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

                                   FORM 10-KSB

(Mark  One)

[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934
     For fiscal year ended DECEMBER 31, 2005
                           -----------------

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

                        COMMISSION FILE NUMBER 000-29267

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

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

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

                                 (843) 521-1968
                    ----------------------------------------
                (Issuer's Telephone Number, Including Area Code)

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

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

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

Check  whether the issuer: (1) filed all reports required to be filed by Section
13  or  15(d) of the Exchange Act during the past 12 months (or for such shorter
period  that  registrant  was  required  to  file such reports) and (2) has been
subject  to  such  filing  requirements  for  past  90  days.  Yes [X]  No [ ]

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

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

State issuer's revenue for its most recent fiscal year: $4,337,576
                                                        ----------

State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates  computed  by  reference  to the price at which the stock was
sold,  or  the  average  bid  and  asked  prices  of such common equity, as of a
specified  date  within  the past 60 days: THE AGGREGATE NUMBER OF SHARES OF THE
                                           -------------------------------------
COMPANY'S  COMMON STOCK HELD BY NON-AFFILIATES AS OF MARCH 13, 2006 WAS 487,442.
--------------------------------------------------------------------------------
THERE  IS  NO PUBLIC TRADING MARKET FOR THE COMPANY'S COMMON STOCK. BASED ON THE
--------------------------------------------------------------------------------
LAST  SALE  OF THE COMPANY'S COMMON STOCK KNOWN TO MANAGEMENT, WHICH OCCURRED ON
--------------------------------------------------------------------------------
MARCH  6,  2006 AT $14.00 PER SHARE, THE AGGREGATE MARKET VALUE OF THE COMPANY'S
--------------------------------------------------------------------------------
COMMON  STOCK  HELD  BY  NON-AFFILIATES  IS  $6,824,188.
-------------------------------------------------------

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest practicable date.  740,260 SHARES OF COMMON STOCK WERE
                                             -----------------------------------
OUTSTANDING  AS  OF  MARCH  13,  2006.
-------------------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the fiscal year ended December
31,  2005  are  incorporated  by  reference into Parts I and II. Portions of the
Proxy  Statement for the Annual Meeting of Shareholders, scheduled to be held on
April  25,  2006,  are  incorporated  by  reference  into  Part  III.

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


<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

                                                                         Page
                                                                        Number
<S>         <C>                                                         <C>
PART I      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      1

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

  ITEM 2.   DESCRIPTION OF PROPERTIES . . . . . . . . . . . . . . . . .     28

  ITEM 3.   LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . .     29

  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . .     30

PART II     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     30

  ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . .      30

  ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS. . . . . . . . . . . .     30

  ITEM 7.   FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . .     30

  ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . .     30

  ITEM 8A.  CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . .     30

  ITEM 8B.  OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .     31

PART III    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     32

  ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
            PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.     32

  ITEM 10.  EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . .     32

  ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . .     32

  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . .     33

  ITEM 13.  EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . .     33

  ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . .     34
</TABLE>


<PAGE>
                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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

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

          -    lack of sustained growth in the economy of Beaufort County;

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

          -    changes in the legislative and regulatory environment;

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

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

     All forward-looking statements attributable to the Company or the Bank are
expressly qualified in their entirety by these cautionary statements. Both the
Company and the Bank disclaim any intent or obligation to update these
forward-looking statements, whether as a result of new information, future
events or otherwise. Our actual results may differ significantly from those we
discuss in these forward-looking statements.

     For other factors, risks and uncertainties that could cause our actual
results to differ materially from estimates and projections contained in these
forward-looking statements, please read the "Risk Factors" section of this
Report beginning on page 6.

                                 ISLANDS BANCORP

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

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


                                        1
<PAGE>
                                ISLANDS COMMUNITY

GENERAL

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

PHILOSOPHY

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

MARKET AREA AND COMPETITION

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

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

     The Bank competes with other commercial banks, savings and loan
associations, credit unions, money market mutual funds and other financial
institutions conducting business in the Beaufort County market and elsewhere.
Many of the Bank's competitors have equal or greater financial or banking
related resources than the Company and the Bank. According to information
provided by the Federal Deposit Insurance Corporation (the "FDIC"), as of June
30, 2005, the Beaufort County area was served by 19 banking and savings
institutions with 62 offices. These competitors offer the same or similar
products and services as the Bank. Currently, the Bank's three largest
competitors in terms of market share are Wachovia Bank, N.A., Bank of America,
N.A. and South Carolina B&T, N.A.

     The Bank operates a loan production office near the Citadel Mall in
Charleston, South Carolina. This limited service office does not accept deposits
and offers small business loans guaranteed by the U.S. Small Business
Administration. The Charleston market was selected because of the size of the
market


                                        2
<PAGE>
and the close proximity to our home office. The Charleston loan production
office is not expected to cause a material impact on the Bank's overall
operation or safety and soundness while providing an opportunity to generate fee
income.

LENDING SERVICES

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

<TABLE>
<CAPTION>
          LOAN CLASSIFICATION            PERCENTAGE
          -------------------            -----------
<S>                                      <C>

          Real estate loans                  70%
          Consumer loans                     10%
          Commercial loans.                  20%
</TABLE>

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

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

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

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

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

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

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


                                        3
<PAGE>
     -    COMMERCIAL REAL ESTATE. The Bank offers commercial real estate loans
          to developers of both commercial and residential properties. The Bank
          manages its credit risk by actively monitoring such measures as
          advance rate, cash flow, collateral value and other appropriate credit
          factors. Risks associated with commercial real estate loans include
          the general risk of the failure of each commercial borrower, which
          will be different for each type of business and commercial entity. We
          evaluate each business on an individual basis and attempt to determine
          its business risks and credit profile. Management attempts to reduce
          credit risks in the commercial real estate portfolio by emphasizing
          loans on owner-occupied office and retail buildings where the
          loan-to-value ratio, established by independent appraisals, does not
          exceed 80 percent. In addition, we may also require personal
          guarantees of the principal owners.

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

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

     CONSUMER AND INSTALLMENT LOANS. Consumer loans include lines of credit and
term loans secured by second mortgages on the residences of borrowers for a
variety of purposes including home improvements, education and other personal
expenditures. Consumer loans also include installment loans to individuals for
personal, family and household purposes, including automobile loans to
individuals and pre-approved lines of credit. Consumer loans generally involve
more risk than first mortgage loans


                                        4
<PAGE>
because the collateral for a defaulted loan may not provide an adequate source
of repayment of the principal due to damage to the collateral or other loss of
value while the remaining deficiency often does not warrant further collection
efforts. In addition, consumer loan performance depends upon the borrower's
continued financial stability and is, therefore, more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Various federal
and state laws also limit the amount that can be recovered.

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

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

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

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


                                        5
<PAGE>
     The Bank's asset/liability mix is monitored on a regular basis with a
monthly report detailing interest-sensitive assets and interest-sensitive
liabilities prepared and presented to the board of directors. The objective of
this policy is to control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on the Bank's
earnings.

EMPLOYEES

     At December 31, 2005, the Company and the Bank employed 18 full-time
employees and two part-time employees. Islands Bancorp does not have any
employees other than its officers who are also employees of the Bank. The
Company considers its relationship with its employees to be excellent.

                                  RISK FACTORS

     An investment in our common stock involves a significant degree of risk. If
any of the following risks or other risks, which have not been identified or
which we may believe are immaterial or unlikely, actually occur, our business,
financial condition and results of operations could be harmed. In such a case,
the trading price of our common stock could decline, and you may lose all or
part of your investment. The risks discussed below include forward-looking
statements, and our actual results may differ substantially from those discussed
in these forward-looking statements.

GOVERNMENT  REGULATION  MAY  HAVE  AN  ADVERSE  EFFECT  ON OUR PROFITABILITY AND
GROWTH.

     Bank holding companies and banks are subject to extensive state and federal
government supervision and regulation. Changes in state and federal banking laws
and regulations or in federal monetary policies could adversely affect our
ability to maintain profitability and continue to grow. For example, new
legislation or regulation could limit the manner in which we may conduct our
business, including our ability to obtain financing, attract deposits, make
loans and achieve satisfactory interest spreads. Many of these regulations are
intended to protect depositors, the public and the FDIC, not shareholders. In
addition, the burden imposed by federal and state regulations may place us at a
competitive disadvantage compared to competitors who are less regulated. The
laws, regulations, interpretations and enforcement policies that apply to us
have been subject to significant, and sometimes retroactively applied, changes
in recent years, and may change significantly in the future. Future legislation
or government policy may also adversely affect the banking industry or our
operations.

INDUSTRY COMPETITION MAY HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY.

     Competition in the banking and financial services industry is intense, and
our profitability depends upon our continued ability to compete in our market
area. We compete with national, regional and community banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies and brokerage and investment banking firms operating locally and
elsewhere. In addition, because the Gramm-Leach-Bliley Act now permits banks,
securities firms and insurance companies to affiliate, a number of larger
financial institutions and other corporations offering wider variety of
financial services than we currently offer could enter and aggressively compete
in the market we currently serve. Many of these competitors have substantially
greater resources, lending limits and operating histories than we do and may
offer services that we do not or cannot provide.

UNEXPECTED CHANGES IN INTEREST RATES MAY DECREASE OUR NET INTEREST INCOME.

     If we are unsuccessful in managing interest rate fluctuations, our net
interest income could decrease materially. Our operations depend substantially
on our net interest income, which is the


                                        6
<PAGE>
difference between the interest income earned on our interest-earning assets and
the interest expense paid on our interest-bearing liabilities. Like most
depository institutions, our earnings and net interest income are affected by
changes in market interest rates and other economic factors beyond our control.

AN  ECONOMIC  DOWNTURN,  ESPECIALLY  IN  COASTAL  SOUTH  CAROLINA, COULD HAVE AN
ADVERSE  EFFECT  ON  THE  QUALITY  OF  OUR  LOAN  PORTFOLIO  AND  OUR  FINANCIAL
PERFORMANCE.

     Economic recession over a prolonged period or other economic problems in
Beaufort County, South Carolina or in our state or nation generally could have a
material adverse impact on the quality of our loan portfolio and the demand for
our products and services. For example, a downturn in the local economy could
make it more difficult for borrowers to repay their loans, which could lead to
loan losses. This could in turn reduce our net income and profitability.

IF  THE  VALUE  OF  REAL ESTATE IN OUR CORE MARKET WERE TO DECLINE MATERIALLY, A
SIGNIFICANT  PORTION  OF  OUR  LOAN PORTFOLIO COULD BECOME UNDER-COLLATERALIZED,
WHICH  COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

     With most of our loans concentrated in Beaufort County, South Carolina, a
decline in local economic conditions could adversely affect the values of our
real estate collateral. Consequently, a decline in local economic conditions may
have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are
geographically diverse.

     In addition to considering the financial strength and cash flow
characteristics of borrowers, we often secure loans with real estate collateral.
At December 31, 2005, approximately 79.4% of our loans had real estate as a
primary or secondary component of collateral. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended. If
we are required to liquidate the collateral securing a loan to satisfy the debt
during a period of reduced real estate values, our earnings and capital could be
adversely affected.

OUR  BUSINESS  STRATEGY  INCLUDES  THE  CONTINUATION  OF  GROWTH  PLANS, AND OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED IF WE
FAIL TO GROW OR FAIL TO MANAGE OUR GROWTH EFFECTIVELY.

     We intend to continue pursuing a growth strategy for our business. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in growth stages of development. We cannot
assure you we will be able to expand our market presence in our existing markets
or successfully enter new markets or that any such expansion will not adversely
affect our results of operations. Failure to manage our growth effectively could
have a material adverse effect on our business, financial condition, results of
operations, or future prospects, and could adversely affect our ability to
successfully implement our business strategy. Also, if our growth occurs more
slowly than anticipated or declines, our results of operations could be
materially adversely affected.


                                        7
<PAGE>
     Our ability to grow successfully will depend on a variety of factors
including the continued availability of desirable business opportunities, the
competitive responses from other financial institutions in our market areas and
our ability to manage our growth. While we believe we have the internal systems
in place to manage our future growth, there can be no assurance that growth
opportunities will be available or growth will be managed successfully.

OPENING NEW OFFICES MAY NOT RESULT IN INCREASED ASSETS OR REVENUES FOR US.

     The investment necessary for branch expansion may negatively impact our
efficiency ratio. There is a risk that we will be unable to manage our growth,
as the process of opening new branches may divert our time and resources. There
is also risk that we may fail to open any additional branches, and a risk that,
if we do open these branches, they may not be profitable which would negatively
impact our results of operations.

ADDITIONAL  GROWTH MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, BUT
THAT  CAPITAL  MAY  NOT  BE  AVAILABLE  WHEN IT IS NEEDED, WHICH COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. We will, at some point,
need to raise additional capital to support our continued growth. Our ability to
raise additional capital, when needed, will depend on conditions in the capital
markets at that time, which are outside our control, and on our financial
performance. Accordingly, there is no assurance of our ability to raise
additional capital, when needed, on terms acceptable to us. If we cannot raise
additional capital when needed, our ability to further expand our operations
could be materially impaired.

THERE  IS  NO  ACTIVE  TRADING  MARKET  FOR OUR STOCK AND IT IS UNLIKELY THAT AN
ACTIVE TRADING MARKET WILL DEVELOP.

     There is no public trading market for our common stock, and an active
trading market is not likely to develop in the foreseeable future. Accordingly,
shareholders who desire to dispose of all or a portion of their shares of common
stock may not be able to do so except by private direct negotiations with third
parties, assuming that third parties are willing to purchase their shares.

ANTI-TAKEOVER  PROVISIONS  IN  OUR ARTICLES OF INCORPORATION AND STATE CORPORATE
LAWS  COULD  DETER OR PREVENT TAKE-OVER ATTEMPTS BY A POTENTIAL PURCHASER OF OUR
COMMON  STOCK  AND  DEPRIVE SHAREHOLDERS OF THE OPPORTUNITY TO OBTAIN A TAKEOVER
PREMIUM FOR THEIR SHARES.

     In many cases, shareholders receive a premium for their shares when a
company is purchased by another. Various provisions in our articles of
incorporation and bylaws and state corporate laws could deter and make it more
difficult for a third party to bring about a merger, sale of control, or similar
transaction without approval of our board of directors. These provisions tend to
perpetuate existing management. As a result, you may be deprived of
opportunities to sell some or all of your shares at prices that represent a
premium over market prices. These provisions, which could make it less likely
that a change in control will occur, include:

     -    provisions in our articles of incorporation establishing three classes
          of directors with staggered terms, which means that only one-third of
          the members of the board of directors is elected each year and each
          director serves for a term of three years.


                                        8
<PAGE>
     -    provisions in our articles of incorporation authorizing the board of
          directors to issue a series of preferred stock without shareholder
          action, which issuance could discourage a third party from attempting
          to acquire, or make it more difficult for a third party to acquire, a
          controlling interest in the Company.

     -    provisions in our bylaws relating to meetings of shareholders which
          limit who may call a meeting and what matters will be voted upon.

     -    state law provisions that require two-thirds of the shareholders to
          approve mergers and similar transactions, and amendments to the
          articles of incorporation.

OUR  EXECUTIVE  OFFICERS  AND  DIRECTORS  OWN  A  SIGNIFICANT  PORTION  OF  OUR
OUTSTANDING COMMON STOCK AND CAN INFLUENCE SHAREHOLDER DECISIONS.

     As  of  March  13,  2005, our directors and executive officers beneficially
owned  or  controlled  388,147  shares,  including shares subject to exercisable
warrants and options, representing approximately 44.3% of our outstanding common
stock.  As  a  result  of  their ownership, the directors and executive officers
have  the  ability,  if  they  voted  their  shares in concert, to influence the
outcome of all matters submitted to our stockholders for approval, including the
election  of  directors.


                           SUPERVISION AND REGULATION

     Both the Company and the Bank are subject to extensive state and federal
banking regulations that impose restrictions on and provide for general
regulatory oversight of their operations. These laws are generally intended to
protect depositors and not shareholders. The following discussion describes the
material elements of the regulatory framework that applies to us.

                                 ISLANDS BANCORP

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

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

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

     -    acquiring all or substantially all of the assets of any bank; or

     -    merging or consolidating with any other bank holding company.

     Additionally, the BHC Act provides that the Federal Reserve may not approve
any of these transactions if it would result in or tend to create a monopoly or,
substantially lessen competition or otherwise function as a restraint of trade,
unless the anticompetitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and


                                        9
<PAGE>
future prospects of the bank holding companies and banks concerned and the
convenience and needs of the community to be served. The Federal Reserve's
consideration of financial resources generally focuses on capital adequacy,
which is discussed below.

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

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

     -    the bank holding company has registered securities under Section 12 of
          the Securities Act of 1934; or

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

     Our common stock is registered under Section 12 the Securities Exchange Act
of 1934 (the "Exchange Act"). The regulations provide a procedure for
challenging the rebuttable presumption of control.

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

     -    banking or managing or controlling banks; and

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

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

     -    factoring accounts receivable;

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

     -    leasing personal or real property;

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

     -    trust company functions;

     -    financial and investment advisory activities;

     -    conducting discount securities brokerage activities;


                                       10
<PAGE>
     -    underwriting and dealing in government obligations and money market
          instruments;

     -    providing specified management consulting and counseling activities;

     -    performing selected data processing services and support services;

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

     -    performing selected insurance underwriting activities.

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

     In addition to the permissible bank holding company activities listed
above, a bank holding company may qualify and elect to become a financial
holding company under the Gramm-Leach-Bliley Financial Services Modernization
Act of 1999. A financial holding company may engage in additional activities
that are financial in nature or incidental or complementary to financial
activity. The BHC Act expressly lists the following activities as financial in
nature:

     -    lending, trust and other banking activities;

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

     -    providing financial, investment, or advisory services;

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

     -    underwriting, dealing in or making a market in securities;

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

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

     -    merchant banking through securities or insurance affiliates; and

     -    insurance company portfolio investments.

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


                                       11
<PAGE>
     SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for the Bank and to
commit resources to support the Bank. This support may be required at times
when, without this Federal Reserve policy, the Company might not be inclined to
provide it. In addition, any capital loans made by the Company to the Bank will
be repaid only after its deposits and various other obligations are repaid in
full. In the unlikely event of the Company's bankruptcy, any commitment by it to
a federal bank regulatory agency to maintain the capital of the Bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.

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

                                ISLANDS COMMUNITY

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

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

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

     PROMPT CORRECTIVE ACTION. The FDIC Improvement Act of 1991 established a
system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have
established five capital categories (well capitalized, adequately


                                       12
<PAGE>
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized) in which all institutions are placed. The federal banking
agencies have specified by regulation the relevant capital level for each
category. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically
undercapitalized.

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

     FDIC INSURANCE ASSESSMENTS. The FDIC has adopted a risk-based assessment
system for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized. These three categories are substantially similar to the prompt
corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory
subgroups based on a supervisory evaluation that the institution's primary
federal regulator provides to the FDIC and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of
deposits, depending on the institution's capital group and supervisory subgroup.
In addition, the FDIC imposes assessments to help pay off the $780 million in
annual interest payments on the $8 billion Financing Corporation bonds issued in
the late 1980s as part of the government rescue of the thrift industry. This
assessment rate is adjusted quarterly and is set at 1.32 cents per $100 of
deposits for the first quarter of 2006.

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

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


                                       13
<PAGE>
     OTHER REGULATIONS. Interest and other charges collected or contracted for
by the Bank are subject to state usury laws and federal laws concerning interest
rates. For example, under the Servicemembers Civil Relief Act, which amended the
Soldiers' and Sailors' Civil Relief Act of 1940, a lender is generally
prohibited from charging an annual interest rate in excess of 6% on any
obligation of a borrower who is on active duty with the United States military.

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

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

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

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

     -    The Fair Credit Reporting Act of 1978, governing the use and provision
          of information to credit reporting agencies;

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

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

     The deposit operations of the Bank are subject to the following:

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

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

CAPITAL ADEQUACY

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

     The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-


                                       14
<PAGE>
balance-sheet exposure, and to minimize disincentives for holding liquid assets.
Assets and off-balance-sheet items, such as letters of credit and unfunded loan
commitments, are assigned to broad risk categories, each with appropriate risk
weights. The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.

     The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier
2 Capital. Tier 1 Capital generally consists of common stock, minority interests
in the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of qualifying cumulative perpetual
preferred stock and trust preferred securities, less goodwill and other
specified intangible assets. Tier 1 Capital must equal at least 4% of
risk-weighted assets. Tier 2 Capital generally consists of subordinated debt,
other preferred stock, and a limited amount of loan loss reserves. The total
amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31,
2005, our ratio of total capital to risk-weighted assets was 11.70% and our
ratio of Tier 1 Capital to risk-weighted assets was 10.48%.

     In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 2005, our leverage ratio was 9.06%. The guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without reliance on intangible assets. The
Federal Reserve considers the leverage ratio and other indicators of capital
strength in evaluating proposals for expansion or new activities.

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

PAYMENT OF DIVIDENDS

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

     The Bank is required by federal law to obtain prior approval of the OCC for
payments of dividends if the total of all dividends declared by our board of
directors in any year will exceed (1) the total of the Bank's net profits for
that year, plus (2) the Bank's retained net profits of the preceding two years,
less any required transfers to surplus. The payment of dividends by the Company
and the Bank may also be affected by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.

     In addition, the OCC may require, after notice and a hearing, that the Bank
stop or refrain from engaging in any practice it considers unsafe or unsound.
The federal banking agencies have indicated that paying dividends that deplete a
depository institution's capital base to an inadequate level would be an unsafe
and unsound banking practice. Under the FDIC Improvement Act of 1991, a
depository institution


                                       15
<PAGE>
may not pay any dividend if payment would cause it to become undercapitalized or
if it already is undercapitalized. Moreover, the federal agencies have issued
policy statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings. See
"-Prompt Corrective Action."

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

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

     -    a bank's loans or extensions of credit to affiliates;

     -    a bank's investment in affiliates;

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

     -    loans or extensions of credit to third parties collateralized by the
          securities or obligations of affiliates; and

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

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

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

     The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.

PRIVACY

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


                                       16
<PAGE>
CONSUMER CREDIT REPORTING

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

     The FCRA Amendments include, among other things:

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

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

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

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

ANTI-TERRORISM LEGISLATION

     The Bank is subject to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"USA PATRIOT Act"), as it amended the Bank Secrecy Act and the rules and
regulations of the Office of Foreign Assets Control (the "OFAC"). These statutes
and related rules and regulations impose requirements and limitations on
specific financial transactions and account relationships and are intended to
guard against money laundering and terrorism financing. The Bank has established
a customer identification program pursuant to Section 326 of the USA PATRIOT Act
and the Bank Secrecy Act, and otherwise has implemented policies and procedures
to comply with the foregoing rules.

FEDERAL DEPOSIT INSURANCE REFORM

     On February 8, 2006, President Bush signed the Federal Deposit Insurance
Reform Act of 2005 ("FDIRA"). The FDIC must adopt rules implementing the various
provisions of FDIRA by November 5, 2006.

     Among other things, FDIRA changes the Federal deposit insurance system by:

          -    raising the coverage level for retirement accounts to $250,000;

          -    indexing deposit insurance coverage levels for inflation
               beginning in 2012;


                                       17
<PAGE>
          -    prohibiting undercapitalized financial institutions from
               accepting employee benefit plan deposits;

          -    merging the Bank Insurance Fund and Savings Association Insurance
               Fund into a new Deposit Insurance Fund (the "DIF"); and

          -    providing credits to financial institutions that capitalized the
               FDIC prior to 1996 to offset future assessment premiums.

     FDIRA also authorizes the FDIC to revise the current risk-based assessment
system, subject to notice and comment and caps the amount of the DIF at 1.50% of
domestic deposits. The FDIC must issue cash dividends, awarded on a historical
basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF
exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash
dividends, awarded on a historical basis, for half of the amount of the excess.

PROPOSED LEGISLATION AND REGULATORY ACTION

     New regulations and statutes are regularly proposed that contain
wide-ranging potential changes to the structures, regulations and competitive
relationships of financial institutions operating and doing business in the
United States. We cannot predict whether or in what form any proposed regulation
or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute.

EFFECT OF GOVERNMENTAL MONETARY POLICIES

     Our earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The
Federal Reserve's monetary policies have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve affect the levels of bank loans, investments and deposits through its
control over the issuance of United States government securities, its regulation
of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject. We cannot predict the nature or
impact of future changes in monetary and fiscal policies.


                        SELECTED STATISTICAL INFORMATION

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

     The  following  is a presentation of the average consolidated balance sheet
of the Company for the years ended December 31, 2005 and 2004. This presentation
includes  all  major  categories of interest-earning assets and interest-bearing
liabilities:  ($  in  thousands)

<TABLE>
<CAPTION>
                            AVERAGE CONSOLIDATED ASSETS

                                                           Year Ended December 31,
                                                          ------------------------
                                                             2005         2004
                                                          -----------  -----------
<S>                                                       <C>          <C>
          Cash and due from banks                         $       936  $       726
                                                          -----------  -----------

          Taxable securities                                    2,574        2,198
          Federal funds sold                                    3,240        1,129
          Interest bearing deposits                                73           39
          Net loans                                            48,591       33,631
                                                          -----------  -----------
          Total interest-earning assets                        54,478       36,997
          Other assets                                          2,850        3,067
                                                          -----------  -----------

              Total assets                                $    58,264  $    40,790
                                                          ===========  ===========

     AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

          Noninterest-bearing deposits                    $     6,220  $     3,996
          NOW, MMDA and savings deposits                        8,188        7,342
          Time deposits                                        35,798       22,467
          Other borrowings                                      2,188        1,790
          Other liabilities                                       376           74
                                                          -----------  -----------
              Total liabilities                                52,770       35,669

          Stockholders' equity                                  5,494        5,121
                                                          -----------  -----------
              Total liabilities and stockholders' equity  $    58,264  $    40,790
                                                          ===========  ===========
</TABLE>


                                       18
<PAGE>
          The following is a presentation of an analysis of the net interest
earnings of the Company for the period indicated with respect to each major
category of interest-earning asset and each major category of interest-bearing
liability: ($ in thousands)

<TABLE>
<CAPTION>
                                Year Ended December 31, 2005         Year Ended December 31, 2004
                            ------------------------------------  ----------------------------------
                             Interest      Average     Interest    Average
                             Average       Earned/      Yield/     Average       Earned/     Yield/
                              Amount        Paid         Rate       Amount        Paid        Rate
                            ----------    ---------    ---------  ----------    ---------    -------
<S>                         <C>           <C>          <C>        <C>           <C>          <C>
             Assets
             ------
     Taxable securities     $   2,574     $     81         3.15%  $   2,198     $     58       2.64%
     Federal funds sold         3,240          106         3.27%      1,129           16       1.42%
     Int. bearing deposits         73            2         2.74%         39            -          -
     Net loans                 48,591(1)     3,683(2)      7.58%     33,631(1)     2,253(2)    6.70%
                            ------------  -----------  ---------  ------------  -----------  -------
     Total earning assets   $  54,478     $  3,872         7.11%  $  36,997     $  2,327       6.29%
                            ==========    =========    =========  ==========    =========    =======

          Liabilities
         -----------
     NOW/MMDA/savings       $   8,188     $    136         1.66%  $   7,342     $     89       1.21%
     Time deposits             35,798        1,195         3.34%     22,467          631       2.81%
     Other borrowings           2,188           73         3.34%      1,790           57       3.18%
                            ----------    ---------    ---------  ----------    ---------    -------
     Total interest-
      bearing liabilities   $  46,174     $  1,404         3.04%  $  31,599     $    777       2.46%
                            ==========    =========    =========  ==========    =========    =======

     Net yield on
      earning assets                                       4.53%                               4.19%
                                                       =========                             =======
<FN>
______________________
1     At  December  31, 2005 and 2004, loans on non-accrual status totaled $313,000 and
      $249,000.
2     Interest  earned on net loans includes $238,000 and $141,000 in loan fees for the
      years ended December 31, 2005 and 2004, respectively.
</TABLE>


                                       19
<PAGE>
                      RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

     The effect on interest income, interest expense and net interest income in
the period indicated from changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance. The effect of a change in average rate has
been determined by applying the change in average rate to the average balance in
the earlier period. Changes resulting from average balance/rate variances are
allocated proportionately between the change in volume and the change in rate.
($ in thousands)

<TABLE>
<CAPTION>
                                     Year Ended December 31, 2005
                                              Compared to
                                     Year Ended December 31, 2004
                                    -------------------------------
                                      Increase (Decrease) due to

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

     Interest earned on:
       Taxable securities           $      11  $      12  $      23
       Federal funds sold                  53         37         90
       Interest bearing deposits            2         --          2
       Net loans                        1,103        326      1,429
                                    ---------  ---------  ---------
         Total interest income          1,169        375      1,544
                                    ---------  ---------  ---------

     Interest paid on:
       NOW/MMDA/savings deposits           11         37         48
       Time deposits                      427        136        563
       Other borrowings                    13          3         16
                                    ---------  ---------  ---------
         Total interest expense           451        176        627
                                    ---------  ---------  ---------

     Change in net interest income  $     718  $     199  $     917
                                    =========  =========  =========
</TABLE>


                                       20
<PAGE>
<TABLE>
<CAPTION>
                                       Year Ended December 31, 2004
                                                Compared to
                                       Year Ended December 31, 2003
                                    ----------------------------------
                                        Increase (Decrease) due to

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

       Interest earned on:
       Taxable securities           $      (3)  $     (14)  $     (17)
       Federal funds sold                   5           3           8
       Net loans                          731         (40)        691
                                    ----------  ----------  ----------
         Total interest income            733         (51)        682
                                    ----------  ----------  ----------

     Interest paid on:
       NOW/MMDA/savings deposits           29          (7)         22
       Time deposits                      166         (38)        128
       Other borrowings                    44           4          48
                                    ----------  ----------  ----------
         Total interest expense           239         (41)        198
                                    ----------  ----------  ----------

     Change in net interest income  $     494   $     (10)  $     484
                                    ==========  ==========  ==========
</TABLE>

                              INVESTMENT PORTFOLIO

     As of December 31, 2005, investment securities comprised approximately 4.0%
of the Bank's assets. The Bank invests primarily in direct obligations of the
United States, obligations guaranteed as to principal and interest by the United
States, and obligations of agencies of the United States. In addition, the Bank
enters into Federal funds transactions with its principal correspondent banks,
and generally acts as a net seller of such funds. At December 31, 2005, the Bank
was a net seller of funds in the Federal funds market. The sale of Federal funds
amounts to a short-term loan from the Bank to another bank.

     The following table presents, for the date indicated, the book value of the
Bank's investments. All securities held at December 31, 2005 and 2004 were
categorized as available-for-sale. ($ in thousands)

<TABLE>
<CAPTION>
                                           December 31,
                                       --------------------
                                         2005       2004
                                       ---------  ---------
<S>                                    <C>        <C>
          U.S. Agency                  $   1,499  $     504
          U.S. Agency Pools                  804      1,368
          FRB/FHLB stock                     356        316
                                       ---------  ---------
              Total                    $   2,659  $   2,188
                                       =========  =========
</TABLE>


                                       21
<PAGE>
     The following table indicates as of December 31, 2005 the amount of
investments due in (i) one year or less, (ii) one to five years, (iii) five to
ten years, and (iv) over ten years:

<TABLE>
<CAPTION>
                                                         Weighted
                                                          Average
                                               Amount      Yield
                                              ---------  ---------
<S>                                           <C>        <C>
          Due in:
            0-1 year                          $      --        --
            Over 1 through 5 years                1,499      4.00%
            Over 5 through 10 years                  --        --
            Over 10 years                           804      2.92%
            FRB and FHLB stock (no maturity)        356      5.37%
                                              ---------  ---------
            Total                             $   2,659      3.85%
                                              =========  =========
</TABLE>

                                 LOAN PORTFOLIO

     The Bank engages in a full complement of lending activities, including
commercial/industrial, consumer and real estate loans. As of December 31, 2005,
the Bank had a legal lending limit for unsecured loans of up to $970,000 to any
one person.

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

     The Bank participates with other banks with respect to loans that exceed
the Bank's lending limits. Management does not believe that loan participations
pose any greater risk of loss than loans that the Bank originates.

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

                  COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS

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


                                       22
<PAGE>
                                 CONSUMER LOANS

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

                                REAL ESTATE LOANS

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


                                 TYPES OF LOANS

     The following table presents various categories of loans contained in the
Bank's loan portfolio as of the date indicated: ($ in thousands)

<TABLE>
<CAPTION>
                                                    As of December 31,
                                                    ------------------
                    Type of Loan                      2005      2004
                    ------------                    --------  --------
<S>                                                 <C>       <C>

     Domestic:
       Commercial, financial and agricultural       $ 8,640   $ 6,390
       Real estate - construction                    17,082    11,085
       Real estate - mortgage                        25,995    18,974
       Installment and other loans to individuals     2,592     4,974
                                                    --------  --------
         Subtotal                                    54,309    41,423
       Less:  Allowance for possible loan losses       (679)     (488)
                                                    --------  --------
         Total (net of allowance)                   $53,630   $40,935
                                                    ========  ========
</TABLE>


                                       23
<PAGE>
       MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

     The following is a presentation of an analysis of maturities of certain
loans as of December 31, 2005: ($ in thousands)

<TABLE>
<CAPTION>
                               Due in   Due after     Due
                               1 year      1 to      after
         Type of Loan         or less    5 years    5 years    Total
         ------------         --------  ----------  --------  -------
<S>                           <C>       <C>         <C>       <C>
  Commercial, financial,
    and agricultural          $  2,315  $    3,838  $  2,487  $ 8,640
  Real estate - construction    13,196       3,887        --   17,083
                              --------  ----------  --------  -------
      Total                   $ 15,511  $    7,725  $  2,487  $25,723
                              ========  ==========  ========  =======
</TABLE>

                                  RISK ELEMENTS

     For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates as of December 31, 2005:

<TABLE>
<CAPTION>
                                Due in   Due after     Due
                                1 year      1 to      after
           Type of Loan        or less    5 years    5 years    Total
           ------------        --------  ----------  --------  -------
<S>                            <C>       <C>         <C>       <C>
  Predetermined interest rate  $  9,212  $    5,153  $     --  $14,365
  Floating interest rate          6,299       2,572     2,487   11,358
                               --------  ----------  --------  -------
      Total                    $ 15,511  $    7,725  $  2,487  $25,723
                               ========  ==========  ========  =======
</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 may have substantive indications
of potential credit weakness. At December 31, 2005 and 2004, the total recorded
investment in impaired loans, all of which had allowances determined in
accordance with FASB Statements No. 114 and No. 118, totaled approximately
$460,000 and $816,000, respectively. The average recorded investment in impaired
loans was approximately $533,000 and $663,000, respectively, for the years ended
December 31, 2005 and 2004. The allowance for loan losses related to impaired
loans was approximately $69,000 and $170,000 at December 31, 2005 and 2004,
respectively. Interest income recognized on impaired loans for the years ended
December 31, 2005 and 2004 was approximately $32,000 and $40,000, respectively.
The amount of interest recognized on impaired loans using the cash method of
accounting was not material for the years ended December 31, 2005 and 2004.
Loans on non-accrual status at December 31, 2005 and 2004 had outstanding
balances of $313,000 and $249,000, respectively. Interest recognized on
non-accruing loans at December 31, 2005 and 2004 was approximately $9,000 and
$3,000, respectively. The Company has no commitments to lend additional funds to
borrowers whose loans have been modified.

     As of December 31, 2005, there were no loans not disclosed above that were
classified for regulatory purposes as doubtful, substandard or special mention
which (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future


                                       24
<PAGE>
operating results, liquidity, or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.

     Accrual of interest is discontinued on a loan when management determines
upon consideration of economic and business factors affecting collection efforts
that collection of interest is doubtful. At December 31, 2005, three loans with
an aggregate principal of approximately $107,000 were over 90 days past due but
still accruing interest, compared with two such loans with an aggregate
principal of $28,000 at December 31, 2004. As of December 31, 2005, no loans
were considered to be "troubled-debt restructured." As of December 31, 2005,
three loans with an aggregate balance of approximately $313,000 were on
non-accrual status, compared to one such loan with an aggregate principal of
approximately $249,000 as of December 31, 2004. Of the three loans on
non-accrual at December 31, 2005, one loan for approximately $110,000 is fully
guaranteed by the SBA, and the Bank anticipates receiving payment for the full
amount.

                         SUMMARY OF LOAN LOSS EXPERIENCE

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

               ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                       ------------------------
                   Type of Loan                            2005         2004
                   ------------                        -----------  -----------
<S>                                                    <C>          <C>
     Balance at beginning of period                    $      488   $      326
                                                       -----------  -----------

     Charge-offs:
     Real estate loans                                         --           --
     Installment and other loans to individuals               (15)         (30)
     Commercial loans                                         (19)          --
     Recoveries                                                --            1
                                                       -----------  -----------
     Net charge-offs                                          (34)         (29)
                                                       -----------  -----------

     Provision charged to operations                          225          191
                                                       -----------  -----------
     Balance at end of period                          $      679   $      488
                                                       ===========  ===========

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


                                       25
<PAGE>
     At December 31, 2005 and 2004, the allowance was allocated as follows: ($
in thousands)

<TABLE>
<CAPTION>
                                                      December 31, 2005                December 31, 2004
                                                 ------------------------------  ------------------------------
                                                                   Percent of                      Percent of
                                                                 loans in each                   loans in each
                                                                  category to                     category to
                                                     Amount       total loans        Amount       total loans
                                                 --------------  --------------  --------------  --------------
<S>                                              <C>             <C>             <C>             <C>
     Commercial, financial and agricultural      $          125           15.9%  $           80           15.4%
     Real estate - construction                             200           31.5%             150           26.8%
     Real estate - mortgage                                 200           47.9%             145           45.8%
     Installment and other loans to individuals             100            4.7%              75           12.0%
     Unallocated                                             54             --               38            N/A
                                                 --------------  --------------  --------------  --------------
         Total                                   $          679          100.0%  $          488          100.0%
                                                 ==============  ==============  ==============  ==============
</TABLE>

     In considering the adequacy of the Company's allowance for possible loan
losses, management has considered the fact that, as of December 31, 2005, 15.9%
of outstanding loans are commercial loans, which includes commercial, industrial
and agricultural loans. Commercial loans generally have greater risk than other
categories of loans. However, 92% of the commercial loans at December 31, 2005
were made on a secured basis. Management believes that the secured condition of
the majority of its commercial loan portfolio significantly reduces the risk of
loss inherently present in commercial loans.

     Real estate mortgage loans comprised 47.9% of outstanding loans at December
31, 2005. The loans in this category represent residential and commercial real
estate mortgages where the amount of the original loan generally does not exceed
85% of the appraised value of the collateral. These loans are considered by
management to be well secured with a low risk of loss.

     The Company's consumer loan portfolio is also well secured. At December 31,
2005, the majority of the Company's consumer loans were secured by collateral
primarily consisting of automobiles, boats and other personal property.

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


                                       26
<PAGE>
                                    DEPOSITS

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


                                       27
<PAGE>
          The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories: ($
in thousands)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                          ------------------------------------------
                                                 2005                  2004
                                          --------------------  --------------------
                                          Average    Average    Average    Average
                                           Amount   Rate Paid    Amount   Rate Paid
                                          --------  ----------  --------  ----------
<S>                                       <C>       <C>         <C>       <C>
     Noninterest-bearing demand deposits  $  6,220         --   $  3,996         --
     NOW/MMDA/savings deposits               8,188       1.66%     7,342       1.21%
     Time deposits                          35,798       3.34%    22,467       2.81%
</TABLE>

     The following table indicates the amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities at December 31, 2005:

<TABLE>
<CAPTION>
                                                  At
                                             December 31,
          Time Certificates of Deposit           2005
          ----------------------------       -------------
<S>                                          <C>
          3 months or less                   $       3,913
          3-6 months                                 3,037
          6-12 months                                2,661
          Over 12 months                             3,737
                                             -------------
            Total                            $      13,348
                                             =============
</TABLE>

                           RETURN ON EQUITY AND ASSETS

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

<TABLE>
<CAPTION>
                                                    Year Ended
                                                    December 31,
                                                  ----------------
                                                   2005     2004
                                                  -------  -------
<S>                                               <C>      <C>
          Return on average assets                   .93%     .37%
          Return on average equity                  9.83%    2.91%
          Average equity to average assets ratio    9.43%   12.50%
          Dividend payout ratio                      -- %      --%
</TABLE>

ITEM 2.    DESCRIPTION OF PROPERTIES

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

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


                                       28
<PAGE>
location as a future branch site. The Bank will be required to seek regulatory
approval prior to establishing a branch at this location.

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

     In 2005, we purchased approximately 1.25 acres of land in Bluffton
Township, known as Okatie Center, Phase 1B, for the purpose of constructing a
future branch location. The Bank will be required to seek regulatory approval
prior to establishing a branch at this location.

ITEM 3.    LEGAL PROCEEDINGS

     On November 15, 2005, the Company terminated the employment of William B.
Gossett as the president and chief executive officer of the Company and the
Bank. Mr. Gossett's employment was terminated for cause under specific
provisions of his employment agreement as a result of regulatory actions
stemming from the 2005 Office of the Comptroller of the Currency ("OCC")
examination of the Bank. Among other things, the OCC commented on management's
failure to properly address issues noted in prior exam reports. As a result of
the OCC examination, each Board member has signed a Commitment Letter with the
OCC agreeing to take proper action to correct all noted issues. Currently, all
of the noted issues have been or are being corrected and the OCC has commented
favorably on the progress being made by the Bank. We believe the Commitment
Letter will not have a material adverse effect on our operations.

     On February 1, 2006, Mr. Gossett, a principal security holder of the
Company, filed a claim with the U.S. Department of Labor Occupational Safety and
Health Administration against the Company and the Bank under 18 U.S.C 1514A. Mr.
Gossett alleges that his termination was in retaliation against him for raising
what the Company determined were minor concerns regarding his ability to provide
the certifications of the principal executive and financial officer which were
required to be filed with the Company's Report on Form 10-QSB for the quarter
ended September 30, 2005. Prior to filing the Form 10-QSB in question, however,
Mr. Gossett's concerns were fully resolved and he provided the required
certifications. The Form 10-QSB in question was timely filed and fully complied
with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
as amended.

     Mr. Gossett claims that he is entitled to receive an amount equal to two
times his salary as in effect at the time of his termination, or approximately
$323,000, together with attorney fees and the reinstatement of options to
acquire 19,581 shares of the Company's stock, which were forfeited upon his
termination. Under the terms of his employment agreement dated July 27, 1999,
Mr. Gossett is not entitled to these payments or reinstatement of his options
since we believe he was properly terminated for cause.

     The Company believes that Mr. Gossett's allegations are without merit and
is vigorously contesting his claim.

     We do not believe Mr. Gossett's claim represents a material proceeding to
which the Company is a party. Accordingly, there are no material pending legal
proceedings to which the Company is a party or of which any of its properties
are subject, nor are there material proceedings known to the Company to be
contemplated by any governmental authority. Additionally, the Company is unaware
of any material proceedings, pending or contemplated, in which any existing or
proposed director, officer or affiliate, or any principal security holder of the
Company or any associate of any of the foregoing, is a party or has an interest
adverse to the Company.


                                       29
<PAGE>
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.


                                     PART II

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

     The response to this Item is partially included in the Company's 2005
Annual Report to Shareholders under the heading "Corporate and Shareholder
Information" and is incorporated herein by reference.

     The Company issued no unregistered securities during the fiscal year ended
December 31, 2005 and did not repurchase any of its shares of common stock
during the fourth quarter of 2005.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS

     The response to this Item is included in the Company's 2005 Annual Report
to Shareholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
reference.

ITEM 7.    FINANCIAL STATEMENTS

     The  following  financial  statements  are  included  in the Company's 2005
Annual  Report  to  Shareholders  and  are  incorporated  herein  by  reference.

     -    Report of Independent Certified Public Accountants

     -    Consolidated Balance Sheets as of December 31, 2005 and 2004

     -    Consolidated Statements of Earnings for the Years Ended December 31,
          2005 and 2004

     -    Consolidated Statements of Comprehensive Income for the Years Ended
          December 31, 2005 and 2004

     -    Consolidated Statements of Changes in Shareholders' Equity for the
          Years Ended December 31, 2005 and 2004

     -    Consolidated Statements of Cash Flows for the Years Ended December 31,
          2005 and 2004

     -    Notes to Consolidated Financial Statements

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

     None.

ITEM 8A.   CONTROLS AND PROCEDURES

     As of the end of the period covered by this Annual Report on Form 10-KSB,
our principal executive officer and our principal financial officer have
evaluated the effectiveness of our "disclosure controls and procedures"
("Disclosure Controls"). Disclosure Controls, as defined in Rule 13a-15(e) of


                                       30
<PAGE>
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Exchange Act, such as
this Annual Report, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure Controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

     Our management, including our principal executive officer and our principal
financial officer, does not expect that our Disclosure Controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.

     Based upon their controls evaluation, our principal executive officer and
our principal financial officer have concluded that our Disclosure Controls are
effective at a reasonable assurance level.

     There have been no changes in our internal controls over financial
reporting during the past fiscal year that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 8B.   OTHER INFORMATION

     Effective as of January 24, 2006, the Company and the Bank entered into a
Change in Control Agreement with Carol J. Nelson, the chief financial officer of
the Company and the Bank. The agreement provides that, in the event (a) Ms.
Nelson is terminated by the Company without cause (as defined in the agreement)
or (b) Ms. Nelson resigns her employment for good reason (as defined in the
agreement) at any time within the 13-month period following a change in control
of the Company (as defined in the agreement), Ms. Nelson is entitled to a lump
sum severance payment (the "Severance Payment") equal to two times the sum of
her salary as in effect at the effective time of the termination of employment
and the amount of bonus earned during the prior calendar year. In addition, Ms.
Nelson is also entitled to receive the Severance Payment in the event that she
resigns her employment for any reason during the thirteenth month following a
change in control of the Company. The agreement also provides that if Ms. Nelson
is terminated for any reason during the 13-month period following a change in
control of the Company, Ms. Nelson will not solicit customers or employees from
the Company or the Bank for a 12-month period following her termination.


                                       31
<PAGE>
                                    PART III

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

     The responses to this Item are included in the Company's Proxy Statement
for the 2006 Annual Meeting of Shareholders under the following headings and are
incorporated herein by reference:

     "Proposal: Election of Directors-Class I Director Nominees," "-Class II
Continuing Directors" and "-Class III Continuing Directors;"

     "Executive Officers;" and

     "Section 16(a) Beneficial Ownership Reporting Compliance."

     The Company has a Code of Ethics that applies to the Company's principal
executive officer and its principal financial and accounting officer. The
Company will provide a copy of the Code of Ethics free of charge to any
shareholder upon written request to the Company.

ITEM 10.   EXECUTIVE COMPENSATION

     The responses to this Item are included in the Company's Proxy Statement
for the 2006 Annual Meeting of Shareholders, under the heading "Compensation,"
and are incorporated herein by reference.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The responses to this Item are partially included in the Company's Proxy
Statement for the 2006 Annual Meeting of Shareholders, under the heading
"Security Ownership of Certain Beneficial Owners and Management," and are
incorporated herein by reference.

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


                                       32
<PAGE>
<TABLE>
<CAPTION>
                                                                            Number of shares
                                                                        remaining available for
                       Number of securities to      Weighted-average     future issuance under
                       be issued upon exercise     exercise price of       the Plan (excludes
                       of outstanding options     outstanding options     outstanding options)
                       -----------------------    --------------------  ------------------------
<S>                    <C>                        <C>                   <C>
Equity compensation
plans approved by                       34,919    $              10.14                    62,986
security holders

Equity compensation
plans not approved by                  200,105(1)                10.00                        --
security holders

Total                                  235,024    $              10.02                    62,986
<FN>
____________________
(1) Represents warrants issued to the Company's directors on July 6, 2001. The warrants became
exercisable  in  equal one-third (1/3) annual increments beginning on July 6, 2002 and are now
fully  exercisable.  Exercisable  warrants  will  remain  exercisable  for the ten-year period
following the date of issuance or for 90 days after the warrant holder ceases to be a director
of  the  Company,  whichever  is  shorter.  The  exercise  price of each warrant is subject to
adjustment  for stock splits, recapitalizations or other similar events.  Additionally, if the
Bank's  capital  falls  below  the minimum level, as determined by the OCC, the Company may be
directed  to  require  the  directors  to  exercise  or  forfeit  their  warrants.
</TABLE>

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The responses to this Item are included in the Company's Proxy Statement
for the 2006 Annual Meeting of Shareholders, under the headings "Relationships
and Related Transactions" and "Compensation," and are incorporated herein by
reference.

ITEM 13.   EXHIBITS

<TABLE>
<CAPTION>
<S>     <C>
  3.1     Articles of Incorporation (incorporated herein by reference to the Company's Registration Statement on
          Form SB-2, Registration No. 333-92653, filed December 13, 1999)

  3.2     Bylaws (incorporated herein by reference to the Company's Registration Statement on Form SB-2,
          Registration No. 333-92653, filed December 13, 1999)

  4.1     Specimen Stock Certificate (incorporated herein by reference to the Company's Registration Statement
          on Form SB-2, Registration No. 333-92653, filed December 13, 1999)

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

  10.1*   Employment Agreement dated as of July 27, 1999 between the Islands Bancorp and William B. Gossett
          (incorporated herein by reference to the Company's Registration Statement on Form SB-2, Registration
          No. 333-92653, filed December 13, 1999)

  10.2    Form of Organizers Warrant Agreement (incorporated herein by reference to the Company's Registration
          Statement on Form SB-2, Registration No. 333-92653, filed December 13, 1999)

  10.3    Islands Bancorp 2002 Stock Incentive Plan (incorporated herein by reference to Appendix A of Exhibit
          99.1 to the Company's Annual Report on Form 10-KSB filed April 1, 2002)


                                       33
<PAGE>
  10.3.1  Form of Incentive Stock Option Award under the Islands Bancorp 2002 Stock Incentive Plan

  10.3.2  Form of Non-qualified Stock Option Award under the Islands Bancorp 2002 Stock Incentive Plan

  10.5    Purchase and Sale Agreement by and between Crescent Resources, LLC and Islands Community Bank,
          N.A., dated April 14, 2005 and as amended June 28, 2005 and July 28, 2005 (incorporated herein by
          reference to the Company's Quarterly Report on Form 10-QSB filed November 15, 2005)

  10.6    Change in Control Agreement between Carol J. Nelson, Islands Bancorp and Islands Community Bank,
          N.A., dated as of January 24, 2006

  13.1    Islands Bancorp 2005 Annual Report to Shareholders.  Except with respect to those portions specifically
          incorporated by reference into this Report, the Company's 2005 Annual Report to Shareholders is not
          deemed to be filed as part of this Report

  22.1    Subsidiaries of Islands Bancorp

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

  31.1    Certification Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002

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

  32.1    Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
          Oxley Act of 2002
</TABLE>
________________________
*     Compensatory  plan  or  arrangement.


ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  responses  to  this Item are included in the Company's Proxy Statement
for  the  2006  Annual  Meeting  of  Shareholders under the heading "Independent
Public  Accountants."


                                       34
<PAGE>
                                   SIGNATURES

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

                                         ISLANDS BANCORP


                                         By:    /s/ John R. Perrill
                                                --------------------------------
                                                John R. Perrill
                                                Acting Chief Executive Officer

                                         Date:  March 21, 2006


                                POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
          SIGNATURE                          TITLE                      DATE
-----------------------------  ----------------------------------  --------------

<S>                            <C>                                 <C>

      /s/ Louis O. Dore        Director                            March 21, 2006
-----------------------------
       Louis O. Dore


-----------------------------  Treasurer and Director
   Paul M. Dunnavant, III


   /s/ Martha B. Fender        Vice Chairman and Director          March 21, 2006
-----------------------------
     Martha B. Fender


   /s/ Daryl A. Ferguson       Director                            March 21, 2006
-----------------------------
     Daryl A. Ferguson


<PAGE>
          SIGNATURE                          TITLE                      DATE
-----------------------------  ----------------------------------  --------------

   /s/ D. Martin Goodman       Chairman of the Board of Directors  March 21, 2006
-----------------------------
      D. Martin Goodman


 /s/ Stancel E. Kirkland, Sr.  Director                            March 21, 2006
-----------------------------
    Stancel E. Kirkland, Sr.


     /s/ Carl E. Lipscomb      Director                            March 21, 2006
-----------------------------
       Carl E. Lipscomb


  /s/ Edward J. McNeil, Jr.    Secretary and Director              March 21, 2006
-----------------------------
    Edward J. McNeil, Jr.


 /s/ Jimmy Lee Mullins, Sr.    Director                            March 21, 2006
-----------------------------
    Jimmy Lee Mullins, Sr.


     /s/ Carol J. Nelson       Chief Financial Officer             March 21, 2006
-----------------------------
      Carol J. Nelson**


  /s/ Frances K. Nicholson     Director                            March 21, 2006
-----------------------------
    Frances K. Nicholson


     /s/ John R. Perrill       Acting Chief Executive Officer      March 21, 2006
-----------------------------
       John R. Perrill*


------------------------------  Director
     Dr. Narayan Shenoy


      /s/ J. Frank Ward        Director                            March 21, 2006
-----------------------------
       J. Frank Ward


     /s/ Bruce K. Wyles        Director                            March 21, 2006
-----------------------------
        Bruce K. Wyles
</TABLE>
_________________________
*    Principal Executive Officer
**   Principal Financial and Accounting Officer


<PAGE>
<TABLE>
<CAPTION>
                                                  EXHIBIT INDEX
                                                  -------------
<S>     <C>
3.1     Articles of Incorporation (incorporated herein by reference to the Company's Registration Statement on
        Form SB-2, Registration No. 333-92653, filed December 13, 1999)

3.2     Bylaws (incorporated herein by reference to the Company's Registration Statement on Form SB-2,
        Registration No. 333-92653, filed December 13, 1999)

4.1     Specimen Stock Certificate (incorporated herein by reference to the Company's Registration Statement
        on Form SB-2, Registration No. 333-92653, filed December 13, 1999)

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

10.1*   Employment Agreement dated as of July 27, 1999 between the Islands Bancorp and William B. Gossett
        (incorporated herein by reference to the Company's Registration Statement on Form SB-2, Registration
        No. 333-92653, filed December 13, 1999)

10.2    Form of Organizers Warrant Agreement (incorporated herein by reference to the Company's Registration
        Statement on Form SB-2, Registration No. 333-92653, filed December 13, 1999)

10.3    Islands Bancorp 2002 Stock Incentive Plan (incorporated herein by reference to Appendix A of Exhibit
        99.1 to the Company's Annual Report on Form 10-KSB filed April 1, 2002)

10.3.1  Form of Incentive Stock Option Award under the Islands Bancorp 2002 Stock Incentive Plan

10.3.2  Form of Non-qualified Stock Option Award under the Islands Bancorp 2002 Stock Incentive Plan

10.5    Purchase and Sale Agreement by and between Crescent Resources, LLC and Islands Community Bank,
        N.A., dated April 14, 2005 and as amended June 28, 2005 and July 28, 2005 (incorporated herein by
        reference to the Company's Quarterly Report on Form 10-QSB filed November 15, 2005)

10.6    Change in Control Agreement between Carol J. Nelson, Islands Bancorp and Islands Community Bank,
        N.A., dated as of January 24, 2006

13.1    Islands Bancorp 2005 Annual Report to Shareholders.  Except with respect to those portions specifically
        incorporated by reference into this Report, the Company's 2005 Annual Report to Shareholders is not
        deemed to be filed as part of this Report

22.1    Subsidiaries of Islands Bancorp

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

31.1    Certification Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002

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

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

_________________________
*    Compensatory plan or arrangement.