  Additionally,  there  are  a  number  of
initiatives  that  are  expected  to  contribute  to  2004  and  beyond.  These
initiatives  include:

     -    expectation of higher productivity from the new loan production office
          in  Charleston,  South  Carolina,  and
     -    investment  in  additional  new  business development capabilities and
          process  improvements  within  the  lending  area.


YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

     For  the year ended December 31, 2003, assets grew by $8.4 million to $32.4
million.  More  specifically,  loans  grew  by  $7.4  million  to $26.3 million,
securities  grew by $1.0 million to $2.3 million, property and equipment grew by
$.1  million  to $3.0 million, while other assets declined by $.1 million to $.5
million.  Note that the entire net growth of $8.4 million consisted of growth in
earning  assets.  To fund the growth in assets, deposits grew by $7.2 million to
$25.7  million,  and  net  borrowings increased by $1.2 million to $1.5 million.

     Net  income  for  the  year ended December 31, 2003 amounted to $19,099, or
$.03  per  share.  This  represents a significant improvement over calendar year
2002  loss of $(237,857), or $(.36) per share.  The reasons for the improvements
in  earnings  are  summarized  below:

     -    An  increase  in  average earning assets, from $14.1 million (2002) to
          $25.5  million  (2003);
     -    An increase in net interest income, from $738,000 (2002) to $1,206,000
          (2003);
     -    An  increase  in  non-interest income, from $90,000 (2002) to $173,000
          (2003);
     -    A  moderate  increase  in operating expense, from $1,066,000 (2002) to
          $1,228,000  (2003);  and
     -    A  reduction in the provision for loan losses, from $144,000 (2002) to
          $121,000  (2003).


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


                                        2
<PAGE>
$.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.

     Net loss for calendar year 2002 amounted to $(237,857) or $(.36) per share.
This  represents  a  material  improvement  over  calendar  year  2001  loss  of
$(361,452)  or  $(.66)  per  share.  The primary reasons for the improvements in
earnings  are  as  follows:

     -    An  increase  in  average  earning  assets from $8.2 million (2001) to
          $14.1  million  (2002);
     -    An  increase  in net interest income, from $318,000 (2001) to $738,000
          (2002);
     -    An  increase  in  non-interest  income, from $23,000 (2001) to $90,000
          (2002);  and
     -    A  moderate  increase  in  operating  expense, from $801,000 (2001) to
          $1,066,000  (2002).


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, 2003             December 31, 2002
                             ----------------------------  ----------------------------
                                       Interest                      Interest
                             Average    Income/   Yield/   Average    Income/   Yield/
                             Balance    Expense    Cost    Balance    Expense    Cost
                             --------  ---------  -------  --------  ---------  -------
<S>                          <C>       <C>        <C>      <C>       <C>        <C>
Federal funds sold           $    752  $       8    1.06%  $    944  $      15    1.59%
Securities                      2,280         75    3.29%     1,463         68    4.65%
Loans, net                     22,507      1,702    7.56%    11,741        981    8.36%
                             --------  ---------  -------  --------  ---------  -------
      Total earning assets   $ 25,539  $   1,785    6.99%  $ 14,148  $   1,064    7.52%
                             ========  =========  -------  ========  =========  -------

Interest bearing deposits    $ 21,258  $     570    2.68%  $  9,772  $     325    3.32%
Other borrowings                  386          9    2.33%        83          1    1.57%
                             --------  ---------  -------  --------  ---------  -------
      Total interest-
       bearing liabilities   $ 21,644  $     579    2.67%  $  9,855  $     326    3.31%
                             ========  =========  -------  ========  =========  -------

Net yield on earning assets                         4.72%                         5.22%
                                                  =======                       =======
</TABLE>


                                        3
<PAGE>
     For  the year ended December 31, 2003, the yield on earning assets amounted
to  6.99%,  while  the cost of funds was 2.67%.  Net yield on earning assets for
the  year  ended  December  31,  2003  and  2002  amounted  to 4.72%, and 5.22%,
respectively.  The  yield  on  earning  assets declined by 53 basis points, from
7.52%  (2002)  to  6.99% (2003).  The cost of funds declined by 64 basis points,
from  3.31% (2002) to 2.67% (2003).  The interest margin improved from 4.21% for
the  year ended December 31, 2002 to 4.32% for the year ended December 31, 2003.
Net  yield  on  average  earning  assets, however, declined from 5.22% (2002) to
4.72% (2003).  The reason for the above decline is the fact that free sources of
funds,  including  capital and demand deposits, as a percent of total sources of
funds,  declined  from  41.3%  (2002)  to  26.0%  (2003).

NON-INTEREST  INCOME

     Non-interest income for the years ended December 31, 2003 and 2002 amounted
to  $173,094  and  $89,697,  respectively.  As  a  percent  of  average  assets,
non-interest  income  increased  from  .53%  (2002) to .59% (2003).  The primary
reason  for  the  above  increase  is  the  increase  in  transactional  volume.

     The  following table summarizes the major components of non-interest income
for  the  years  ended  December  31,  2003  and  2002.

<TABLE>
<CAPTION>
                                   Years Ended December 31,
                                 ---------------------------
                                     2003          2002
                                 ------------  -------------
<S>                              <C>           <C>
Service fee on deposit accounts  $    163,970  $      87,348
Miscellaneous, other                    9,124          2,349
                                 ------------  -------------
      Total non-interest income  $    173,094  $      89,697
                                 ============  =============
</TABLE>

NON-INTEREST  EXPENSE

     Non-interest  expense  for  the  years  ended  December  31,  2003 and 2002
amounted  to  $1,227,809  and  $1,066,179,  respectively.  As a percent of total
average  assets, non-interest expense declined from 6.29% for calendar year 2002
to  4.19%  for  calendar  year  2003.  Operating expense as a percent of average
assets  is  especially  high  for  calendar  year 2002.  Since many expenses are
fixed,  such  as  depreciation,  repairs, maintenance, etc., management does not
have  the  ability  to  control them.  However, as the Bank grows, the effect of
these  fixed  expenses  on  the  Bank's  income  would  diminish.

     Below  are the major components of non-interest expenses for the year ended
December  31,  2003  and  2002.

<TABLE>
<CAPTION>
                                     Years Ended December 31,
                                   --------------------------
                                       2003          2002
                                   ------------  -------------
<S>                                <C>           <C>
Salaries and benefits              $    681,164  $     579,046
Data processing, ATM                    152,126        136,599
Professional fees                        59,516         49,800
Depreciation, amortization              141,859         69,828
Other operating expenses                193,144        230,906
                                   ------------  -------------
      Total non-interest expenses  $  1,227,809  $   1,066,179
                                   ============  =============
</TABLE>


                                        4
<PAGE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES

     During  2003,  the allowance for possible loan losses increased to $326,555
and,  as  of  December  31,  2003,  it  amounted to 1.22% of gross loans.  As of
December  31,  2003, 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.


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, 2003 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.


                                        5
<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>
Earning assets:
   Loans                      $10,947  $ 2,106  $ 2,039   $11,313  $  268  $26,673
   Securities                    -  -     -  -     -  -      -  -   2,323    2,323
   Federal funds sold               8     -  -     -  -      -  -    -  -        8
                              -------  -------  --------  -------  ------  -------
   Total earning assets       $10,955  $ 2,106  $ 2,039   $11,313  $2,591  $29,004
                              =======  =======  ========  =======  ======  =======

Supporting sources of funds:
  Interest bearing
   demand deposits
   and savings                $ 5,838  $  -  -  $  -  -   $  -  -  $ -  -  $ 5,838
Certificates,
   less than $100M              1,362      861    2,879     6,108    -  -   11,210
Certificates,
   $100M and more               1,613      605    2,171     1,806    -  -    6,195
Borrowings                       -  -     -  -     -  -     1,500    -  -    1,500
                              -------  -------  --------  -------  ------  -------
   Total interest-
   bearing liabilities        $ 8,813  $ 1,466  $ 5,050   $ 9,414  $ -  -  $24,743
                              =======  =======  ========  =======  ======  =======

Interest rate
   sensitivity gap              2,142      640   (3,011)    1,899   2,591    4,261
Cumulative gap                  2,142    2,782     (229)    1,670   4,261    4,261
Interest rate
   sensitivity gap ratio         1.24     1.44      .40      1.20  N/A        1.17
Cumulative interest rate
   sensitivity gap ratio         1.24     1.27      .99      1.07    1.17     1.17
</TABLE>

     As  evidenced  by  the  table  above, at December 31, 2003, 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
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.


                                        6
<PAGE>
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, 2003
and  2002:  ($  in  thousands)

<TABLE>
<CAPTION>
                                              December 31,
                                           ------------------
                                            2003      2002
                                           -------  ---------
<S>                                        <C>      <C>
Cash and cash equivalents                  $  327   $    394
Securities                                 $2,323   $  1,335
CDs, over $100,000 to total deposit ratio    24.1%      16.7%
Brokered deposits                               0%         0%
Loan to deposit ratio                         104%       102%
</TABLE>

     Cash and cash equivalents are the primary source of liquidity.  At December
31,  2003,  cash and cash equivalents amounted to $.3 million, representing 1.0%
of total assets.  Securities available for sale that provides a secondary source
of  liquidity  represented  approximately  7.2%  of  total  assets.

     At  December  31, 2003, large denomination certificates accounted for 24.1%
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.

     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, 2003,
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


                                        7
<PAGE>
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.

     The  table  below  illustrates  the  Bank  and Company's regulatory capital
ratios  at  December  31,  2003:

<TABLE>
<CAPTION>
                                                            Minimum
                                                           regulatory
Bank                                  December 31, 2003   requirement
----                                  ------------------  ------------
<S>                                   <C>                 <C>
Tier 1 Capital                                     19.7%          4.0%
Tier 2 Capital                                      1.3%          N/A
                                      ------------------  ------------
      Total risk-based capital ratio               21.0%          8.0%
                                      ==================  ============

Leverage ratio                                     18.1%          3.0%
                                      ==================  ============

Company - Consolidated
----------------------
Tier 1 Capital                                     19.8%          4.0%
Tier 2 Capital                                      1.3%          N/A
                                      ------------------  ------------
      Total risk-based capital ratio               21.1%          8.0%
                                      ==================  ============

Leverage ratio                                     18.2%          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.


                                        8
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA

                        CONSOLIDATED FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 2003 AND 2002



                                        9
<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
                                -----------------


<S>                                                                         <C>
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . .   11

CONSOLIDATED FINANCIAL STATEMENTS

      Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . .   12

      Consolidated Statements of Operations . . . . . . . . . . . . . . . .   13

      Consolidated Statements of Changes in Shareholders' Equity. . . . . .   14

      Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . .   15

      Notes to Consolidated Financial Statements. . . . . . . . . . . . . .   16
</TABLE>


                                       10
<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, 2003 and
2002,  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,  2003.  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, 2003 and 2002, and
the  consolidated  results  of their operations and their cash flows for each of
the  three  years  in  the  period  ended  December 31, 2003, in conformity with
accounting  principles  generally  accepted  in  the  United  States.


/s/  Francis  &  Co.,  CPAs

Atlanta,  Georgia
March  6,  2004


                                       11
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
                                     ------
                                                     As of December 31,
                                                --------------------------
                                                    2003          2002
                                                ------------  ------------
<S>                                             <C>           <C>
Cash and due from banks                         $   318,730   $   394,484
Federal funds sold, net                               8,000          -  -
                                                ------------  ------------
  Total cash and cash equivalents               $   326,730   $   394,484
Securities:
 Available-for-sale at fair value                 2,322,726     1,334,763
Loans, net                                       26,346,760    18,872,582
Property and equipment, net                       2,968,191     2,858,610
Other assets                                        469,298       559,591
                                                ------------  ------------
  Total Assets                                  $32,433,705   $24,020,030
                                                ============  ============

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

Liabilities:
------------
 Deposits:
  Non-interest bearing deposits                 $ 2,413,409   $ 1,563,515
  Interest bearing deposits                      23,243,145    16,926,102
                                                ------------  ------------
       Total deposits                           $25,656,554   $18,489,617
FHLB advances                                     1,500,000          -  -
Federal funds purchased                                -  -       308,000
Other liabilities                                   152,247        88,529
                                                ------------  ------------
  Total Liabilities                             $27,308,801   $18,886,146
                                                ------------  ------------

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)                               (1,067,330)   (1,086,429)
Accumulated other comprehensive income/(loss)       (20,827)        7,252
                                                ------------  ------------
   Total Shareholders' Equity                   $ 5,124,904   $ 5,133,884
                                                ------------  ------------
   Total Liabilities and Shareholders' Equity   $32,433,705   $24,020,030
                                                ============  ============
<FN>

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


                                       12
<PAGE>
<TABLE>
<CAPTION>
                                      ISLANDS BANCORP
                                  BEAUFORT, SOUTH CAROLINA
                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                      For the Years Ended December 31,
                                                 ------------------------------------------
Interest Income:                                    2003           2002            2001
----------------                                 ----------  ----------------  ------------
<S>                                              <C>         <C>               <C>
 Interest and fees on loans                      $1,702,166  $       981,216   $   129,811
 Interest on investment securities                   74,715           68,450       266,363
 Interest on federal funds sold                       8,475           14,627        46,772
                                                 ----------  ----------------  ------------
    Total interest income                        $1,785,356  $     1,064,293   $   442,946
Interest Expense:
-----------------
 Interest on deposits and borrowings                579,104          325,888       124,654
                                                 ----------  ----------------  ------------
Net interest income                              $1,206,252  $       738,405   $   318,292
Provision for possible loan losses                  121,461          144,374        76,850
                                                 ----------  ----------------  ------------
Net interest income after provision for
  possible loan losses                           $1,084,791  $       594,031   $   241,442
                                                 ----------  ----------------  ------------

Other Income:
-------------
 Service fees on deposit accounts                $  163,970  $        87,348   $    21,978
 Miscellaneous, other                                 9,124            2,349           671
                                                 ----------  ----------------  ------------
     Total other income                          $  173,094  $        89,697   $    22,649
                                                 ----------  ----------------  ------------

Other Expenses:
---------------
  Salaries and benefits                          $  681,164  $       579,046   $   460,562
  Data processing and ATM                           152,126          136,599        42,512
  Advertising and public relations                   14,444           45,500        41,178
  Depreciation                                      141,859           69,828        28,606
  Professional fees                                  59,516           49,800        44,202
  Other operating expenses                          178,700          185,406       183,989
                                                 ----------  ----------------  ------------
     Total other expenses                        $1,227,809  $     1,066,179   $   801,049
                                                 ----------  ----------------  ------------

Income/(loss) before income tax (benefit)        $   30,076  $      (382,451)  $  (536,958)
Income tax expense/(benefit)                         10,977         (144,594)     (175,506)
                                                 ----------  ----------------  ------------

Net income/(loss)                                $   19,099  $      (237,857)  $  (361,452)
                                                 ==========  ================  ============

Basic income/(loss) per share                    $      .03  $          (.36)  $      (.66)
                                                 ==========  ================  ============
Diluted income/(loss) per share                  $      .03  $          (.36)  $      (.66)
                                                 ==========  ================  ============

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

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


                                       13
<PAGE>
<TABLE>
<CAPTION>
                                           ISLANDS BANCORP
                                       BEAUFORT, SOUTH CAROLINA
                      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                        FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003


                                        Common Stock                      Accumulated
                                     --------------------                    Other
                                     No. of     Common       Retained     Comprehensive
                                     Shares      Stock      (Deficit)     Income/(Loss)      Total
                                     -------  -----------  ------------  ---------------  -----------
<S>                                  <C>      <C>          <C>           <C>              <C>
Balance, January 1, 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/(loss)       -  -        -  -      (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/(loss)       -  -        -  -      (237,857)           7,767     (230,090)
                                     -------  -----------  ------------  ---------------  -----------
Balance, December 31, 2002           652,705  $6,213,061   $(1,086,429)  $        7,252   $5,133,884
                                     -------  -----------  ------------  ---------------  -----------
Comprehensive income:
 Net income, 2003                       -  -        -  -        19,099             -  -       19,099
 Net unrealized (loss), securities      -  -        -  -          -  -          (28,079)     (28,079)
                                     -------  -----------  ------------  ---------------  -----------
Total comprehensive income/(loss)       -  -        -  -        19,099          (28,079)      (8,980)
                                     -------  -----------  ------------  ---------------  -----------
Balance, December 31, 2003           652,705  $6,213,061   $(1,067,330)  $      (20,827)  $5,124,904
                                     =======  ===========  ============  ===============  ===========
<FN>

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


                                       14
<PAGE>
<TABLE>
<CAPTION>
                                      ISLANDS BANCORP
                                 BEAUFORT, SOUTH CAROLINA
                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                    For the Years Ended December 31,
                                               -------------------------------------------
Cash flows from operating activities:              2003           2002           2001
-------------------------------------          -------------  -------------  -------------
<S>                                            <C>            <C>            <C>
  Net income/(loss)                            $     19,099   $   (237,857)  $   (361,452)
  Adjustments to reconcile net income/(loss)
  to net cash provided by/(used in)
  operating activities:
      Provision for possible loan losses            121,461   $    144,374   $     76,850
      Depreciation                                  141,859         69,828         28,606
      Net amortization on securities                  2,494            181          4,470
  (Increase)/decrease in
   receivables and other assets                      90,293       (159,013)      (102,203)
  Increase in payables and other liabilities         63,718         22,361         49,684
                                               -------------  -------------  -------------
Net cash provided by/(used in)
 operating activities                          $    438,924   $   (160,126)  $   (304,045)
                                               -------------  -------------  -------------

Cash flows from investing activities:
-------------------------------------
   Principal reduction, securities, AFS        $    997,421   $    501,098   $       -  -
   Purchase of securities, AFS                   (2,015,957)      (539,333)    (1,293,927)
   (Increase) in loans, net                      (7,595,639)   (12,740,487)    (6,353,319)
   Purchase of property and equipment              (251,440)    (1,395,112)      (993,819)
                                               -------------  -------------  -------------
Net cash used in investing activities          $ (8,865,615)  $(14,173,834)  $ (8,641,065)
                                               -------------  -------------  -------------

Cash flows from financing activities:
-------------------------------------
   Issuance of common stock, net               $       -  -   $       -  -   $  6,207,561
   Increase in deposits                           7,166,937     14,956,305      3,533,312
   Increase/(decrease) in borrowed funds          1,192,000       (692,000)      (371,856)
                                               -------------  -------------  -------------
Net cash provided by financing activities      $  8,358,937   $ 14,264,305   $  9,369,017
                                               -------------  -------------  -------------

Net increase/(decrease)
  in cash and cash equivalents                 $    (67,754)  $    (69,655)  $    423,907
Cash and cash equivalents, beginning of year        394,484        464,139         40,232
                                               -------------  -------------  -------------
Cash and cash equivalents, end of year         $    326,730   $    394,484   $    464,139
                                               =============  =============  =============

SUPPLEMENTAL INFORMATION:

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

Interest paid                                  $    566,960   $    306,260   $    123,310
                                               =============  =============  =============
<FN>

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


                                       15
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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 that 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, 2003, 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.


                                       16
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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
income  (loss)  or  shareholders'  equity.

     Basis  of Accounting.  The accounting and reporting policies of the Company
     ---------------------
conform  to accounting principles generally accepted in the United States 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  that  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.


                                       17
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     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.

     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.

     Accrual  of  interest  on  loans is discontinued either when (i) reasonable
doubt  exists as to the full or timely collection of interest or principal, (ii)
a  loan  becomes  contractually  past  due  by  90  days or more with respect to
interest or principal, or (iii) the terms of the loan have been renegotiated due
to  a  serious  weakening of the borrower's financial condition.  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.  Restructured loans are those
loans  on which concessions in terms have been granted because of the borrower's
financial or legal difficulties.  Interest is generally accrued on such loans in
accordance  with  the  renegotiated  terms.

     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.


                                       18
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     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,  2003  and  2002.

     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


                                       19
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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>
                                         Years Ended December 31,
                                    -----------------------------------
                                      2003        2002         2001
                                    ---------  -----------  -----------
<S>                                 <C>        <C>          <C>
Net income/(loss), as reported      $ 19,099   $ (237,857)  $ (361,452)
Stock-based compensation expense      77,160       58,392       52,261
                                    ---------  -----------  -----------
Pro-forma (fair value) net (loss)   $(58,061)  $ (296,249)  $ (413,713)
                                    =========  ===========  ===========

Basic income/(loss) per share:
As reported                         $    .03   $     (.36)  $     (.66)
                                    =========  ===========  ===========
Pro-forma                           $   (.09)  $     (.45)  $     (.76)
                                    =========  ===========  ===========

Diluted income/(loss) per share:
As reported                         $    .03   $     (.36)  $     (.66)
                                    =========  ===========  ===========
Pro-forma                           $   (.09)  $     (.45)  $     (.79)
                                    =========  ===========  ===========

Pro-forma value of warrant/option   $   3.27   $     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.


                                       20
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     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>
                                    Years Ended December 31,
                                 -------------------------------
                                   2003       2002       2001
                                 ---------  ---------  ---------
<S>                              <C>        <C>        <C>
Risk-free interest rate              3.95%      3.93%      4.73%
Dividend yield                         --         --         --
Volatility factor                     5.0%       1.6%       0.0%
Weighted average life of option     8 yrs      9 yrs     10 yrs
</TABLE>

     Recent  Accounting  Pronouncements.  In  January  2003,  the  Financial
     -----------------------------------
Accounting  Standards  Board  ("FASB") issued Consolidation of Variable Interest
Entities,  an  interpretation  of  Accounting  Research  Bulletin  No.  51  (the
Interpretation),  FASB  Interpretation  No.  46 ("FIN 46").  The purpose of this
interpretation  is  to  provide  guidance on how to identify a variable interest
entity  (VIE)  and  determine  when  the  assets,  liabilities,  non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements.  A company that holds variable interest in an
entity will need to consolidate that entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses and
or receive a majority of the VIE's expected residual returns, if they occur.  As
of  December  31,  2003,  management believes that the Company does not have any
VIE's  which  would  be  consolidated  under  the  provisions  of  FIN  46.

     In  December  2003,  the  FASB  issued  a  revision of FIN 46.  The Revised
Interpretation  codifies  both  the  proposed  modifications and other decisions
previously issued through certain FASB Staff Positions (FSPs) and supersedes the
original  Interpretation  to  include:  (1)  deferring the effective date of the
Interpretation's  provisions  for  certain  variable  interests,  (2)  providing
additional scope exceptions for certain other variable interests, (3) clarifying
the  impact of troubled debt restructurings on the requirement to reconsider (a)
whether  an  entity  is a VIE or (b) which party is the primary beneficiary of a
VIE,  and  (4)  revising  Appendix B of the Interpretation to provide additional
guidance on what constitutes a variable interest.  The revised Interpretation is
effective  for  financial  statements  of  periods  ending after March 15, 2004.

     Adoption  of  the  revised  FIN  46  will not have an adverse effect on the
Company's  financial  position,  results  of  operations,  or  liquidity.

     SFAS  No.  149  "Amendment  of  Statement 133 on Derivative Instruments and
Hedging  Activities."  In April 2003, the FASB issued SFAS No. 149, which amends
and  clarifies  financial  accounting  and reporting for derivative instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities  under  SFAS No. 133, "Accounting for Derivative Instruments
and  Hedging  Activities,"  resulting  in  more  consistent  reporting  of


                                       21
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


contracts  as  either  derivatives  or  hybrid  instruments.  SFAS  No.  149  is
effective for contracts entered into or modified after June 30, 2003, and should
be  applied  prospectively.  Adoption  of  SFAS No. 149 will not have a material
impact  on the Company's financial position, results of operations or liquidity.

     SFAS  No.  150  "Accounting  for  Certain  Financial  Instruments  with
Characteristics  of  Both Liabilities and Equity."  In May 2003, the FASB issued
SFAS  No. 150, which establishes standards for how certain financial instruments
with  characteristics  of  both  liabilities  and  equity should be measured and
classified.  Certain  financial  instruments  with  characteristics  of  both
liabilities  and  equity will be required to be classified as a liability.  This
statement  is effective for financial instruments entered into or modified after
May  31,  2003,  and  July  1, 2003 for all other financial instruments with the
exception  of  existing  mandatorily  redeemable financial instruments issued by
limited life subsidiaries that have been indefinitely deferred from the scope of
the statements.  The Company does not believe the adoption of SFAS 150 will have
a  material impact on the Company's financial position, results of operations or
liquidity.

     Statement  of  Position 03-3 ("SOP 03-3"): "Accounting for Certain Loans or
Debt  Securities  Acquired  in  a  Transfer."  In  December  2003,  the American
Institute  of  Certified Public Accountants ("AICPA") issued SOP 03-3.  SOP 03-3
requires  loans  acquired  through  a  transfer, such as a business combination,
where  there  are  differences in expected cash flows and contractual cash flows
due  in part to credit quality be recognized at their fair value.  The excess of
contractual  cash  flows  over expected cash flows is not to be recognized as an
adjustment of yield, loss accrual, or valuation allowance.  Valuation allowances
cannot  be  created  nor  "carried  over"  in  the  initial accounting for loans
acquired  in  a  transfer on loans subject to SFAS 114, "Accounting by Creditors
for  Impairment  of  a  Loan."  This  SOP  is effective for loans acquired after
December 31, 2004, with early adoption encouraged.  The Company does not believe
the  adoption of SOP 03-3 will have a material impact on the Company's financial
position,  results  of  operations  or  liquidity.

     In  December  2003,  the FASB issued a revision of SFAS No. 132, Employer's
Disclosures  about  Pensions  and  Other  Postretirement  Benefits.  Most of the
provisions of the revised statements are effective for fiscal years ending after
December  15, 2003.  The Statement requires more detailed disclosures about plan
assets,  investment  strategies,  benefit  obligations,  cash  flows,  and  the
assumptions  used in accounting for the plans.  Adoption of the revision to SFAS
No.  132  will  not  have a material impact on the Company's financial position,
results  of  operations  or  liquidity.

     On  December  11,  2003, the SEC Staff announced its intention to release a
Staff  Accounting  Bulletin  in  order  to clarify existing accounting practices
relating  to  the  valuation of issued loan commitments, including interest rate
lock  commitments, subject to Derivative Implementation Group Issue C-13, When a
Loan  Commitment  is  included  in  Scope  of  Statement


                                       22
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


133.  The  new  guidance  is  expected  to  require  all  registrants  to  begin
accounting for these commitments subject to SFAS No. 133 as written options that
would  be  reported  as  liabilities  until  they  are exercised or expire.  The
provisions  of  this  guidance are expected to be effective for loan commitments
entered  into  after March 31, 2004.  Management intends to adopt the provisions
of  this  guidance  effective  April  1,  2004  and does not anticipate that the
adoption  will  have  a  materially  adverse  effect  on the Company's financial
position,  results  of  operations  or  liquidity.


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, 2003, the Bank was a net seller
in  the  federal  funds  market,  while at December 31, 2002, the Bank was a net
purchaser.  Below  is  pertinent  information:

<TABLE>
<CAPTION>
                            December 31,
                         ------------------
                          2003      2002
                         ------  ----------
<S>                      <C>     <C>
Federal funds sold       $8,000  $    -  -
Federal funds purchased    -  -   (308,000)
                         ------  ----------
Federal funds position   $8,000  $(308,000)
                         ======  ==========
</TABLE>

NOTE 4 - SECURITIES AVAILABLE-FOR-SALE

     The amortized costs and estimated market values of securities
available-for-sale as of December 31, 2003 follow:

<TABLE>
<CAPTION>
                                       Gross
                                     Unrealized
                      Amortized   -----------------    Estimated
Description             Costs     Gains    Losses    Market Values
-----------           ----------  ------  ---------  --------------
<S>                   <C>         <C>     <C>        <C>
U.S. Agency pool      $2,127,066  $  332  $(32,072)  $    2,095,326
Other securities         227,400    -  -      -  -          227,400
                      ----------  ------  ---------  --------------
    Total securities  $2,354,466  $  332  $(32,072)  $    2,322,726
                      ==========  ======  =========  ==============
</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, 2002 follow:


                                       23
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                                      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>

     The  amortized  costs  and  estimated  market  values  of  securities
available-for-sale  at  December 31, 2003, 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        $2,127,066  $    2,095,326
FRB & FHLB stock (no maturity)     227,400         227,400
                                ----------  --------------
   Total securities             $2,354,466  $    2,322,726
                                ==========  ==============
</TABLE>

     No  securities  were  sold  by  the Company in either calendar year 2003 or
2002,  and  none of the securities was pledged as of December 31, 2003 and 2002.


NOTE  5  -  LOANS

     The  composition  of  net  loans by major loan category, as of December 31,
2003  and  2002,  follows:

<TABLE>
<CAPTION>
                                            December 31,
                                     --------------------------
                                         2003          2002
                                     ------------  ------------
<S>                                  <C>           <C>
Commercial, financial, agricultural  $ 4,287,975   $ 6,569,562
Real estate - construction             5,805,592       360,245
Real estate - mortgage                13,641,510    11,172,747
Installment                            2,938,238       991,252
                                     ------------  ------------
Loans, gross                         $26,673,315   $19,093,806
Deduct:
 Allowance for loan losses              (326,555)     (221,224)
                                     ------------  ------------
    Loans, net                       $26,346,760   $18,872,582
                                     ============  ============
</TABLE>

     The  Company  considers  impaired  loans to include all restructured loans,
loans on which the accrual of interest has been discontinued, loans that are not
performing  in  accordance  with agreed upon terms, and all other loans that are
performing  according  to  the  loan  agreement  but


                                       24
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


may  have  substantive indication of potential credit weakness.  At December 31,
2003 and 2002, the total recorded investment in impaired loans, all of which had
allowances  determined  in  accordance with FASB Statements No. 114 and No. 118,
amounted  to  approximately  $565,396  and  $591,976, respectively.  The average
recorded  investment  in  impaired  loans amounted to approximately $570,412 and
$316,411,  respectively,  for  the  years ended December 31, 2003 and 2002.  The
allowance  for  loan  losses related to impaired loans amounted to approximately
$32,150  and  $29,600  at  December  31,  2003 and 2002, respectively.  Interest
income  recognized  on  impaired loans for the years ended December 31, 2003 and
2002  amounted  to  $32,242  and  $19,718, respectively.  The amount of interest
recognized  on  impaired  loans  using  the  cash  method  of accounting was not
material  for  the years ended December 31, 2003 and 2002.  Loans on non-accrual
status at December 31, 2003 and 2002 had outstanding balances of $38,803 and $0,
respectively.  Interest  recognized  on  non-accruing loans at December 31, 2003
and  2002  was  $1,422  and $0, respectively.  The Company has no commitments to
lend  additional  funds  to  borrowers  whose  loans  have  been  modified.


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.  Real  estate,  receivables,  inventory,  machinery,  equipment, or
financial  instruments  generally  secure  the majority of the non-consumer loan
categories.  The  amount  of  collateral  obtained  is  based  upon management's
evaluation  of  the  borrower.

     Activity  within  the  Allowance  account  for the years ended December 31,
2003,  2002,  and  2001  follows:

<TABLE>
<CAPTION>
                                            Years ended December 31,
                                        --------------------------------
                                          2003        2002       2001
                                        ---------  ----------  ---------
<S>                                     <C>        <C>         <C>
Balance, beginning of year              $221,224   $   76,850  $    -  -
Add:  Provision for loan losses          121,461      144,374     76,850
Add:  Recoveries of previously charged
           off amounts                      -  -         -  -       -  -
                                        ---------  ----------  ---------
   Total                                $342,685   $  221,224  $  76,850
Deduct: Amount charged-off               (16,130)        -  -       -  -
                                        ---------  ----------  ---------
Balance, end of year                    $326,555   $  221,224  $  76,850
                                        =========  ==========  =========
</TABLE>


                                       25
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE 7 - PROPERTY AND EQUIPMENT

     Components  of  property and equipment included in the consolidated balance
sheets  at  December  31,  2003  and  2002  follow:

<TABLE>
<CAPTION>
                                       December 31,
                                 ------------------------
                                    2002         2001
                                 -----------  -----------
<S>                              <C>          <C>
Land                             $  750,614   $  750,614
Building                          1,872,135    1,662,411
Furniture, equipment                599,484      557,768
                                 -----------  -----------
  Property and equipment, gross  $3,222,233   $2,970,793
Deduct:
 Accumulated depreciation          (254,042)    (112,183)
                                 -----------  -----------
    Property and equipment, net  $2,968,191   $2,858,610
                                 ===========  ===========
</TABLE>

     Depreciation  expense  for the years ended December 31, 2003, 2002 and 2001
amounted  to  $141,859,  $69,828  and  $28,606,  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:

<TABLE>
<CAPTION>
Type of Asset            Life in Years  Depreciation Method
-----------------------  -------------  -------------------
<S>                      <C>            <C>
Furniture and equipment     3 to 7         Straight-line
Building                    5 o 40         Straight-line
</TABLE>


                                       26
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


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, 2003 and 2002, the Company had unused loan commitments of
approximately  $3,996,414  and  $2,103,992, respectively.  Additionally, standby
letters  of  credit  of  approximately  $171,986 and $80,162 were outstanding at
December  31,  2003  and  2002, 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 that
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.

     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.

     Effective  August  15, 2003, the Bank leased an office space in Charleston,
South  Carolina,  to be used as a loan production office.  The lease extends for
fifteen  months,  with  an option to renew for three additional years.  The Bank
may  cancel  the  lease at any time upon a thirty-day notice.  The monthly lease
payment  is  $667.

     Please refer to Note 14 concerning warrants and options earned by directors
and  Bank  personnel.


                                       27
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE  9  -  BORROWINGS

     During  calendar  year  2003,  the  Bank  obtained  funds,  in  the form of
borrowings,  from  the  Federal  Home  Loan  Bank  ("the  FHLB").  Additional
information  is  provided  below:

<TABLE>
<CAPTION>
                                         First
  Outstanding Borrowings                Possible
       December 31,                     Interest        Is
-------------------------  Interest    Adjustment    Principal   Maturity
    2003         2002      Rate       or Call Date  Amortizing?    Date
------------  -----------  ---------  ------------  -----------  --------
<S>           <C>          <C>        <C>           <C>          <C>
$  1,000,000  $      -  -    3.64%        N/A            No       9/24/08
     500,000         -  -    2.32%        N/A            No      12/22/05
------------  -----------  ---------  ------------  -----------  --------
$  1,500,000  $      -  -     N/A         N/A           N/A        N/A
============  ===========
</TABLE>

NOTE  10  -  DEPOSITS

     The following details deposit accounts at December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                            December 31,
                                      ------------------------
                                         2003         2002
                                      -----------  -----------
<S>                                   <C>          <C>
Non-interest bearing deposits         $ 2,413,409  $ 1,563,515
                                      -----------  -----------
Interest bearing deposits:
   NOW accounts                         1,863,490      925,533
   Money market accounts                3,447,943    2,207,093
   Savings                                526,333      225,769
   Time, less than $100,000            11,210,408   10,486,624
   Time, $100,000 and over              6,194,971    3,081,083
                                      -----------  -----------
     Total interest bearing deposits   23,243,145   16,926,102
                                      -----------  -----------

   Total deposits                     $25,656,554  $18,489,617
                                      ===========  ===========
</TABLE>


                                       28
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     At  December  31,  2003,  the  scheduled  maturities of all certificates of
deposit  were  as  follows:

<TABLE>
<CAPTION>
Year Ending
December 31,        Amount
------------     ------------
<S>              <C>

   2004          $  9,491,152
   2005             5,647,725
   2006               728,682
   2007             1,140,317
   2008               397,503
                 ------------
   Total         $ 17,405,379
                 ============
</TABLE>

NOTE 11 - INTEREST ON DEPOSITS AND BORROWINGS

     A summary of interest expense for the years ended December 31, 2003, 2002
and 2001 follows:

<TABLE>
<CAPTION>
                                                  December 31,
                                          ----------------------------
                                            2003      2002      2001
                                          --------  --------  --------
<S>                                       <C>       <C>       <C>
NOW accounts                              $ 15,949  $  7,170  $  3,239
Money market accounts                       45,858    37,475    11,828
Savings                                      3,798     1,425       343
Time, less than $100,000                   373,218   202,504     6,665
Time, $100,000 and over                    131,462    76,015     6,749
Other borrowings                             8,819     1,299    95,830
                                          --------  --------  --------
    Total interest on deposits
        and other borrowings              $579,104  $325,888  $124,654
                                          ========  ========  ========
</TABLE>


                                       29
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE  12  -  OTHER  OPERATING  EXPENSES

     A summary of other operating expenses for the years ended December 31,
2003, 2002 and 2001 follows:

<TABLE>
<CAPTION>
                                                    December 31,
                                            ----------------------------
                                              2003      2002      2001
                                            --------  --------  --------
<S>                                         <C>       <C>       <C>
Rent expense                                $  3,733  $ 42,750  $ 50,260
Postage and delivery                          19,540    14,511     7,345
Supplies and printing                         31,078    31,172    38,114
Taxes and insurance                           37,560    35,571    21,115
Utilities and telephone                       28,389    18,527    16,894
Repairs, maintenance and service contracts    12,573    22,917    27,627
All other                                     45,827    19,958    22,634
                                            --------  --------  --------
      Total other operating expenses        $178,700  $185,406  $183,989
                                            ========  ========  ========
</TABLE>

NOTE 13 - INCOME TAXES

     As  of December 31, 2003, 2002 and 2001, the Company's provision for income
taxes  consisted  of  the  following:

<TABLE>
<CAPTION>
                                              December 31,
                                      -------------------------------
                                       2003       2002        2001
                                      -------  ----------  ----------
<S>                                   <C>      <C>         <C>
Current                               $  -  -  $    -  -   $    -  -
Deferred                               10,977   (144,594)   (175,506)
                                      -------  ----------  ----------
Federal income tax expense/(benefit)  $10,977  $(144,594)  $(175,506)
                                      =======  ==========  ==========
</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,
                                    ----------------------------------
                                       2003        2002        2001
                                    ----------  ----------  ----------
<S>                                 <C>         <C>         <C>
Income taxes at statutory rate      $  10,226   $(130,033)  $(182,565)
State tax, net of Federal benefits       (318)    (15,298)     (6,114)
Change in valuation allowance            -  -        -  -       2,569
Other                                   1,069         737      10,604
                                    ----------  ----------  ----------
   Total                            $  10,977   $(144,594)  $(175,506)
                                    ==========  ==========  ==========
</TABLE>

     The tax effects of the temporary differences that comprise the net deferred
tax  assets  at  December  31,  2003,  and  2002  are  presented  below:


                                       30
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                                                    2003        2002
                                                 ----------  ----------
Deferred tax assets:
<S>                                              <C>         <C>
   Allowance for loan losses                     $ 111,029   $  75,216
   Net operating loss carryforward                 200,797     212,027
   Organization costs                               98,797     131,730
   Available for sale securities                    10,849        -  -
                                                 ----------  ----------
Gross deferred tax assets                        $ 421,472   $ 418,973
Less, deferred tax liabilities:
   Available for sale securities                      -  -      (3,736)
   Accumulated depreciation                         12,625        (310)
                                                 ----------  ----------
Deferred tax assets net of deferred liabilities  $ 434,097   $ 414,927
Less, valuation allowance                         (113,433)   (113,433)
                                                 ----------  ----------
      Net deferred tax assets                    $ 320,664   $ 301,494
                                                 ==========  ==========
</TABLE>

     The valuation allowance did not change during calendar years 2003 and 2002.
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,  2003.


NOTE  14  -  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  year  ended  December 31, 2003, 10,010 warrants were forfeited.  There
were  200,105  and  210,115  warrants outstanding at December 31, 2003 and 2002,
respectively.

     Options.  The  Company  has  a  stock  options  plan  with 97,905 shares of
     --------
options  authorized.  During  calendar  years  2003  and 2002, 19,919 and 28,581
shares of options, respectively, were granted at an exercise price of $10.00, an
amount  equal  to  the  Company's


                                       31
<PAGE>
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 was either exercised or forfeited during calendar years 2003
and  2002,  and as of December 31, 2003, 49,405 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, 2003 and 2002, loans outstanding to directors,
their related interests and executive officers aggregated $844,269 and $230,325,
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.

     A summary of the related party loan transactions during the calendar years
2003 and 2002 follows:

<TABLE>
<CAPTION>
                                Insider Loan Transactions
                             ------------------------------
                                  2003            2002
                             --------------  --------------
<S>                          <C>             <C>
Balance, beginning of year   $     230,325   $     230,275
New loans                          638,855          24,111
Less:  Principal reductions        (24,911)        (24,061)
                             --------------  --------------
Balance, end of year         $     844,269   $     230,325
                             ==============  ==============
</TABLE>

     Deposits  by directors and their related interests, as of December 31, 2003
and  2002  approximated  $789,138  and  $735,465,  respectively.


NOTE 15 - 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-three  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.


                                       32
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     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  $815,000.


NOTE 16 - REGULATORY MATTERS

     The  Company is governed by various regulatory agencies.  The FRB regulates
bank  holding  companies  and their nonbanking subsidiaries.  National banks are
primarily  regulated  by the OCC.  The FDIC also regulates all federally-insured
banks.  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
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, 2003, 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,  2003.

     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.


                                       33
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


     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, 2003, meet all capital adequacy requirements to which they
are  subject.

     As  of  December  31, 2003, the Bank was considered to be Well Capitalized.
There  are  no  conditions  or  events  since  December 31, 2003 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:


                                       34
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                                                  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, 2003:
Total capital-risk-based
(to risk-weighted assets):
   Bank                      $ 5,442   21.0%  $    2,075  >       8%  $           2,594  >         10%
                                                          -                              -
   Consolidated                5,470   21.1%       2,075  >       8%                N/A  >         N/A
                                                          -                              -

Tier 1 capital-risk-based
(to risk-weighted assets):
   Bank                      $ 5,118   19.7%  $    1,037  >       4%  $           1,556  >          6%
                                                          -                              -
   Consolidated                5,146   19.8%       1,037  >       4%                N/A            N/A
                                                          -

Tier 1 capital-leverage
(to average assets):
   Bank                      $ 5,118   18.1%  $    1,129  >       4%  $           1,411  >          5%
                                                          -                              -
   Consolidated                5,146   18.2%       1,129  >       4%                N/A            N/A
                                                          -


AS OF DECEMBER 31, 2002:
Total capital-risk-based
(to risk-weighted assets):
   Bank                      $ 5,331   25.6%  $    1,663  >       8%  $           2,078  >         10%
                                                          -                              -
   Consolidated                5,357   25.7%       1,633  >       8%                N/A  >         N/A
                                                          -                              -

Tier 1 capital-risk-based
(to risk-weighted assets):
   Bank                      $ 5,110   24.6%  $      831  >       4%  $           1,247  >          6%
                                                          -                              -
   Consolidated                5,136   24.7%         831  >       4%                N/A            N/A
                                                          -

Tier 1 capital-leverage
(to average assets):
   Bank                      $ 5,110   22.6%  $      906  >       4%  $           1,132  >          5%
                                                          -                              -
   Consolidated                5,136   22.7%         907  >       4%                N/A            N/A
                                                          -
</TABLE>


                                       35
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


NOTE  17  -  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.


NOTE  18  -  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:                                             2003          2002
-------                                         ------------  ------------
<S>                                             <C>           <C>
Cash                                            $    27,532   $    27,127
Investment in Bank                                5,097,372     5,106,757
                                                ------------  ------------
   Total Assets                                 $ 5,124,904   $ 5,133,884
                                                ============  ============

Liabilities and Shareholders' Equity:
-------------------------------------
Accounts payable                                $      -  -   $      -  -
                                                ------------  ------------
   Total Liabilities                            $      -  -   $      -  -
                                                ------------  ------------

Common stock                                    $ 6,213,061   $ 6,213,061
Retained (deficit)                               (1,067,330)   (1,086,429)
Accumulated other comprehensive income              (20,827)        7,252
                                                ------------  ------------
   Total Shareholders' equity                   $ 5,124,904   $ 5,133,884
                                                ------------  ------------
   Total Liabilities and Shareholders' equity   $ 5,124,904   $ 5,133,884
                                                ============  ============
</TABLE>


                                       36
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                 Parent Company Statements of Operations
                 ---------------------------------------

                                            Years Ended December 31,
                                        ---------------------------------
Revenues:                                 2003       2002        2001
---------                               --------  ----------  -----------
<S>                                     <C>       <C>         <C>
Interest income                         $    405  $     532   $   17,062
Other                                       -  -      5,500         -  -
                                        --------  ----------  -----------
     Total revenues                     $    405  $   6,032   $   17,062
                                        --------  ----------  -----------

Expenses:
---------
  Interest expense                      $   -  -  $    -  -   $   20,480
  Other expenses                            -  -       -  -       46,021
                                        --------  ----------  -----------
     Total expenses                     $   -  -  $    -  -   $   66,501
                                        --------  ----------  -----------

Income before equity in undistributed
  earnings/(loss) of Bank               $    405  $   6,032   $  (49,439)
Equity in undistributed earnings/
  (loss) of Bank                          18,694   (243,889)    (312,013)
                                        --------  ----------  -----------

Net income/(loss)                       $ 19,099  $(237,857)  $ (361,452)
                                        ========  ==========  ===========
</TABLE>


                                       37
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2003 AND 2002


                      Parent Company Statements of Cash Flows
                      ---------------------------------------

                                                         Years Ended December 31,
                                                   ------------------------------------
                                                      2003        2002         2001
                                                   ----------  ----------  ------------
<S>                                                <C>         <C>         <C>
Cash flows from operating activities:
-------------------------------------
  Net income/(loss)                                $  19,099   $(237,857)  $  (361,452)
  Adjustments to reconcile net income/(loss) to
  net cash provided by operating activities:
     Equity in undistributed loss of the Bank        (18,694)    243,890       312,013
 Decrease in other assets                               -  -        -  -       866,488
 (Decrease) in payables                                 -  -      (6,000)      (10,484)
                                                   ----------  ----------  ------------
Net cash provided by operating activities          $     405   $      33   $   806,565
                                                   ----------  ----------  ------------

Cash flows from investing activities:
-------------------------------------
 Investment in Bank                                $    -  -   $    -  -   $(5,655,408)
                                                   ----------  ----------  ------------
Net cash used in financing activities              $    -  -   $    -  -   $(5,655,408)
                                                   ----------  ----------  ------------

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

Net increase in cash and cash equivalents          $     405   $      33   $   (13,138)
Cash and cash equivalents, beginning of the year      27,127      27,094        40,232
                                                   ----------  ----------  ------------
Cash and cash equivalents, end of year             $  27,532   $  27,127   $    27,094
                                                   ==========  ==========  ============
</TABLE>


                                       38
<PAGE>
<TABLE>
<CAPTION>
                                      CORPORATE AND SHAREHOLDER INFORMATION

                                         DIRECTORS AND EXECUTIVE OFFICERS

<S>                                    <C>                                  <C>
LOUIS O. DORE                          PAUL M. DUNNAVANT, III               MARTHA B. FENDER
Attorney                               Chief Financial Officer              President and Business Owner
Louis O. Dore, P.A.                    Holmes Timber, Inc. &                Coastal Carolina Realty, Inc.
                                         Atlantic Coast Homes, Inc.

DARYL A. FERGUSON                      D. MARTIN GOODMAN                    WILLIAM B. GOSSETT
Co-Chairman                            Restaurateur                         President and Chief Executive Officer
Hungarian Telephone Company            Area Manager                         Islands Bancorp, Inc.
                                       University of South Carolina Small
                                       Business Development Center

STANCEL E. KIRKLAND, SR., ESQ.         CARL E. LIPSCOMB                     EDWARD J. MCNEIL, JR., MD
Business Owner                         Vice President                       President and Physician
Country Chef, LLC;                     Argus Corp. (construction)           Internal Medicine Healthcare, P.A.
Managing Member of
Bull Point Plantation

JIMMY LEE MULLINS, SR.                 FRANCES K. NICHOLSON                 NARAYAN SHENOY, MD
President and Chief Executive Officer  Managing Partner                     Partner & Anesthesiologist
Mullins Trucking Company, Inc.         Nicholson Investments, LLC           Critical Health Systems, Inc.

J. FRANK WARD                          BRUCE K. WYLES, DDS
Realtor                                Dentist
Coastal Carolina Realty
</TABLE>

                              COPIES OF FORM 10-KSB

     A copy of the Company's 2003 Annual Report on Form 10-KSB can be obtained
free of charge on the Securities and Exchange Commission's website (www.sec.gov)
                                                                    -----------
or by calling Ms. Patsy Masters at the Bank at (843) 521-1968.

                      MARKET FOR THE COMPANY'S COMMON STOCK

     There is no public market for the Company's common stock.  Very few trades
took place during calendar years 2002 and 2003.  During 2002 all trades known to
management were at approximately $10.00 per share.  During 2003 all trades known
to management were at $10.00 per share, with the exception of one trade which
took place on October 10, 2003 at $7.87 per share.


                                       39
<PAGE>