ISLANDS BANCORP
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The  following  discussion  of Islands Bancorp (the "Company") and its financial
condition  and  results  of  operations  should  be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
herein.

The  Company  was  formed  for the purpose of becoming a bank holding company by
owning  the  capital stock of Islands Community Bank, N.A. (the "Bank"). Because
the  primary activity of the Company is the ownership and operation of the Bank,
the  Company's  financial  performance  has  been  determined  primarily  by the
operation of the Bank.  Accordingly, the discussion below relates principally to
the  operations  of  the  Bank.


CRITICAL  ACCOUNTING  POLICIES

The  accounting  and  financial  reporting  policies  of  the Company conform to
accounting  principles  generally  accepted  in the United States and to general
practices  within  the  banking industry.  The following is a description of the
accounting  policies  applied  by  the  Company  which  are  deemed  "critical".
Critical  accounting policies are defined as policies that are very important to
the presentation of the Company's financial condition and results of operations,
and  that require management's most difficult, subjective, or complex judgments.
The  Company's  financial  results  could  differ  significantly  if  different
judgments  or  estimates  are  applied  in  the  application  of  the  policies.

Management  has  made  a  number  of  estimates  and assumptions relating to the
reporting  of assets and liabilities and the disclosure of contingent assets and
liabilities  in  order  to  prepare  the  consolidated  financial  statements in
conformity  with  generally  accepted  accounting  principles.  Management  has
determined  that  the accounting for the allowance for loan losses is a critical
accounting  policy  with respect to the determination of financial condition and
reporting  results  of  operations.

The  collectibility  of loans is reflected through the Company's estimate of the
allowance  for  loan  losses.  The  Company  performs  periodic  and  systematic
detailed reviews of its lending portfolio to assess overall collectibility. This
analysis  includes  consideration  of  historical  performance, current economic
conditions,  the level of nonperforming loans, loan concentrations, and a review
of  certain  individual  loans. The Company's allowance for loan losses provides
for  probable  losses  based upon evaluations of known and inherent risks in the
loan  portfolio.

Management  believes  that  the  allowance  for  loan losses is adequate.  While
management  uses  available  information  to  recognize  losses on loans, future
additions  to the allowance for loan losses may be necessary based on changes in
economic  conditions.  In addition, the regulatory agencies, as an integral part
of their examination process, periodically review the allowance.  These agencies
may  require  the  Bank  to  recognize additions to the allowance based on their
judgments  about information available to them at the time of their examination.


<PAGE>
FINANCIAL CONDITION

For  the  year  ended  December 31, 2005, total assets increased by $18,223,000,
ending the year at $66,207,000 compared to $47,984,000 at December 31, 2004. The
primary  contributor to the increase in assets was the Company's loan portfolio,
which  increased  by  $12,887,000 during 2005, ending the year at $54,310,000 as
compared  to  $41,423,000  at  December  31,  2004. Loan demand in the Company's
primary  market  area  of  Beaufort County remained strong in 2005, and the Bank
added  an  additional  lender  to  further  service  this area. During 2005, the
investment  portfolio increased by $467,000, and federal funds sold increased by
$4,053,000,  as  deposits  increased  in  excess  of  the  demand  for  loans.

Total  deposits  increased $18,008,000 to $58,135,000 at December 31, 2005. This
growth  is  a result of an increase of $2,141,000 in noninterest-bearing demand,
an  increase  of $1,226,000 in interest-bearing demand, savings and money market
accounts, and an increase of $14,641,000 in certificates of deposit. As interest
rates  increased  throughout  2005,  the  Bank  began  offering  a  5%  17-month
certificate  of  deposit  which  was  attractive  to  local  depositors.

For  the year ended December 31, 2004, total assets increased by $15,559,000 and
ended  2004  at  $47,984,000.  The  major component of the increase was the loan
portfolio,  which increased by $14,749,000 as the Bank continued to grow and add
customers.  Federal  funds sold increased by $774,000, and investment securities
decreased  by $165,000, as the Bank was able to invest the majority of new funds
into  loans. Total deposits increased by $14,471,000, with growth in all deposit
categories.  Noninterest-bearing  demand  deposits  increased  by  $1,965,000,
interest-bearing  demand  and money market accounts increased by $1,277,000, and
certificates  of  deposit  increased  by  $11,229,000.


RESULTS OF OPERATIONS

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


NET INTEREST INCOME

The  Company  reported  net  interest  income  of  $2,469,000 for the year ended
December 31, 2005, compared to $1,551,000 in 2004.  The increase in net interest
income  was  due to both an increase in the volume of average earning assets and
an  increase  in  yields.

Average  earning  assets  increased $17,481,000 during 2005, due primarily to an
increase  of  $14,960,000  in  average  outstanding  loans.  For  the year ended
December  31,  2005,  the  yield  on


<PAGE>
average  earning assets was 7.11% compared to 6.29% during 2004. The increase in
the  yield  on  average earning assets can be attributed to the increases in the
prime  rate  which  began  in  2004  and  continued  throughout  2005.  Average
interest-bearing  liabilities  increased by $14,575,000 in 2005 primarily due to
an  increase  of $13,331,000 in average outstanding certificates of deposit. The
Bank's cost of funds for 2005 was 3.04% compared to 2.46% for 2004. The interest
rate spread, which is the difference between the yield on earning assets and the
rate  paid  on  liabilities,  increased to 4.07% for the year ended December 31,
2005, compared to 3.83% for 2004. The net interest margin, which is net interest
income divided by average earning assets, increased to 4.53% in 2005 compared to
4.19%  in  2004.

Net interest income in 2004 was $1,551,000 compared to $1,067,000 in 2003.  This
increase  can  be  attributed  primarily  to  an $11,124,000 increase in average
outstanding  loans due to continuing strong loan demand in the Company's primary
market area, combined with a decrease in the Bank's cost of funds.  The increase
in average loans was funded primarily with deposits, as average interest-bearing
deposits  increased  by  $8,551,000  in 2004.  The interest rate paid on average
interest-bearing  liabilities  was  2.46%  in  2004  compared  to 2.67% in 2003.

The  table  below  shows  the  yearend  average  balances  for  each category of
interest-earning  asset  and  interest-bearing liability and the average rate of
interest  earned  or  paid  (dollars  in  thousands).

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

Interest bearing deposits    $  8,188   $    136     1.66%  $ 7,342  $    89    1.21%
Certificates of deposit        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%
                                                   =======                    =======
</TABLE>

PROVISION FOR LOAN LOSSES

The  Company's  allowance  for  loan  losses  was $679,000 at December 31, 2005,
compared  to  $488,000  at  December  31,  2004, representing 1.25% and 1.18% of
yearend  outstanding loans as of 2005 and 2004, respectively.  The allowance for
loan  losses  reflects  management's  assessment


<PAGE>
and estimate of the risks associated with extending credit and its evaluation of
the  quality  of  the  loan  portfolio.  The Bank periodically analyzes the loan
portfolio in an effort to review asset quality and to establish an allowance for
loan  losses  that  management believes will be adequate in light of anticipated
risks  and  loan  losses.

The  allowance  for loan losses is established through charges to expense in the
form of a provision for loan losses.  Loan losses and recoveries are charged and
credited  directly to the allowance.  The provision for loan losses was $225,000
in  2005  compared  to $191,000 in 2004.  The provision for loan losses reflects
management's  estimate of probable loan losses inherent in the portfolio and the
creation  of  an  allowance  for  loan  losses  adequate  to absorb such losses.

While  it  is  the  Bank's  policy to charge off in the current period loans for
which a loss is considered probable, there are additional risks of future losses
which  cannot  be  quantified  precisely  or  attributed  to particular loans or
classes  of  loans.  Because  these  risks  include  the  state  of the economy,
management's  judgment  as  to  the  adequacy  of  the  allowance is necessarily
approximate  and imprecise.  After review of all relevant matters affecting loan
collectibility,  management  believes the allowance for loan losses is adequate.


NONINTEREST INCOME

The  following  table  summarizes the major components of noninterest income for
the  years  ended  December  31,  2005  and  2004  (dollars  in  thousands).

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    ------------------------
                                                       2005         2004
                                                    -----------  -----------
<S>                                                 <C>          <C>
Service charges on deposit accounts                 $       158  $       133
Gains on sales of loans                                     164          181
Mortgage loan brokerage fees                                 69           44
Other income                                                 74           60
                                                    -----------  -----------
Total noninterest income                            $       465  $       418
                                                    ===========  ===========
</TABLE>

Noninterest income for 2005 was $465,000 compared to $418,000 for the year ended
December  31,  2004. Service charges on deposit accounts increased by $25,000 as
the Bank's deposit base continued to grow. Gains on sales of SBA loans decreased
by  $96,000  due  to  less  secondary market activity in 2005; however, gains on
sales  of  mortgage  loans increased by $79,000 as the Bank hired an experienced
mortgage lender.   Mortgage loan brokerage fees increased by $25,000 in 2005 due
to  increased productivity by the mortgage department. Other income increased by
$14,000  primarily  due  to  increases  in fees received from ATM and debit card
transactions,  and  an  increase  in  income  from  the  servicing of SBA loans.


NONINTEREST EXPENSE

The  following  table summarizes the major components of noninterest expense for
the  years  ended  December  31,  2005  and  2004  (dollars  in  thousands).


<PAGE>
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    ------------------------
                                                        2005         2004
                                                    -----------  -----------
<S>                                                 <C>          <C>
Salaries and employee benefits                      $     1,034  $       884
Data processing and ATM expense                             181          159
Depreciation expense                                        154          141
Professional fees                                           257           71
Supplies and printing                                        34           33
Taxes and insurance                                          52           42
Utilities and telephone                                      32           28
Advertising and public relations                             77           49
Other operating expenses                                    150          128
                                                    -----------  -----------
    Total noninterest expense                       $     1,971  $     1,535
                                                    ===========  ===========
</TABLE>

The  largest  component  of  noninterest expense is salaries and benefits, which
increased  to  $1,034,000  as of December 31, 2005 compared to $884,000 in 2004.
This  increase  was  primarily  due  to  an increase in the number of employees,
normal  salary  increases,  and increases in health insurance and other employee
benefits.  Data processing and ATM expense increased by $22,000 due to continued
increases  in  the  Bank's  customer  base  and  increased transaction activity.
Depreciation  expense  increased  by $13,000 primarily due to replacement of the
Bank's  main  server  and additional equipment needed to support the increase in
staff.  Professional  services  increased  by  $186,000  due  to increased audit
expenses,  legal  expenses,  and  expenses related to executive officer changes.
Other  operating  expenses increased in line with the overall growth of the Bank
during  the  year.

As  a  percentage of total average assets, noninterest expense was 3.4% and 3.8%
for  2005  and  2004,  respectively.  The  efficiency ratio (noninterest expense
divided  by  net  interest  income plus other income) was 67% for the year ended
December  31,  2005  compared  to  78%  in  2004.


INTEREST RATE SENSITIVITY

The  Company's  objective  is  to  manage  assets  and  liabilities to provide a
satisfactory,  consistent  level  of  profitability  within  the  framework  of
established policies.  Interest rate sensitivity refers to the responsiveness of
interest-earning  assets  and  interest-bearing liabilities to changes in market
interest  rates.  The  rate sensitive position, or gap, is the difference in the
volume  of  rate  sensitive  assets  and liabilities at a given time interval. A
negative gap (more liabilities repricing than assets) generally indicates that a
bank's  net  interest  income  will  decrease  if  interest  rates rise and will
increase  if  interest  rates  fall.  A  positive gap generally indicates that a
bank's  net  interest  income  will  decrease  if  interest  rates fall and will
increase  if  interest rates rise. The general objective of gap management is to
manage  rate  sensitive  assets  and  liabilities  so as to reduce the impact of
interest  rate  fluctuations  on  the  net  interest  margin.

The  interest rate sensitivity position at December 31, 2005 is presented in the
following  table.  The  difference  between  rate  sensitive  assets  and  rate
sensitive  liabilities,  or  the  interest rate sensitivity gap, is shown at the
bottom  of  the  table  (dollars  in thousands.) However, income associated with
interest-earning  assets  and costs associated with interest-bearing liabilities
may


<PAGE>
not  be  affected  uniformly  by  changes  in  interest rates.  In addition, the
magnitude  and  duration  of  changes  in  interest rates may have a significant
impact  on  net  interest  income.  For  example,  although  certain  assets and
liabilities  may have similar maturities or periods of repricing, they may react
in  different  degrees  to  changes  in  market  interest  rates.

<TABLE>
<CAPTION>
                                               After     After      After
                                               3 mos     6 mos      1 yr
                                     Within     but       but        but     After
                                        3      within    within    within      5
EARNING ASSETS                       months    6 mos     1 year    5 years   years    Total
                                     -------  --------  --------  ---------  ------  -------
<S>                                  <C>      <C>       <C>       <C>        <C>     <C>
Loans                                $25,302  $ 7,072   $ 5,623   $ 16,093   $  219  $54,309
Securities                               - -      - -       - -      1,500    1,159    2,659
Federal funds sold and other           4,969      - -       - -        - -      - -    4,969
                                     -------  --------  --------  ---------  ------  -------
Total earning assets                 $30,271  $ 7,072   $ 5,623   $ 17,593   $1,378  $61,937
                                     =======  ========  ========  =========  ======  =======

INTEREST BEARING LIABILITIES
Interest bearing demand deposits
and savings                          $ 8,341  $   - -   $   - -   $    - -   $  - -  $ 8,341
Certificates under $100M               4,855    5,010     7,213     12,850      - -   29,928
Certificates $100M and over            3,913    3,037     2,561      3,837      - -   13,348
Borrowings                               - -      - -       700      1,000      - -    1,700
                                     -------  --------  --------  ---------  ------  -------
Total interest-bearing liabilities   $17,109  $ 8,047   $10,474   $ 17,687   $  - -  $53,317
                                     =======  ========  ========  =========  ======  =======

Interest rate sensitivity gap         13,162     (975)   (4,851)       (94)   1,378    8,620
Cumulative gap                        13,162   12,187     7,336      7,242    8,620    8,620
Interest rate sensitivity gap ratio     1.77      .88       .54        .99      N/A     1.16
Cumulative interest rate
sensitivity gap ratio                   1.77     1.48      1.20       1.11     1.16     1.16
</TABLE>

Adjustable  rate  loans  are  shown  in  the  above table in the period in which
interest  rates  are next scheduled to adjust rather than in the period in which
they are due, and fixed rate loans are included in the periods in which they are
anticipated  to  be  repaid  based  on scheduled maturities.  The Bank's savings
accounts  and  interest-bearing  demand  accounts  (NOW and money market deposit
accounts),  which are generally subject to immediate withdrawal, are included in
the  "three  months or less" category; however, historical experience has proven
these  deposits to be more stable over the course of a year.  The table does not
necessarily  indicate  the  impact of general interest rate movements on the net
interest  margin  since  the  repricing  of  various  categories  of  assets and
liabilities  is  subject  to  competitive  pressures and the needs of the Bank's
customers.


LIQUIDITY

The  Bank  must  maintain,  on  a  daily  basis,  sufficient  funds to cover the
withdrawals from depositors' accounts and to supply new borrowers with funds. To
meet  these obligations, the Bank keeps cash on hand, maintains account balances
with  its  correspondent  banks, and purchases and sells federal funds and other
short-term  investments.  Asset  and  liability  maturities  are monitored in an
attempt  to  match  these  to  meet  liquidity  needs.


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

Below  are  the pertinent liquidity balances and ratios at December 31, 2005 and
2004:

<TABLE>
<CAPTION>
                                                   December 31
                                                ------------------
                                                  2005      2004
                                                --------  --------
<S>                                             <C>       <C>
     Cash and cash equivalents                  $ 5,840   $ 1,540
     Securities available for sale              $ 2,659   $ 2,188
     CDs over $100,000 to total deposits ratio     23.0%     22.5%
     Brokered deposits                                0         0
     Loan to deposit ratio                           93%      103%
</TABLE>

At December 31, 2005, cash and cash equivalents totaled $5,840,000, representing
8.8%  of  total assets. Securities available for sale provide a secondary source
of  liquidity  and  totaled  $2,659,000  at  December  31,  2005. Scheduled loan
payments  are  a relatively stable source of funds, but loan payoffs and deposit
flows  can  fluctuate significantly since they are influenced by interest rates,
competition  and  general  economic  conditions.

At December 31, 2005, large denomination certificates represented 23.0% of total
deposits.  Large  denomination  CDs  are  generally  more  volatile  than  other
deposits.  As  a  result, management continually monitors the competitiveness of
the  rates  it  pays  on  its  large  denomination certificates and periodically
adjusts  its rates in accordance with market demands. Significant withdrawals of
large denomination certificates may have a material adverse effect on the Bank's
liquidity.

At  December  31,  2005,  the  Company  had  loan  commitments  outstanding  of
$10,019,000.  Because  these  commitments  generally have fixed expiration dates
and  may  expire  without being drawn upon, the total commitment amount does not
necessarily  represent  future  cash  requirements.  The  Bank  maintains
relationships  with  correspondent  banks  that can provide funds to it on short
notice  if  needed. The Bank currently has arrangements with correspondent banks
for  short-term  unsecured  advances  up  to  $5,040,000.


CAPITAL ADEQUACY

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

Risk-based capital guidelines measure the amount of a bank's required capital in
relation to the degree of risk perceived in its assets and its off-balance sheet
items.  Under  the  risk-based  capital


<PAGE>
guidelines,  capital  is  divided  into  two  "tiers."  Tier 1 capital generally
consists  of  common  shareholders'  equity,  non-cumulative perpetual preferred
stock,  a  limited amount of qualifying cumulative perpetual preferred stock and
minority interest, less goodwill and other specified intangibles. Tier 2 capital
consists  of  a limited amount of the allowance for possible loan losses, hybrid
capital  instruments,  term  subordinated  debt  and intermediate term preferred
stock.  Banks  are  required  to  maintain a minimum risk-based capital ratio of
8.0%,  with  at  least  4.0%  consisting  of  Tier  1  capital.

The  second  measure  of  capital  adequacy  relates  to the leverage ratio. The
leverage  ratio  is computed by dividing Tier 1 capital by total average assets.
For banks not receiving the highest safety and soundness rating by their primary
regulator,  the minimum leverage ratio should be 3.0% plus an additional cushion
of  at  least  1  to  2 percent, depending upon risk profiles and other factors.

The  table  below  shows  the  Bank  and  Company's regulatory capital ratios at
December  31,  2005:

<TABLE>
<CAPTION>
                                                             Minimum
                                                            Regulatory
Bank                                December 31, 2005      Requirement
----                                ------------------  ------------------
<S>                                 <C>                 <C>
Tier 1 Capital                                   10.5%                4.0%
Tier 2 Capital                                    1.2%                N/A
                                    ------------------  ------------------

    Total risk-based capital ratio               11.7%                8.0%
                                    ==================  ==================

Leverage ratio                                    9.1%                3.0%
                                    ==================  ==================
Company- Consolidated
---------------------
Tier 1 Capital                                   10.5%                4.0%
Tier 2 Capital                                    1.3%                N/A
                                    ------------------

    Total risk-based capital ratio               11.8%                8.0%
                                    ==================  ==================
Leverage ratio                                    9.1%                3.0%
                                    ==================  ==================
</TABLE>

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


<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA

                        CONSOLIDATED FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 2005 AND 2004




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


<S>                                                             <C>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
    CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . .  1

    Consolidated Balance Sheets. . . . . . . . . . . . . . . .  2

    Consolidated Statements of Income. . . . . . . . . . . . .  3

    Consolidated Statements of Changes in Shareholders' Equity  4

    Consolidated Statements of Cash Flows. . . . . . . . . . .  5

    Notes to Consolidated Financial Statements . . . . . . . .  6
</TABLE>


<PAGE>
             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


Board of Directors and Shareholders
Islands Bancorp
Beaufort, South Carolina

          We  have  audited  the  accompanying  consolidated  balance  sheets of
Islands  Bancorp  and  subsidiary,  (the "Company"), as of December 31, 2005 and
2004,  and  the  related  consolidated  statements  of  income,  changes  in
shareholders'  equity  and  cash  flows  for each of the two years in the period
ended  December  31,  2005.  These  consolidated  financial  statements  are the
responsibility  of the Company's management. Our responsibility is to express an
opinion  on  these  consolidated  financial  statements  based  on  our  audits.

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

          In  our  opinion,  the  consolidated  financial statements referred to
above  present  fairly,  in  all  material  respects, the consolidated financial
position  of  Islands Bancorp, and subsidiary at December 31, 2005 and 2004, and
the  consolidated  results  of their operations and their cash flows for each of
the  two  years  in  the  period  ended  December  31,  2005, in conformity with
accounting  principles  generally  accepted  in  the  United  States of America.



/s/ Francis & Co., CPAs

Atlanta, Georgia
February 23, 2006


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


                                     ASSETS
                                     ------
                                                     As of December 31,
                                                 --------------------------
                                                    2005         2004
                                                 ------------  ------------
<S>                                              <C>          <C>
Cash and due from banks                          $   871,491   $   730,629
Interest-bearing deposits in other banks             133,713        27,480
Federal funds sold                                 4,834,905       782,000
                                                 ------------  ------------
    Total cash and cash equivalents                5,840,109     1,540,109
Securities:
  Available-for-sale at fair value                 2,625,535     2,158,126
Loans, net                                        53,630,260    40,934,809
Property and equipment, net                        3,333,014     2,800,967
Other assets                                         777,794       549,692
                                                 ------------  ------------
    Total Assets                                 $66,206,712   $47,983,703
                                                 ============  ============

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

Liabilities:
------------
  Deposits:
    Non-interest bearing deposits                $ 6,518,928   $ 4,378,127
    Interest bearing deposits                     51,616,172    35,749,189
                                                 ------------  ------------
      Total deposits                              58,135,100    40,127,316
FHLB advances                                      1,700,000     2,200,000
Other liabilities                                    568,423       390,354
                                                 ------------  ------------
    Total Liabilities                             60,403,523    42,717,670
                                                 ------------  ------------

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

Shareholders' Equity:
---------------------
Common stock, zero par value, 10,000,000
  shares authorized; 652,705 shares issued
  and outstanding                                  6,213,061     6,213,061
Retained (deficit)                                  (387,558)     (927,289)
Accumulated other
  comprehensive (loss), net of tax                   (22,314)      (19,739)
                                                 ------------  ------------
    Total Shareholders' Equity                     5,803,189     5,266,033
                                                 ------------  ------------
    Total Liabilities and Shareholders' Equity   $66,206,712   $47,983,703
                                                 ============  ============
</TABLE>

            Refer to notes to the consolidated financial statements.


                                        2
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                        CONSOLIDATED STATEMENTS OF INCOME

                                                For the Years Ended December 31,
                                                --------------------------------
Interest Income:                                     2005             2004
---------------                                 ---------------  ---------------
<S>                                             <C>              <C>
  Interest and fees on loans                    $     3,683,095  $     2,253,670
  Interest on investment securities                      83,053           57,803
  Interest on federal funds sold                        106,596           16,048
                                                ---------------  ---------------
      Total interest income                           3,872,744        2,327,521
Interest Expense:
----------------
  Interest on deposits and borrowings                 1,404,089          776,684
                                                ---------------  ---------------
Net interest income                                   2,468,655        1,550,837
Provision for possible loan losses                      225,000          190,413
                                                ---------------  ---------------
Net interest income after provision for
  possible loan losses                                2,243,655        1,360,424
                                                ---------------  ---------------

Other Income:
------------
  Service fees on deposit accounts                      158,110          133,089
  Gain on sale of loans                                 163,492          181,300
  Mortgage loan brokerage fees                           68,957           43,342
  Other income                                           74,273           60,175
                                                ---------------  ---------------
      Total other income                                464,832          417,906
                                                ---------------  ---------------

Other Expenses:
--------------
  Salaries and benefits                               1,034,156          884,490
  Data processing and ATM                               180,827          158,959
  Depreciation                                          153,506          140,707
  Professional fees                                     257,269           71,027
  Other operating expenses                              344,831          279,865
                                                ---------------  ---------------
      Total other expenses                            1,970,589        1,535,048
                                                ---------------  ---------------

Income before income tax expense                        737,898          243,282
Income tax expense                                      198,167           94,434
                                                ---------------  ---------------

Net Income                                      $       539,731  $       148,848
                                                ===============  ===============

Basic income per share                          $           .83  $           .23
                                                ===============  ===============
Diluted income per share                        $           .80  $           .23
                                                ===============  ===============

Weighted average number of shares outstanding:
Basic                                                   652,705          652,705
                                                ===============  ===============
Diluted                                                 674,702          652,705
                                                ===============  ===============
</TABLE>

            Refer to notes to the consolidated financial statements.


                                        3
<PAGE>
<TABLE>
<CAPTION>
                                                  ISLANDS BANCORP
                                              BEAUFORT, SOUTH CAROLINA
                             CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                   FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2005


                                               Common Stock                          Accumulated
                                     -----------------------------                      Other
                                        No. of          Common         Retained     Comprehensive
                                        Shares          Stock         (Deficit)     Income/(Loss)        Total
                                     -------------  --------------  --------------  --------------  ---------------
<S>                                  <C>            <C>             <C>             <C>             <C>
Balance, December 31, 2003                 652,705  $    6,213,061  $  (1,076,137)  $     (20,827)  $    5,116,097
                                     -------------  --------------  --------------  --------------  ---------------

Comprehensive income:
  Net income, 2004                             - -             - -        148,848             - -          148,848
  Net unrealized gain, securities              - -             - -            - -           1,088            1,088
                                     -------------  --------------  --------------  --------------  ---------------
Total comprehensive income                     - -             - -        148,848           1,088          149,936
                                     -------------  --------------  --------------  --------------  ---------------

Balance, December 31, 2004                 652,705       6,213,061       (927,289)        (19,739)       5,266,033
                                     -------------  --------------  --------------  --------------  ---------------

Comprehensive income:
  Net income, 2005                             - -             - -        539,731             - -          539,731
  Net unrealized (loss), securities            - -             - -            - -          (2,575)          (2,575)
                                     -------------  --------------  --------------  --------------  ---------------
Total comprehensive income                     - -             - -        539,731          (2,575)         537,156
                                     -------------  --------------  --------------  --------------  ---------------

Balance, December 31, 2005                 652,705  $    6,213,061  $    (387,558)  $     (22,314)  $    5,803,189
                                     =============  ==============  ==============  ==============  ===============
</TABLE>

            Refer to notes to the consolidated financial statements.


                                        4
<PAGE>
<TABLE>
<CAPTION>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                               For the Years Ended December 31,
                                              ----------------------------------
Cash flows from operating activities:               2005              2004
------------------------------------          ----------------  ----------------
<S>                                           <C>               <C>
  Net income                                  $       539,731   $       148,848
  Adjustments to reconcile net income
  to net cash provided by
  operating activities:
      Provision for possible loan losses              225,000           190,413
      Depreciation                                    153,506           140,707
      Net amortization on securities                   22,066             6,223
  (Increase) in receivables and other assets         (228,102)          (89,201)
  Increase in payables and other liabilities          178,069           238,107
                                              ----------------  ----------------
Net cash provided by operating activities             890,270           635,097
                                              ----------------  ----------------

Cash flows from investing activities:
------------------------------------
    Principal reduction, securities, AFS            1,046,084           756,470
    Purchase of securities, AFS                    (1,538,134)         (597,005)
    (Increase) in loans, net                      (12,920,451)      (14,778,462)
    (Purchase) of property and equipment             (685,553)           26,517
                                              ----------------  ----------------
Net cash used by investing activities             (14,098,054)      (14,592,480)
                                              ----------------  ----------------

Cash flows from financing activities:
------------------------------------
    Increase in deposits                           18,007,784        14,470,762
    (Decrease)/increase in borrowed funds            (500,000)          700,000
                                              ----------------  ----------------
Net cash provided by financing activities          17,507,784        15,170,762
                                              ----------------  ----------------

Net increase in cash and cash equivalents           4,300,000         1,213,379
Cash and cash equivalents, beginning of year        1,540,109           326,730
                                              ----------------  ----------------
Cash and cash equivalents, end of year        $     5,840,109   $     1,540,109
                                              ================  ================

SUPPLEMENTAL INFORMATION:

Income taxes paid                             $       223,850   $          -  -
                                              ================  ================

Interest paid                                 $     1,334,965   $       752,273
                                              ================  ================
</TABLE>

            REFER TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                        5
<PAGE>
                                ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  1  -  ORGANIZATION OF THE BUSINESS

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

     The  Company  is  authorized to issue up to 10.0 million shares of its zero
par  value  per share common stock. In the public offering that was completed in
early  2001,  652,155 shares of the Company's common stock were sold and issued.
Proceeds  from the offering, net of selling expenses, amounted to $6,207,561. At
December 31, 2005 and 2004, there were 652,705 shares of common stock issued and
outstanding.

     The  Company  is  also  authorized  to issue of up to 2.0 million shares of
preferred stock. The Company's Board of Directors may, without further action by
the  shareholders,  direct  the  issuance  of  preferred  stock  for  any proper
corporate  purpose  with  preferences,  voting  powers,  conversion  rights,
qualifications,  special or relative rights and privileges which could adversely
affect  the  voting  power  or  other rights of shareholders of common stock. At
December  31,  2005  and  2004,  there were no shares of the Company's preferred
stock issued or outstanding.

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


                                        6
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis  of  Presentation  and  Reclassification.  The consolidated financial
     -----------------------------------------------
statements include the accounts of the Company and its subsidiary. The Bank is a
voting  interest entity under U.S. generally accepted accounting principles. All
significant  intercompany  accounts  and  transactions  have  been eliminated in
consolidation.  Certain  prior year amounts have been reclassified to conform to
the  current  year  presentation;  such  reclassifications  had no impact on net
income or shareholders' equity.

     Basis  of Accounting.  The accounting and reporting policies of the Company
     ---------------------
conform  to  U.S.  generally  accepted  accounting  principles  and  to  general
practices  within  the  banking industry. In preparing the financial statements,
management  is  required  to  make  estimates  and  assumptions  that affect the
reported  amounts  of assets and liabilities and disclosure of contingent assets
and  liabilities  at  the  date of the consolidated financial statements and the
reported  amounts  of  revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates. Material estimates that
are  particularly  susceptible  to significant change in the near term relate to
the  determination  of the allowance for possible loan losses, the fair value of
financial instruments, and the status of contingencies.

     Cash, Due from Banks and Federal Funds Sold.  The Company maintains deposit
     --------------------------------------------
relationships  with  other financial institutions in amounts that exceed federal
deposit  insurance  coverage.  Furthermore,  federal  funds sold are essentially
uncollateralized  loans  to  other  financial institutions. Management regularly
evaluates  the  credit  risks  associated  with  the  counterparties  to  these
transactions  and  believes  that  the Company is not exposed to any significant
credit risks on the above accounts.

     Securities.  Securities  that  the  Company  has  the  positive  intent and
     -----------
ability  to hold to maturity are classified as held-to-maturity and are reported
at  amortized cost. Securities held for current resale are classified as trading
securities  and  are  reported  at  fair value, with unrealized gains and losses
included  in  earnings. Securities to be held for indefinite periods of time are
classified  as  available-for-sale and carried at fair value with the unrealized
holding  gains/losses reported as a component of other comprehensive income, net
of  tax.  Generally,  in the available-for-sale category are securities that are
held  to  meet  investment  objectives  such  as  interest  rate risk, liquidity
management  and  asset-liability  management  strategies  among  others.  The
classification  of  investment  securities  as  held-to-maturity,  trading  or
available-for-sale  is  determined at the date of purchase. The Company does not
have  any  held-to-maturity  or  trading  securities as of December 31, 2005 and
2004.  Securities  with  limited  marketability,  such  as  stock in the Federal
Reserve Bank and the Federal Home Loan Bank, are carried at cost.


                                        7
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Interest  income  includes amortization of purchase premiums and discounts.
Realized  gains  and  losses are derived from the amortized cost of the security
sold.  Declines  in  the  fair  value of held-to-maturity and available-for-sale
securities  below  their  cost  that  are  deemed to be other than temporary are
reflected  in  earnings  as  realized losses. In estimating other-than-temporary
impairment  losses,  management considers, among other things, (i) the length of
time  and  the  extent to which the fair value has been less than cost, (ii) the
financial  condition and near-term prospects of the issuer, and (iii) the intent
and  ability  of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.

     Loans.  Loans  are  reported  at  the  principal balance outstanding net of
     ------
unearned  discounts.  Interest  income  on  loans is reported on the level-yield
method  and  includes amortization of deferred loan fees and costs over the loan
term.  Loan  commitment  fees  for  commitment periods greater than one year are
deferred  and  amortized  into  fee  income  on  a  straight-line basis over the
commitment period.

     The  accrual  of  interest  on  loans is discontinued when, in management's
opinion,  the  borrower may be unable to meet payment obligations as they become
due, as well as when required by regulatory provisions. When interest accrual is
discontinued,  all  unpaid  accrued  interest  is  reversed.  Interest income is
subsequently  recognized only to the extent cash payments are received in excess
of  principal  due.  Loans are returned to accrual status when all the principal
and  interest  amounts contractually due are brought current and future payments
are reasonably assured.

     Loans  are  considered  impaired  when,  based  on  current information and
events,  it  is  probable that the Company will be unable to collect all amounts
due  in  accordance  with  the  original  contractual  terms  of  the agreement,
including  scheduled principal and interest payments. Impairment is evaluated on
an  individual loan basis. If a loan is impaired, a specific valuation allowance
is  allocated,  if  necessary,  so that the loan is reported net, at the present
value  of  estimated  future cash flows using the loan's existing rate or at the
fair  value  of  collateral if repayment is expected solely from the collateral.
Interest  payments  on  impaired loans are typically applied to principal unless
collectibility  of  the  principal  amount  is reasonably assured, in which case
interest is recognized on a cash basis. Impaired loans, or portions thereof, are
charged off when deemed uncollectible.

     SBA  Loans.  At  times,  the Bank originates loans to customers under Small
     -----------
Business  Administration  ("SBA")  programs  that  generally  provide  for  SBA
guarantees  of  50%  to  85%  of  each  loan.  Periodically,  the Bank sells the
guaranteed  portion  of  certain  SBA  loans  to  investors  and  retains  the
unguaranteed  portion  and  servicing  rights.  Gains  on these sales are earned
through  the  sale of the guaranteed portion of the loan for an amount in excess
of the adjusted


                                        8
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

carrying  value  of  the portion of the loan sold. At the time of sale, the Bank
allocates the carrying value of such loans between the portion sold, the portion
retained,  and  a value assigned to servicing rights. The difference between the
adjusted  carrying  value  of  the  portion  retained and the face amount of the
portion  retained  is  amortized to interest income over the life or anticipated
life of the related loan.

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

     The  Company's  allowance  for  possible  loan  losses  consists  of  three
elements:  (i)  specific valuation allowances established for probable losses on
specific  loans;  (ii)  historical  valuation  allowances  calculated  based  on
historical  loan  loss experience for similar loans with similar characteristics
and  trends; and (iii) unallocated general valuation allowances determined based
on  general economic conditions and other qualitative risk factors both internal
and external to the Company.

     Property  and  Equipment.  Building, leasehold improvements, furniture, and
     -------------------------
equipment  are  stated at cost, net of accumulated depreciation. Land is carried
at  cost. Depreciation is computed principally by the straight-line method based
on the estimated useful lives of the related assets. Maintenance and repairs are
charged  to  operations,  while  major  improvements  are  capitalized.  Upon
retirement,  sale  or  other disposition of property and equipment, the cost and
accumulated  depreciation  are eliminated from the accounts, and gain or loss is
included  in  operations.  The  Company  had no capitalized lease obligations at
December 31, 2005 and 2004.


                                        9
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Other  Real  Estate.  Other real estate represents property acquired by the
     --------------------
Company in satisfaction of a loan. Other real estate is carried at the lower of:
(i)  cost  or  (ii)  fair  value  less  estimated  selling  costs. Fair value is
determined  on  the  basis  of  current  appraisals,  comparable sales and other
estimates  of value obtained principally from independent sources. Any excess of
the  loan  balance  at  the  time of foreclosure over the fair value of the real
estate  held  as  collateral  is  treated as a loan loss and charged against the
allowance  for  loan  losses.  Gain  or loss on the sale of the property and any
subsequent  adjustments  to  reflect  changes  in fair value of the property are
reflected in the income statement. Recoverable costs relating to the development
and  improvement  of  the property are capitalized whereas routine holding costs
are  charged  to  expense.  The Company had no other real estate at December 31,
2005 and 2004.

     Income  Taxes.  Deferred  income  tax assets and liabilities are determined
     --------------
using  the  liability  (or  balance  sheet)  method.  Under this method, the net
deferred  tax  asset  or liability is determined based on the tax effects of the
differences  between  the book and tax bases of the various balance sheet assets
and liabilities and gives recognition to changes in tax rates and laws.

     A  valuation  allowance for deferred tax assets is required when it is more
likely  than  not that some portion or all of the deferred tax asset will not be
realized.  In  assessing  the realization of the deferred tax assets, management
considers  the scheduled reversals of deferred tax liabilities, projected future
taxable income (in the near-term based on current projections), and tax planning
strategies.

     The  operating  results  of  the Company and its subsidiary are included in
consolidated income tax returns.

     Stock-Based Compensation.  Employee compensation expense under stock option
     -------------------------
plans  is  reported only if options are granted below market price at grant date
in  accordance  with  the  intrinsic value method of Accounting Principles Board
Opinion  (APB)  No.  25, "Accounting for Stock Issued to Employees," and related
interpretations  by  accounting standards setters. Because the exercise price of
the  Company's  employee stock options equals the market price of the underlying
stock  on  the  measurement  date,  which  is  generally  the  date of grant, no
compensation  expense is recognized on options granted. Compensation expense for
non-vested  stock  awards  is  based  on  the  market  price of the stock on the
measurement  date,  which  is  generally  the  date  of grant, and is recognized
ratably over the service period of the award.

     Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for  Stock-Based  Compensation,"  as  amended  by  SFAS  148, requires pro forma
disclosures  of net income and earnings per share for companies not adopting its
fair  value  accounting  method  for  stock-based employee compensation. The pro
forma disclosures as required under SFAS 123 and 148 are presented below.


                                       10
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                        --------------------------
                                            2005          2004
                                        ------------  ------------
<S>                                     <C>           <C>
     Net income, as reported            $   539,731   $   148,848
     Stock-based compensation expense       (61,768)      (60,960)
                                        ------------  ------------
     Pro-forma (fair value) net income  $   477,963   $    87,888
                                        ============  ============

     Basic income per share:
     As reported                        $       .83   $       .23
                                        ============  ============
     Pro-forma                          $       .73   $       .13
                                        ============  ============

     Diluted income per share:
     As reported                        $       .80   $       .23
                                        ============  ============
     Pro-forma                          $       .71   $       .13
                                        ============  ============

     Pro-forma value of option issued   $      4.02       N/A
                                        ============  ============
</TABLE>

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

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

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                      ------------------------
                                         2005         2004
                                      -----------  -----------
<S>                                   <C>          <C>
     Risk-free interest rate                4.25%          --%
     Dividend yield                           --           --
     Volatility factor                      12.0%          --%
     Weighted average life of option      10 yrs           --
</TABLE>

     The  Company  expects to adopt the provisions of SFAS No. 123, "Share-Based
Payment  (Revised  2004),"  on  January  1,  2006. Among other things, SFAS 123R
eliminates  the ability to account for stock-based compensation using APB 25 and
requires that such transactions be recognized as compensation cost in the income
statement based on their fair values on the date of the grant.


                                       11
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Cash  and Cash Equivalents.  For purposes of reporting cash flows, cash and
     ---------------------------
cash  equivalents  include  cash  on  hand,  deposits  with  other  financial
institutions  that  have an initial maturity of less than 90 days, federal funds
sold  and  resell  agreements. Net cash flows are reported for loans, loans held
for sale, deposit transactions, and short-term borrowings.

     Operating  Segments.  The  Company determined, in accordance with Financial
     --------------------
Accounting  Standards  No.  131,  "Disclosure about Segment of an Enterprise and
Related  Information,"  that  it  is  a  single reportable entity. The Company's
business activities are confined to community banking.

     Earnings Per Share.  Basic earnings per share is determined by dividing net
     -------------------
income  by  the  weighted-average  number  of common shares outstanding. Diluted
income  per  share  is determined by dividing net income by the weighted average
number  of  common  shares  outstanding increased by the number of common shares
that  would be issued assuming exercise of stock options. This also assumes that
only  options  with  an  exercise  price below the existing market price will be
exercised.  In  computing  net  income  per share, the Company uses the treasury
stock method.

     Comprehensive  Income.  Accounting  principles  generally  require  that
     ----------------------
recognized  revenue,  expenses,  gains  and  losses  be  included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the  equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. Comprehensive income for calendar years 2005
and  2004  are  shown in the consolidated statements of changes in shareholders'
equity.

     Recent  Accounting  Pronouncements.  SFAS  No. 154, "Accounting Changes and
     -----------------------------------
Error  Corrections,  a  Replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS 154 establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle in the absence of
explicit  transition  requirements  specific  to  a  newly  adopted  accounting
principle.  Previously,  most changes in accounting principle were recognized by
including  the  cumulative effect of changing to the new accounting principle in
net  income  of  the  period  of  the  change.  Under  SFAS  154,  retrospective
application  requires  (i)  the  cumulative  effect  of  the  change  to the new
accounting  principle on periods prior to those presented to be reflected in the
carrying  amounts  of  assets  and  liabilities as of the beginning of the first
period  presented,  (ii)  an  offsetting  adjustment,  if any, to be made to the
opening balance of retained earnings (or other appropriate components of equity)
for that period, and (iii) financial statements for each individual prior period
presented  to  be  adjusted  to  reflect  the  direct period-specific effects of
applying  the  new  accounting  principle. Special retroactive application rules
apply  in  situations  where  it  is  impracticable  to  determine  either  the
period-specific effects


                                       12
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

or  the  cumulative  effect  of  the  change.  Indirect  effects  of a change in
accounting  principle  are  required  to  be reported in the period in which the
accounting  change is made. SFAS 154 carries forward the guidance in APB Opinion
20  "Accounting  Changes,"  requiring  justification  of  a change in accounting
principle  on  the basis of preferability. SFAS 154 also carries forward without
change the guidance contained in APB Opinion 20, for reporting the correction of
an  error  in  previously  issued  financial  statements  and for a change in an
accounting  estimate.  SFAS  154  is  effective  for  accounting  changes  and
corrections  of  errors  made in fiscal years beginning after December 15, 2005.
The Corporation does not expect SFAS 154 will significantly impact its financial
statements upon its adoption on January 1, 2006.

     SFAS  No.  123, "Share-Based Payment (Revised 2004)." SFAS 123R establishes
standards  for  the accounting for transactions in which an entity (i) exchanges
its  equity  instruments  for  goods  or services, or (ii) incurs liabilities in
exchange  for goods or services that are based on the fair value of the entity's
equity  instruments  or  that  may  be  settled  by  the  issuance of the equity
instruments.  SFAS  123R  eliminates  the  ability  to  account  for stock-based
compensation  using  APB 25 and requires that such transactions be recognized as
compensation  cost  in  the  income  statement based on their fair values on the
measurement  date, which is generally the date of the grant. SFAS 123R was to be
effective  for the Company on July 1, 2005; however, the required implementation
date  was  delayed  until  January  1,  2006.  The  Company  will  transition to
fair-value  based  accounting  for  stock-based  compensation  using  a modified
version  of  prospective application ("modified prospective application"). Under
modified  prospective application, as it is applicable to the Company, SFAS 123R
applies  to  new  awards and to awards modified, repurchased, or cancelled after
January  1,  2006. Additionally, compensation cost for the portion of awards for
which  the  requisite  service  has  not  been  rendered (generally referring to
non-vested awards) that are outstanding as of January 1, 2006 must be recognized
as  the  remaining requisite service is rendered during the period of and/or the
periods  after  the  adoption of SFAS 123R. The attribution of compensation cost
for  those  earlier  awards  will  be  based  on the same method and on the same
grant-date  fair  values  previously  determined  for  the pro forma disclosures
required  for  companies that did not adopt the fair value accounting method for
stock-based employee compensation.

     FASB  Staff  Position (FSP) No. 115-1, "The Meaning of Other-Than-Temporary
Impairment  and  Its  Application  to  Certain  Investments." FSP 115-1 provides
guidance  for  determining  when  an  investment is considered impaired, whether
impairment  is  other-than-temporary,  and measurement of an impairment loss. An
investment  is  considered  impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence to evaluate the
realizable  value  of  its  investment,  impairment  is  determined  to  be
other-than-temporary,  then an impairment loss should be recognized equal to the
difference between the investment's cost and its fair value. FSP 115-1 nullifies
certain  provisions  of  Emerging  Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and It's


                                       13
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

Application to Certain Investments," while retaining the disclosure requirements
of  EITF  03-1 which were adopted in 2003.  FSP 115-1 is effective for reporting
periods  beginning  after  December  15,  2005.  The Company does not expect FSP
115-1  will  significantly  impact its financial statements upon its adoption on
January 1, 2006.


NOTE  3  -  FEDERAL FUNDS SOLD

     The  Bank  is required to maintain legal cash reserves computed by applying
prescribed  percentages  to its various types of deposits.  When the Bank's cash
reserves  are  in excess of the required amount, the Bank may lend the excess to
other banks on a daily basis.  At December 31, 2005 and 2004, federal funds sold
were $4,834,905 and $782,000, respectively.


NOTE  4  -  SECURITIES AVAILABLE-FOR-SALE

     The  amortized  costs  and  estimated  market  values  of  securities
available-for-sale as of December 31, 2005 follow:

<TABLE>
<CAPTION>
                                         Gross
                                       Unrealized
                      Amortized   -----------------------    Estimated
Description             Costs       Gains       Losses     Market Values
-----------           ----------  ----------  -----------  -------------
<S>                   <C>         <C>         <C>          <C>
U.S. Agency           $1,498,738  $      - -  $  (14,363)  $   1,484,375
U.S. Agency pool         804,606         - -     (19,446)        785,160
Other securities         356,000         - -         - -         356,000
                      ----------  ----------  -----------  -------------
    Total securities  $2,659,344  $      - -  $  (33,809)  $   2,625,535
                      ==========  ==========  ===========  =============
</TABLE>

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

The amortized costs and estimated market values of securities available-for-sale
as  of  December  31,  2004  follow:

<TABLE>
<CAPTION>
                                         Gross
                                       Unrealized
                      Amortized   -----------------------    Estimated
Description             Costs       Gains       Losses     Market Values
-----------           ----------  ----------  -----------  -------------
<S>                   <C>         <C>         <C>          <C>
U.S. Agency           $  503,715  $      - -  $     (590)  $     503,125
U.S. Agency pool       1,368,018         874     (30,191)      1,338,701
Other securities         316,300         - -         - -         316,300
                      ----------  ----------  -----------  -------------
    Total securities  $2,188,033  $      874  $  (30,781)  $   2,158,126
                      ==========  ==========  ===========  =============
</TABLE>


                                       14
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     The  amortized  costs  and  estimated  market  values  of  securities
available-for-sale  at  December 31, 2005, by contractual maturity, are shown in
the  following chart. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.

<TABLE>
<CAPTION>
                                       Amortized      Estimated
                                         Costs      Market Values
                                     -------------  -------------
<S>                                  <C>            <C>
     Due in one to five years        $   1,498,738  $   1,484,375
     Due in ten years or more              804,606        785,160
     FRB & FHLB stock (no maturity)        356,000        356,000
                                     -------------  -------------
         Total securities            $   2,659,344  $   2,625,535
                                     =============  =============
</TABLE>

     No  securities  were  sold  by  the Company in either calendar year 2005 or
2004, and none of the securities was pledged as of December 31, 2005 and 2004.

     Information  pertaining  to  securities  with  gross  unrealized  losses at
December  31,  2005  and  2004,  aggregated  by  investment category and further
segregated  by  the  length  of  time (less than or over twelve months) that the
securities have been in a continuous loss position follows:

<TABLE>
<CAPTION>
                                             December 31, 2005
                                             -----------------

                         Less than                  Over
                       Twelve Months            Twelve Months                Total
                  -----------------------  -----------------------  -----------------------
                    Fair      Unrealized      Fair      Unrealized     Fair     Unrealized
                    Value        Loss        Value        Loss        Value        Loss
                  ----------  -----------  ----------  -----------  ----------  -----------
<S>               <C>         <C>          <C>         <C>          <C>         <C>
U.S. Agency       $1,484,375  $  (14,363)  $      - -  $      - -   $1,484,375  $  (14,363)
U.S. Agency pool         - -         - -      785,160     (19,446)     785,160     (19,446)
                  ----------  -----------  ----------  -----------  ----------  -----------
Total             $1,484,375  $  (14,363)  $  785,160  $  (19,446)  $2,269,535  $  (33,809)
                  ==========  ===========  ==========  ===========  ==========  ===========
</TABLE>

<TABLE>
<CAPTION>
                                             December 31, 2005
                                             -----------------

                         Less than                  Over
                       Twelve Months            Twelve Months                Total
                  -----------------------  -----------------------  -----------------------
                    Fair      Unrealized      Fair      Unrealized     Fair     Unrealized
                    Value        Loss        Value        Loss        Value        Loss
                  ----------  -----------  ----------  -----------  ----------  -----------
<S>               <C>         <C>          <C>         <C>          <C>         <C>
U.S. Agency       $  503,125  $     (590)  $      - -  $      - -   $  503,125  $     (590)
U.S. Agency pool         - -         - -    1,148,391     (30,191)   1,148,391     (30,191)
                  ----------  -----------  ----------  -----------  ----------  -----------
    Total         $  503,125  $     (590)  $1,148,391  $  (30,191)  $1,651,516  $  (30,781)
                  ==========  ===========  ==========  ===========  ==========  ===========
</TABLE>


                                       15
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Unrealized  losses  in  the securities portfolio amounted to $33,809 (2005)
and  $30,781  (2004)  representing  1.29%  (2005)  and 1.43% (2004) of the total
portfolio.  All  of  the  unrealized losses relate to U.S. Agency securities and
U.S.  government  corporations.  These  unrealized  losses  were  caused  by
fluctuations  in  market  interest  rates,  rather than concerns over the credit
quality  of  the  issuers.  The  Company  believes  that  the  U.S. Agencies and
government  corporations  will continue to honor their interest payments on time
as  well  as the full debt at maturity. Because the unrealized losses are due to
fluctuations  in  the interest rate, and no credit-worthiness factors exist, the
Company  believes that the investments are not considered other-than-temporarily
impaired.


NOTE  5  -  LOANS

     The  composition  of  net  loans by major loan category, as of December 31,
2005 and 2004, follows:

<TABLE>
<CAPTION>
                                                 December 31,
                                          --------------------------
                                              2005         2004
                                          ------------  ------------
<S>                                       <C>           <C>
     Commercial, financial, agricultural  $ 8,640,354   $ 6,389,530
     Real estate - construction            17,082,585    11,084,783
     Real estate - mortgage                25,994,861    18,973,750
     Installment                            2,591,801     4,974,601
                                          ------------  ------------
     Loans, gross                          54,309,601    41,422,664
     Deduct:
       Allowance for loan losses             (679,341)     (487,855)
                                          ------------  ------------
         Loans, net                       $53,630,260   $40,934,809
                                          ============  ============
</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 indication
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, amounted to approximately
$459,951 and $816,137, respectively. The average recorded investment in impaired
loans  amounted  to  approximately  $532,764 and $663,119, respectively, for the
years ended December 31, 2005 and 2004. The allowance for loan losses related to
impaired  loans  amounted  to approximately $68,993 and $169,648 at December 31,
2005  and  2004,  respectively. Interest income recognized on impaired loans for
the  years  ended  December  31,  2005 and 2004 amounted to $31,975 and $39,597,
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


                                       16
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

on  non-accrual status at December 31, 2005 and 2004 had outstanding balances of
$313,148  and  $249,202, respectively. Interest recognized on non-accruing loans
at  December  31,  2005 and 2004 was $9,136 and $3,347 respectively. The Company
has  no  commitments to lend additional funds to borrowers whose loans have been
modified.


NOTE  6  -  ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

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

     Activity within the Allowance account for the years ended December 31, 2005
and 2004 follows:

<TABLE>
<CAPTION>
                                             Years ended December 31,
                                             ------------------------
                                                2005         2004
                                             -----------  -----------
<S>                                          <C>          <C>
     Balance, beginning of year              $  487,855   $  326,555
     Add:  Provision for loan losses            225,000      190,413
     Add:  Recoveries of previously charged
             off amounts                            - -          532
                                             -----------  -----------
        Total                                   712,855      517,500
     Deduct: Amount charged-off                 (33,514)     (29,645)
                                             -----------  -----------
     Balance, end of year                    $  679,341   $  487,855
                                             ===========  ===========
</TABLE>


                                       17
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  7  -  PROPERTY AND EQUIPMENT

     Components  of  property and equipment included in the consolidated balance
sheets at December 31, 2005 and 2004 follow:

<TABLE>
<CAPTION>
                                         December 31,
                                   ------------------------
                                       2005        2004
                                   -----------  -----------
<S>                                <C>          <C>
Land                               $1,383,911   $  750,614
Building                            1,872,135    1,872,135
Furniture, equipment                  625,223      572,967
                                   -----------  -----------
    Property and equipment, gross   3,881,269    3,195,716
Deduct:
  Accumulated depreciation           (548,255)    (394,749)
                                   -----------  -----------
    Property and equipment, net    $3,333,014   $2,800,967
                                   ===========  ===========
</TABLE>

     Depreciation  expense  for  the  years  ended  December  31,  2005 and 2004
amounted  to  $153,506  and  $140,707,  respectively. Depreciation is charged to
operations  over  the estimated useful lives of the assets. The estimated useful
lives and methods of depreciation for the principal items follow:

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

     At December 31, 2005 and 2004, included under "Land" in the above table are
investments  in  the  amount  of  $1,180,125  and  $546,828,  respectively.  The
investments  relate to two (2005) and one (2004) tracts of land that the Company
intends to utilize for future expansion.


NOTE  8  -  COMMITMENTS AND CONTINGENCIES

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


                                       18
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     At  December  31, 2005 and 2004, the Company had unused loan commitments of
approximately  $10,019,119  and  $6,094,763, respectively. Additionally, standby
letters  of  credit  of  approximately $176,920 and $344,087 were outstanding at
December  31, 2005 and 2004, respectively. The majority of these commitments are
collateralized by various assets. No material losses are anticipated as a result
of these transactions.

     The  Company  and  its  subsidiary  are subject to claims and lawsuits that
arise  primarily  in  the  ordinary  course  of  business.  It is the opinion of
management  that  the  disposition  or  ultimate  resolution  of such claims and
lawsuits  will  not have a material adverse effect on the consolidated financial
position of the Company and its subsidiary.

     On  July  27,  1999,  the Company entered into an employment agreement (the
"Agreement")  with  its  President  and  Chief  Executive  Officer  (the  "CEO")
regarding  his  employment with the Company and the Bank. Upon expiration of the
initial  term of the Agreement in July 2004, the Agreement automatically renewed
for  additional  two-year  terms  unless  either party notified the other of its
intent  not  to  renew  at  least  180  days  prior to the then-current term. On
November  15,  2005,  pursuant  to  the  terms  of  the  Agreement,  the Company
terminated the CEO's employment. Under the Agreement, the CEO received an annual
salary  and bonus if certain performance criteria were met. He was also provided
with  an automobile, life insurance coverage, club dues, retirement, medical and
other benefit programs.

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


NOTE  9  -  BORROWINGS

     During calendar year 2005 and 2004, the Bank obtained funds, in the form of
borrowings,  from  the Federal Home Loan Bank ("the FHLB"). These borrowings are
secured  by  specific  first  lien  residential  mortgages  held  by  the  Bank.
Additional information on the advances are provided below:

<TABLE>
<CAPTION>
                                              First
     Outstanding Borrowings                 Possible
          December 31,                      Interest        Is
     ----------------------    Interest    Adjustment    Principal    Maturity
        2005        2004         Rate     or Call Date  Amortizing?     Date
     ----------  ----------  -----------  ------------  -----------  ----------
<S>              <C>         <C>          <C>           <C>          <C>
     $  700,000  $  700,000        4.42%       Monthly           No     9/14/06
      1,000,000   1,000,000        3.64%           N/A           No     9/24/08
            - -     500,000        2.32%           N/A           No    12/22/05
     ----------  ----------  -----------  ------------  -----------  ----------
     $1,700,000  $2,200,000         N/A            N/A          N/A         N/A
     ==========  ==========
</TABLE>


                                       19
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Note  that the interest rate on the $700,000 advance adjusts monthly and is
4.42%  as  of  December 31, 2005. The interest rate on the other two advances is
fixed until expiration.


NOTE  10  -  DEPOSITS

     The following details deposit accounts at December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                 December 31,
                                           ------------------------
                                               2005        2004
                                           -----------  -----------
<S>                                        <C>          <C>
     Non-interest bearing deposits         $ 6,518,928  $ 4,378,127
                                           -----------  -----------
     Interest bearing deposits:
       NOW accounts                          2,697,994    2,055,427
       Money market accounts                 4,764,716    4,383,644
       Savings                                 877,809      675,421
       Time, less than $100,000             29,927,537   19,604,665
       Time, $100,000 and over              13,348,116    9,030,032
                                           -----------  -----------
         Total interest bearing deposits    51,616,172   35,749,189
                                           -----------  -----------

        Total deposits                     $58,135,100  $40,127,316
                                           ===========  ===========
</TABLE>

     At  December  31,  2005,  the  scheduled  maturities of all certificates of
deposit  were  as  follows:

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

                            2006       $26,588,958
                            2007        14,548,823
                            2008         1,911,352
                            2009           223,858
                            2010             2,662
                                       -----------
                            Total      $43,275,653
                                       ===========
</TABLE>


                                       20
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  11  -  INTEREST ON DEPOSITS AND BORROWINGS

     A  summary  of  interest  expense for the years ended December 31, 2005 and
2004 follows:

<TABLE>
<CAPTION>
                                          December 31,
                                     --------------------
                                        2005       2004
                                     ----------  --------
<S>                                  <C>         <C>
     NOW accounts                    $   30,826  $ 24,026
     Money market accounts               97,035    58,407
     Savings                              7,949     6,108
     Time, less than $100,000           834,459   447,335
     Time, $100,000 and over            360,520   183,773
     Other borrowings                    73,300    57,035
                                     ----------  --------
       Total interest on deposits
         and other borrowings        $1,404,089  $776,684
                                     ==========  ========
</TABLE>

NOTE  12  -  OTHER OPERATING EXPENSES

     A summary of other operating expenses for the years ended December 31, 2005
and  2004  follows:

<TABLE>
<CAPTION>
                                           December 31,
                                       ------------------
                                         2005      2004
                                       --------  --------
<S>                                    <C>       <C>
     Supplies and printing             $ 33,616  $ 32,504
     Taxes and insurance                 51,587    42,475
     Utilities and telephone             31,764    28,167
     Advertising and public relations    77,218    48,792
     All other                          150,646   127,927
                                       --------  --------
       Total other operating expenses  $344,831  $279,865
                                       ========  ========
</TABLE>


                                       21
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  13  -  INCOME  TAXES

     As  of December 31, 2005 and 2004, the Company's provision for income taxes
consisted  of  the  following:

<TABLE>
<CAPTION>
                                    December 31,
                                 -----------------
                                   2005     2004
                                 --------  -------
<S>                              <C>       <C>
     Current                     $129,129  $   - -
     Deferred                      69,038   94,434
                                 --------  -------
     Federal income tax expense  $198,167  $94,434
                                 ========  =======
</TABLE>

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

<TABLE>
<CAPTION>
                                             December 31,
                                         --------------------
                                            2005      2004
                                         ---------  ---------
<S>                                      <C>        <C>
     Income taxes at statutory rate      $250,885   $ 82,718
     State tax, net of Federal benefits    29,942     10,930
     Change in valuation allowance            - -    (47,731)
     Other                                (82,660)    48,517
                                         ---------  ---------
       Total                             $198,167   $ 94,434
                                         =========  =========
</TABLE>

     The tax effects of the temporary differences that comprise the net deferred
tax  assets  at  December  31,  2005,  and  2004  are  presented  below:

<TABLE>
<CAPTION>
                                                         2005      2004
                                                      ---------  ---------
<S>                                                   <C>        <C>
     Deferred tax assets:
       Allowance for loan losses                      $230,976   $165,871
       Net operating loss carryforward                     - -     83,543
       Organization costs                               32,932     65,864
       Available for sale securities                    11,495     10,168
                                                      ---------  ---------
     Gross deferred tax assets                         275,403    325,446
     Less, deferred tax liabilities:
       Accumulated depreciation                         17,052        515
                                                      ---------  ---------
     Deferred tax assets net of deferred liabilities   258,351    324,931
     Less, valuation allowance                         (65,702)   (65,702)
                                                      ---------  ---------
         Net deferred tax assets                      $192,649   $259,229
                                                      =========  =========
</TABLE>


                                       22
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     In assessing the realizability of deferred tax assets, management considers
whether  it is more likely than not that some portion or all of the deferred tax
assets  will not be realized. The ultimate realization of deferred tax assets is
dependent  upon  the  generation  of future taxable income during the periods in
which  those  temporary  differences become deductible. Management considers the
scheduled  reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the projection
for  future  taxable  income  over  the  periods which the temporary differences
resulting  in  the deferred tax assets are deductible, management believes it is
more  likely  than  not  that  the  Company  will  realize the benefits of those
deductible  differences, net of the existing valuation allowance at December 31,
2005.


NOTE  14  -  RELATED PARTY TRANSACTIONS

     Directors'  Warrants.  The  Directors  of the Company received an aggregate
     ---------------------
total of 210,115 stock warrants, or approximately one stock warrant for each one
share  of  the  Company's common stock purchased by the directors in the initial
public  offering.  Each warrant entitles its holder to purchase one share of the
Company's  common  stock  for $10.00. As of December 31, 2005, all warrants were
fully  vested.  All  unexercised  warrants  will  expire on July 8, 2011. During
calendar years 2005 and 2004, no warrants were granted, exercised, or forfeited.
There were 200,105 warrants outstanding at December 31, 2005 and 2004.

     Options.  The Company has a stock option plan with 97,905 shares of options
     --------
authorized.  During  calendar  year 2005, 1,000 stock options were granted at an
exercise  price of $10.00 per share and with a vesting period of three years. In
addition,  5,000  stock  options were granted at an exercise price of $11.00 per
share  and  with  an  immediate  vesting.  No  stock options were granted during
calendar  year  2004. During calendar years 2005 and 2004, no stock options were
exercised.  In  calendar  year  2005,  19,581  options  were forfeited. No stock
options  were  forfeited  during calendar year 2004. Of the 54,500 stock options
granted  since  inception, 34,919 are outstanding and 27,280 are fully vested at
December  31,  2005.  The average exercise price of an option as of December 31,
2005 and 2004 is $10.14 and $10.00, respectively. At December 31, 2005 and 2004,
62,986 and 49,405 options, respectively, were available for grant.

     Borrowings  and  Deposits  by  Directors  and  Executive Officers.  Certain
     ------------------------------------------------------------------
directors,  principal  officers and companies with which they are affiliated are
customers  of and have banking transactions with the Bank in the ordinary course
of  business.  As of December 31, 2005 and 2004, loans outstanding to directors,
their  related  interests  and  executive  officers  aggregated  $3,499,034  and
$2,818,192, respectively. These loans were made on substantially the same terms,
including  interest  rates  and collateral, as those prevailing at the same time
for comparable


                                       23
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

transactions  with  unrelated  parties.  In  the opinion of management, loans to
related  parties  did  not involve more than normal credit risk or present other
unfavorable features.

     A  summary of the related party loan transactions during the calendar years
2005 and 2004 follows:

<TABLE>
<CAPTION>
                                   Insider Loan Transactions
                                  --------------------------
                                      2005         2004
                                  ------------  ------------
<S>                               <C>           <C>
     Balance, beginning of year   $ 2,818,192   $   844,269
     New loans                      2,212,825     2,225,355
     Less:  Principal reductions   (1,531,983)     (251,432)
                                  ------------  ------------
     Balance, end of year         $ 3,499,034   $ 2,818,192
                                  ============  ============
</TABLE>

     Deposits  by directors and their related interests, as of December 31, 2005
and 2004 approximated $1,178,711 and $598,407, respectively.


NOTE  15  -  CONCENTRATIONS OF CREDIT

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

     Approximately  79.4%  of  the  Company's  loan portfolio is concentrated in
loans  secured by real estate, of which a substantial portion is secured by real
estate  in  the  Company's  primary  market  area.  Accordingly,  the  ultimate
collectibility  of  the  loan  portfolio  is  susceptible  to  changes in market
conditions  in  the  Company's  primary  market  area.  The  other  significant
concentrations of credit by type of loan are set forth under Note 5.

     The Company, as a matter of policy, does not generally extend credit to any
single  borrower  or  group  of related borrowers in excess of 15% of the Bank's
statutory capital, or approximately $970,000.


NOTE  16  -  REGULATORY MATTERS

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


                                       24
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

     Various requirements and restrictions under federal and state laws regulate
the  operations  of  the  Company.  These  laws, among other things, require the
maintenance  of  reserves  against  deposits, impose certain restrictions on the
nature  and  terms  of the loans, restrict investments and other activities, and
regulate  mergers  and the establishment of branches and related operations. The
ability  of  the  parent  company  to pay cash dividends to its shareholders and
service  debt may be dependent upon cash dividends from its subsidiary bank. The
subsidiary  bank  is  subject  to limitations under federal law in the amount of
dividends  it  may  declare. At December 31, 2005, none of the subsidiary bank's
capital accounts was available for dividend declaration without prior regulatory
approval.

     The  banking  industry is also affected by the monetary and fiscal policies
of  regulatory  authorities,  including  the FRB. Through open market securities
transactions,  variations  in  the  discount  rate, the establishment of reserve
requirements  and  the  regulation  of  certain interest rates payable by member
banks,  the  FRB exerts considerable influence over the cost and availability of
funds  obtained  for  lending  and investing. Changes in interest rates, deposit
levels and loan demand are influenced by the changing conditions in the national
economy  and  in the money markets, as well as the effect of actions by monetary
and fiscal authorities. Pursuant to the FRB's reserve requirements, the Bank was
required  to maintain certain cash reserves in the amount of $50,000 at December
31, 2005.

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

     Qualitative  measures  established by regulation to ensure capital adequacy
require  the  Company  and  the Bank to maintain minimum amounts and ratios (set
forth  in  the  table  below)  of  total  and  Tier 1 capital (as defined in the
regulations)  to  risk-weighted  assets  (as  defined), and of Tier 1 capital to
average  assets (as defined). Management believes that the Company and the Bank,
as  of  December  31, 2005, meet all capital adequacy requirements to which they
are subject.

     As  of  December  31, 2005, the Bank was considered to be Well Capitalized.
There  are  no  conditions  or  events  since  December 31, 2005 that management
believes have changed the


                                       25
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

Bank's Well Capitalized category. To be categorized as Adequately Capitalized or
Well Capitalized, the Bank must maintain the following capital ratios:

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

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

<TABLE>
<CAPTION>
                                                Minimum Regulatory Capital Guidelines for Banks
                                               -------------------------------------------------
                                                     Adequately                  Well
(Dollars in thousands)           Actual             Capitalized               Capitalized
                            -----------------  -----------------------  ------------------------
                            AMOUNT    RATIO    AMOUNT          RATIO     AMOUNT          RATIO
<S>                         <C>      <C>       <C>      <C>  <C>        <C>       <C>  <C>
AS OF DECEMBER 31, 2005:
Total capital-risk-based
(to risk-weighted assets):
  Bank                      $ 6,477     11.7%  $ 4,418    >         8%  $  5,523   >         10%
                                                          -                        -
  Consolidated                6,504     11.8%    4,418    >         8%       N/A   >        N/A
                                                          -                        -

Tier 1 capital-risk-based
(to risk-weighted assets):
  Bank                      $ 5,798     10.5%  $ 2,209    >         4%  $  3,314   >          6%
                                                          -                        -
  Consolidated                5,825     10.5%    2,209    >         4%       N/A            N/A
                                                          -

Tier 1 capital-leverage
(to average assets):
  Bank                      $ 5,798      9.1%  $ 2,556    >         4%  $  3,195   >          5%
                                                          -                        -
  Consolidated                5,825      9.1%    2,556    >         4%       N/A            N/A
                                                          -
</TABLE>


                                       26
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                Minimum Regulatory Capital Guidelines for Banks
                                               -------------------------------------------------
                                                     Adequately                  Well
(Dollars in thousands)           Actual             Capitalized               Capitalized
                            -----------------  -----------------------  ------------------------
                            AMOUNT    RATIO    AMOUNT          RATIO     AMOUNT          RATIO
<S>                         <C>      <C>       <C>      <C>  <C>        <C>       <C>  <C>
AS OF DECEMBER 31, 2004:
Total capital-risk-based
(to risk-weighted assets):
  Bank                      $ 5,646     13.8%  $ 3,266    >         8%  $  4,082      >      10%
                                                          -                           -
  Consolidated                5,674     13.9%    3,266    >         8%       N/A      >      N/A
                                                          -                           -

Tier 1 capital-risk-based
(to risk-weighted assets):
  Bank                      $ 5,158     12.6%  $ 1,633    >         4%  $  2,449      >       6%
                                                          -                           -
  Consolidated                5,186     12.7%    1,633    >         4%       N/A             N/A
                                                          -

Tier 1 capital-leverage
(to average assets):
  Bank                      $ 5,158     10.9%  $ 1,885    >         4%  $  2,357      >       5%
                                                          -                           -
  Consolidated                5,186     11.0%    1,885    >         4%       N/A             N/A
                                                          -
</TABLE>

NOTE  17  -  DIVIDENDS

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


                                       27
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE  18  -  PARENT COMPANY FINANCIAL INFORMATION

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

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

                                                     December 31,
                                               ------------------------
Assets:                                            2005        2004
-------                                        -----------  -----------
<S>                                            <C>          <C>

Cash                                           $   27,566   $   27,837
Investment in Bank                              5,775,623    5,238,196
                                               -----------  -----------
  Total Assets                                 $5,803,189   $5,266,033
                                               ===========  ===========

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

Shareholders' Equity:
Common stock                                    6,213,061    6,213,061
Retained (deficit)                               (387,558)    (927,289)
Accumulated other comprehensive income            (22,314)     (19,739)
                                               -----------  -----------
  Total Shareholders' equity                    5,803,189    5,266,033
                                               -----------  -----------
  Total Liabilities and Shareholders' equity   $5,803,189   $5,266,033
                                               ===========  ===========
</TABLE>


                                       28
<PAGE>
                                 ISLANDS BANCORP
                            BEAUFORT, SOUTH CAROLINA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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

                                            Year Ended December 31,
                                          ---------------------------
                                              2005           2004
                                          -------------  ------------
<S>                                       <C>            <C>
Income:
------
Interest income                           $        429   $        305
                                          -------------  ------------
    Total revenues                                 429            305
                                          -------------  ------------

Expenses:
--------
    Total expenses                                 700            - -
                                          -------------  ------------

Income/(loss) before equity
  in undistributed earnings of Bank               (271)           305
Equity in undistributed earnings of Bank       540,002        148,543
                                          -------------  ------------

Net income                                $    539,731   $    148,848
                                          =============  ============
</TABLE>

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

                                                        Year Ended December 31,
                                                      ----------------------------
                                                          2005           2004
                                                      -------------  -------------
<S>                                                   <C>            <C>
Cash flows from operating activities:
-------------------------------------
  Net income                                          $    539,731   $    148,848
  Adjustments to reconcile net income to
  net cash provided by operating activities:
    Equity in undistributed earnings of Bank              (540,002)      (148,543)
                                                      -------------  -------------
Net cash used by operating activities                         (271)           305
                                                      -------------  -------------

Cash flows from investing activities:
-------------------------------------
Net cash from investing activities                             - -            - -
                                                      -------------  -------------

Cash flows from financing activities:
-------------------------------------
Net cash from financing activities                             - -            - -
                                                      -------------  -------------

Net (decrease)/increase in cash and cash equivalents          (271)           305
Cash and cash equivalents, beginning of the year            27,837         27,532
                                                      -------------  -------------
Cash and cash equivalents, end of year                $     27,566   $     27,837
                                                      =============  =============
</TABLE>


                                       29
<PAGE>
                      CORPORATE AND SHAREHOLDER INFORMATION

                        DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S>                                 <C>
           LOUIS O. DORE                        J. FRANK WARD
             Attorney                              Realtor
        Louis O. Dore, P.A.                      SCN Realty

        MARTHA B. FENDER                   PAUL M. DUNNAVANT, III
   President and Business Owner           Chief Financial Officer
   Coastal Carolina Realty, Inc.           Holmes Timber, Inc. &
                                         Atlantic Coast Homes, Inc.
       D. MARTIN GOODMAN
          Restaurateur                        DARYL A. FERGUSON
          Area Manager                            Investor
University of South Carolina Small
    Business Development Center                JOHN R. PERRILL
                                       Acting Chief Executive Officer
  STANCEL E. KIRKLAND, SR., ESQ.               Islands Bancorp
           Business Owner
         Managing Member of                   CARL E. LIPSCOMB
       Bull Point Plantation                      Realtor
                                          Hilton Head Luxury Homes
    EDWARD J. MCNEIL, JR., MD
     President and Physician              JIMMY LEE MULLINS, SR.
Internal Medicine Healthcare, P.A.  President and Chief Executive Officer
                                       Mullins Trucking Company, Inc.
         CAROL J. NELSON
      Senior Vice President                  NARAYAN SHENOY, MD
    Chief Financial Officer              Partner & Anesthesiologist
         Islands Bancorp               Critical Health Systems, Inc.

       FRANCES K. NICHOLSON                 BRUCE K. WYLES, DDS
         Managing Partner                        Dentist
    Nicholson Investments, LLC
</TABLE>

                              COPIES OF FORM 10-KSB

A  copy  of the Company's 2005 Annual Report on Form 10-KSB can be obtained free
of  charge  on the Securities and Exchange Commission's website (www.sec.gov) or
by  calling  Ms.  Carol  Nelson  at  the  Bank  at  (843)  521-1968.

                      MARKET FOR THE COMPANY'S COMMON STOCK

There  is no public market for the Company's common stock.  Very few trades took
place during calendar year 2005 and 2004.  During 2005 and 2004 all trades known
to  management  were  at $10.00 per share, with the exception of one trade which
took  place  on  December  8,  2005  at  $11.00  per  share.