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

                               FORM 10-KSB
(Mark One)

  x   Annual report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934

For fiscal year ended December 31, 2001
                      -----------------

      Transition report under Section 13 or 15(d) of the Securities Exchange
----- Act of 1934

      For the transition period from ______________to _______________

      Commission file number 000-29267
                             ---------

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

             South Carolina                          57-1082388
    -------------------------------              -------------------
    (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)              Identification No.)

2348 Boundary Street, Beaufort, South Carolina               29902
------------------------------------------------          ----------
   (Address of Principal Executive Offices)               (Zip Code)

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

Securities registered pursuant to Section 12(g) of the Act:    None.

Check whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that Islands Bancorp was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.

                     Yes     X         No
                           -----           -----

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or a
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.   X
                                           ---

State issuer's revenues for its most recent fiscal year:     $465,595

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days:  The aggregate number of shares of
the Company's common stock held by non-affiliates as of March 25, 2002 was
421,735.  There is no public trading market for the Company's common stock.
Based on the last sale of the Company's common stock known to management,
which occurred on February 13, 2002 at $10.00 per share, the aggregate market
value of the Company's common stock held by non-affiliates is $4,217,350.

               APPLICABLE ONLY TO CORPORATE REGISTRANTS

     State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.  652,705 shares of
common stock were outstanding as of March 25, 2002.

                 DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 2001 are incorporated by reference into Part II.

     Transitional Small Business Disclosure format (check one):

                            Yes       No   X
                                -----    -----



                            TABLE OF CONTENTS

                                                                 Page
                                                                Number

PART I..............................................................3
  ITEM 1.   DESCRIPTION OF BUSINESS.................................3
  ITEM 2.   DESCRIPTION OF PROPERTIES..............................23
  ITEM 3.   LEGAL PROCEEDINGS......................................24
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....24

PART II............................................................24
  ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS............................24
  ITEM 6.   MANAGEMENT'S PLAN OF OPERATION.........................24
  ITEM 7.   FINANCIAL STATEMENTS...................................29
  ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
            ON ACCOUNTING AND FINANCIAL DISCLOSURE.................29

PART III...........................................................30
  ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
            AND CONTROL PERSONS;   COMPLIANCE WITH
            SECTION 16(a) OF THE EXCHANGE ACT......................30
  ITEM 10.  EXECUTIVE COMPENSATION.................................33
  ITEM 11.  SECURITY OWNERSHIP OF CERTAIN
            BENEFICIAL OWNERS AND MANAGEMENT.......................34
  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........36
  ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB.............37



                                PART I


ITEM 1.   DESCRIPTION OF BUSINESS

               CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

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

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

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

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

      .  Changes in the legislative and regulatory environment;

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

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

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


                                ISLANDS BANCORP

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

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


                            ISLANDS COMMUNITY

GENERAL

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

PHILOSOPHY

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

MARKET AREA AND COMPETITION

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

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

     The Bank competes with other commercial banks, savings and loan
associations, credit unions, money market mutual funds and other financial
institutions conducting business in the Beaufort County market and elsewhere.
Many of the Bank's competitors have equal or greater financial or banking
related resources than the Company and the Bank.  According to information
provided by the FDIC, as of June 30, 2001, the Beaufort County area was
served by 17 banking and savings institutions with 56 offices.  These
competitors offer the same or similar products and services as the Bank.
Currently, the Bank's three largest competitors in terms of market share are
Lighthouse Community Bank, Bank of America, N.A. and Wachovia Bank, N.A.

LENDING SERVICES

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

          Loan Classification               Percentage
          -------------------               ----------
           Real estate loans                   40%
           Consumer loans                      17%
           Commercial loans                    43%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                               EMPLOYEES

     At December 31, 2001. The Company and the Bank employed nine full-time
employees and one part-time employee.  Islands Bancorp does not have any
employees other than its officers who are also employees of the Bank.  The
Company considers its relationship with its employees to be excellent.


                       SUPERVISION AND REGULATION

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


ISLANDS BANCORP

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

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

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

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

     .  Merging or consolidating with any other bank holding company.

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

     Under the Bank Holding Company Act, if adequately capitalized and
adequately managed, the Company or any other bank holding company located in
South Carolina may purchase a bank located outside of South Carolina.
Conversely, an adequately capitalized and adequately managed bank holding
company located outside of South Carolina may purchase a bank located inside
South Carolina.  In each case, however, restrictions may be placed on the
acquisition of a bank that has only been in existence for a limited amount of
time or will result in specified concentrations of deposits.  For example,
South Carolina law prohibits a bank holding company from acquiring control of
a financial institution until the target financial institution has been in
existence and has had continuous operations for five years.

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

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

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

     Currently, our common stock is not registered under the Securities
Exchange Act of 1934.  However, we are required to register our common stock
under the Securities Exchange Act of 1934 on or before April 30, 2002.  The
regulations provide a procedure for challenge of the rebuttable control
presumption.

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

     .  Banking or managing or controlling banks; and

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

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

     .  Factoring accounts receivable;

     .  Making, acquiring, brokering or servicing loans and usual related
        activities;

     .  Leasing personal or real property;

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

     .  Trust company functions;

     .  Financial and investment advisory activities;

     .  Conducting discount securities brokerage activities;

     .  Underwriting and dealing in government obligations and money market
        instruments;

     .  Providing specified management consulting and counseling activities;

     .  Performing selected data processing services and support services;

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

     .  Performing selected insurance underwriting activities.

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

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

     .  Lending, trust and other banking activities;

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

     .  Providing financial, investment, or advisory services;

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

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

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

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

     .  Merchant banking through securities or insurance affiliates; and

     .  Insurance company portfolio investments.

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

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

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


ISLANDS COMMUNITY

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

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

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

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

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

     FDIC INSURANCE ASSESSMENTS.  The FDIC has adopted a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets
and liabilities.  The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized.  These three categories are substantially similar to the
prompt corrective action categories described above, with the
"undercapitalized" category including institutions that are undercapitalized,
significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes.  The FDIC also assigns an institution to one of
three supervisory subgroups based on a supervisory evaluation that the
institution's primary federal regulator provides to the FDIC and information
that the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds.  Assessments
range from 0 to 27 cents per $100 of deposits, depending on the institution's
capital group and supervisory subgroup.  In addition, the FDIC imposes
assessments to help pay off the $780 million in annual interest payments on
the $8 billion Financing Corporation bonds issued in the late 1980s as part
of the government rescue of the thrift industry.  This assessment rate is
adjusted quarterly and is set at 1.82 cents per $100 of deposits for the
first quarter of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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


CAPITAL ADEQUACY

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

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

     The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%.  Total capital consists of two components, Tier 1 Capital and
Tier 2 Capital.  Tier 1 Capital generally consists of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of qualifying cumulative
perpetual preferred stock, less goodwill and other specified intangible
assets.  Tier 1 Capital must equal at least 4% of risk-weighted assets.  Tier
2 Capital generally consists of subordinated debt, other preferred stock, and
a limited amount of loan loss reserves.  The total amount of Tier 2 Capital
is limited to 100% of Tier 1 Capital.  At December 31, 2001, our ratio of
total capital to risk-weighted assets was 68.6% and our ratio of Tier 1
Capital to risk-weighted assets was 67.6%.

     In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies.  These guidelines provide for a
minimum ratio of Tier 1 Capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating and
implementing the Federal Reserve's risk-based capital measure for market
risk.  All other bank holding companies generally are required to maintain a
leverage ratio of at least 4%.  At December 31, 2001 our leverage ratio was
58.7%.  The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
reliance on intangible assets.  The Federal Reserve considers the leverage
ratio and other indicators of capital strength in evaluating proposals for
expansion or new activities.

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


PAYMENT OF DIVIDENDS

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

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

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


RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

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

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

     . A bank's investment in affiliates;

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

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

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

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

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

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


PRIVACY

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


ANTI-TERRORISM LEGISLATION
     In the wake of the tragic events of September 11th, on October 26, 2001,
the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT)
Act of 2001.  Under the USA PATRIOT Act, financial institutions are subject
to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and "know your customer"
standards in their dealings with foreign financial institutions and foreign
customers.  For example, the enhanced due diligence policies, procedures, and
controls generally require financial institutions to take reasonable steps-

     .  to conduct enhanced scrutiny of account relationships to guard
        against money laundering and report any suspicious transaction;

     .  to ascertain the identity of the nominal and beneficial owners of,
        and the source of funds deposited into, each account as needed to
        guard against money laundering and report any suspicious
        transactions;

     .  to ascertain for any foreign bank, the shares of which are not
        publicly traded, the identity of the owners of the foreign bank, and
        the nature and extent of the ownership interest of each such owner;
        and

     .  to ascertain whether any foreign bank provides correspondent accounts
        to other foreign banks and, if so, the identity of those foreign
        banks and related due diligence information.

     Under the USA PATRIOT Act, financial institutions have 180 days from
enactment (or until April 25, 2002) to establish anti-money laundering
programs.  The USA PATRIOT Act  sets forth minimum standards for these
programs, including:

     .  the development of internal policies, procedures, and controls;

     .  the designation of a compliance officer;

     .  an ongoing employee training program; and

     .  an independent audit function to test the programs.

     Before the 180-day grace period expires, the Secretary of the Treasury
will prescribe regulations that consider the extent to which these new
requirements are commensurate with the size, location, and activities of
financial institutions subject to the Act.

     In addition, the USA PATRIOT Act authorizes the Secretary of the
Treasury to adopt rules increasing the cooperation and information sharing
between financial institutions, regulators, and law enforcement authorities
regarding individuals, entities and organizations engaged in, or reasonably
suspected based on credible evidence of engaging in, terrorist acts or money
laundering activities.  Any financial institution complying with these rules
will not be deemed to have violated the privacy provisions of the Gramm-
Leach-Bliley Act, as discussed above.


PROPOSED LEGISLATION AND REGULATORY ACTION

     New regulations and statutes are regularly proposed that contain wide-
ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions.  We cannot predict
whether or in what form any proposed regulation or statute will be adopted or
the extent to which our business may be affected by any new regulation or
statute.


EFFECT OF GOVERNMENTAL MONETARY POLICES

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


SELECTED STATISTICAL INFORMATION

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

     The following is a presentation of the average consolidated balance
sheet of the Company for the year ended December 31, 2001.  Financial
information concerning calendar year 2000 was omitted because inclusion of
such information may be misleading.  Recall that principal banking operations
commenced on July 9, 2001.  This presentation includes all major categories
of interest-earning assets and interest-bearing liabilities:  ($ in
thousands)

                      AVERAGE CONSOLIDATED ASSETS

     Cash and due from banks                             $   221
                                                         -------
     Taxable securities                                  $ 4,614
     Federal funds sold	                                   2,007
     Net loans                                             1,941
                                                         -------
          Total interest-earning assets                  $ 8,262
     Other assets                                            192
                                                         -------
     Total assets                                        $ 8,975
                                                         =======

     AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

     Non-interest-bearing deposits                       $   592
     NOW and money market deposits                           798
     Savings deposits                                         42
     Time deposits                                           494
     Other borrowings                                      1,347
     Other liabilities                                        41
                                                         -------
          Total liabilities                              $ 3,314
     Stockholders' equity                                  5,661
                                                         -------
     Total liabilities and stockholders' equity          $ 8,975
                                                         =======

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

                                         Year Ended December 31, 2001
                                      ---------------------------------
                                       Average    Interest     Average
            Assets                     Amount   Earned/Paid  Yield/Rate
            ------                     ------   -----------  ----------
     Taxable securities               $ 4,614     $   266       5.76%
     Federal funds sold                 2,007          47       2.34%
     Net loans                          1,941(1)      130(2)    6.70%
                                      -------     -------       ----
          Total earnings assets       $ 8,562     $   443       5.17%
                                      =======     =======       ----

            Liabilities
     NOW and money market deposits    $   798     $    15       1.88%
     Savings deposits                      42           1       2.38%
     Time deposits                        494          13       2.63%
     Other borrowings                   1,347          96       7.13%
                                      -------     -------       ----
          Total interest
           bearing liabilities        $ 2,681     $   125       4.66%
                                      =======     =======       ----
     Net yield on earnings assets                               3.71%
                                                                ====
______________________
(1)  At December 31, 2001, all loans were accruing interest.
(2)  Interest earned on net loans includes $26 in loan fees and loan service
     fees.


RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

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

                                           Year Ended December 31, 2001
                                                    Compared to
                                           Year Ended December 31, 2000
                                        ---------------------------------

                                           Increase (decrease) due to:

                                         Volume        Rate         Total
                                         ------        ----         -----
                                                 (In thousands)
Interest earned on:
  Taxable securities                    $   266      $  --        $   266
  Federal funds sold                         47         --             47
  Net loans                                 130         --            130
                                        -------      -------      -------
   Total interest income                $   443      $     0      $   443
                                        -------      -------      -------

Interest paid on:
  NOW and money market deposits         $    15      $  --        $    15
  Savings deposits                            1         --              1
  Time deposits                              13         --             13
  Other borrowings                           56           (4)          52
                                        -------      -------      -------
   Total interest expense               $    85      $    (4)     $    81
                                        -------      -------      -------
Change in net interest income           $   358      $     4      $   362
                                        =======      =======      =======


II.   INVESTMENT PORTFOLIO

     As of December 31, 2001, investment securities comprised approximately
12.9% of the Bank's assets and net loans comprised approximately 63.0% of the
Bank's assets.  The Bank invests primarily in direct obligations of the
United States, obligations guaranteed as to principal and interest by the
United States, obligations of agencies of the United States and certificates
of deposit issued by commercial banks.  In addition, the Bank enters into
Federal Funds transactions with its principal correspondent banks, and
generally acts as a net seller of such funds.  At December 31, 2001, however,
the Bank was a net purchaser of funds in the Federal funds market.  The sale
of Federal Funds amounts to a short-term loan from the Bank to another bank.

     The following table presents, for the date indicated, the book value of
the Bank's investments.  All securities held at December 31, 2001 were
categorized as available-for-sale.  ($ in thousands)

                                           December 31, 2001
                                           -----------------
                U.S. Agencies                   $1,109
                Federal Reserve Bank stock         180
                                                ------
                     Total                      $1,289
                                                ======

     The following table indicates as of December 31, 2001 the amount of
investments due in (i) one year or less, (ii) one to five years, (iii) five
to ten years, and (iv) over ten years:


                                                     Weighted
                                                     Average
                                            Amount    Yield
                                            ------   --------
    Obligations of U.S. Agencies:
        0 - 1 year                          $  --      N/A
        Over 1 through 5 years                 --      N/A
        Over 5 through 10 years                --      N/A
        Over 10 years                         1,109   6.75%
    Federal Reserve Bank Stock, no maturity     180   6.00%
                                            -------   ----
        Total                               $ 1,289   6.64%
                                            =======   ====


III. LOAN PORTFOLIO

A.   TYPES OF LOANS.

     The following table presents various categories of loans contained in
the Bank's loan portfolio as of the date indicated and the total amount of
all loans for such period:  ($ in thousands)
                                                       As of
           Type of Loan                             December 31,
           ------------                             ------------
                                                       2001
                                                       ----
     Domestic:
     Commercial, financial and agricultural          $   1,112
     Real estate - construction                            134
     Real estate - mortgage                              4,331
     Installment and other loans to individuals            776
                                                     ---------
        Subtotal                                     $   6,353
     Less: Allowance for possible loan losses              (77)
                                                     ---------
        Total (net of allowance)                     $   6,276
                                                     =========

B.   MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES.

     The following is a presentation of an analysis of maturities of certain
loans as of December 31, 2001:  ($ in thousands)

                               Due in     Due after    Due
                               1 year       1 to      after
   Type of Loan                or less     5 years   5 years      Total
   ------------               ---------   --------   --------   ---------
Commercial, financial,
 and agricultural             $     649   $    360   $    103   $   1,112
Real estate-construction            134   $  --          --           134
                              ---------   --------   --------   ---------
   Total                      $     783   $    360   $    103   $   1,246
                              =========   ========   ========   =========


C.   RISK ELEMENTS.

     For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates as of December 31, 2001:

                               Due in     Due after    Due
                               1 year       1 to      after
   Interest Category           or less     5 years   5 years      Total
   -----------------          ---------   --------   --------   ---------
Predetermined interest rate   $     422   $    217   $  --      $     639
Floating interest rate              361   $    143        103         607
                              ---------   --------   --------   ---------
   Total                      $     783   $    360   $    103   $   1,246
                              =========   ========   ========   =========

     The Bank considers impaired loans to include all restructured loans,
loans on which the accrual of interest had been discontinued and all other
loans which are performing according to the loan agreement, but may have
substantive indication of potential credit weakness.  At December 31, 2001
none of the Bank's loans was considered to be impaired.

     As of December 31, 2001, there were no loans not disclosed above that
are classified for regulatory purposes as doubtful, substandard or special
mention which (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating
results, liquidity, or capital resources, or (ii) represent material credits
about which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the
loan repayment terms.  There are no loans not disclosed above where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.

     Accrual of interest is discontinued on a loan when management of the
Bank determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.  At December 31,
2001, all loans were accruing interest.


IV.  SUMMARY OF LOAN LOSS EXPERIENCE

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

             Analysis of the Allowance for Possible Loan Losses

                                                    Years Ended
                                                    December 31,
                                                    ------------
                                                        2001
                                                        ----
     Balance at beginning of period                  $       0
                                                     ---------
     Charge-offs:
     Real estate loans                                    --
     Installment and other loans to individuals           --
     Commercial loans                                     --
     Recoveries                                           --
                                                     ---------
     Net charge-offs                                 $       0
                                                     ---------
     Additions charged to operations                        77
                                                     ---------
     Balance at end of period                        $      77
                                                     =========
     Ratio of net charge-offs
      during the period to average
      loans outstanding during the period                 0%
                                                          =

     At December 31, 2001, the allowance was allocated as follows: ($ in
thousands)
                                                           Percent of loans
                                                           in each category
                                                  Amount    to total loans
                                                ---------     ---------
     Commercial, financial and agricultural      $    19        17.5%
     Real Estate - Construction                        3         2.1%
     Real Estate - Mortgage                           39        68.2%
     Installment and other loans to individuals       10        12.2%
     Unallocated                                       6         --
                                                 -------       -----
          Total                                  $    77       100.0%
                                                 =======       =====

     In considering the adequacy of the Company's allowance for possible loan
losses, management has focused on the fact that as of December 31, 2001,
17.5% outstanding loans are in the category of commercial loans, which
includes commercial, industrial and agricultural loans.  Commercial loans are
generally considered by management as having greater risk than other
categories of loans in the Company's loan portfolio.  However, 93.0% of these
commercial loans at December 31, 2001 were made on a secured basis.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio greatly reduces any risk of loss inherently
present in commercial loans.

     The Company's consumer loan portfolio is also well secured.  At December
31, 2001, 88.0%  of the Company's consumer loans were secured by collateral
primarily consisting of automobiles, boats and other personal property.
Management believes that these loans involve less risk than commercial loans.

     Real estate mortgage loans constituted 68.2% of outstanding loans at
December 31, 2001.  The loans in this category represent residential and
commercial real estate mortgages where the amount of the original loan
generally does not exceed 85% of the appraised value of the collateral.
These loans are considered by management to be well secured with a low risk
of loss.

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


V.   DEPOSITS

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

                                              Year Ended December 31, 2001
                                                -----------------------
                                                 Average       Average
Deposit Category                                  Amount      Rate Paid
----------------                                   ----       ---------
Non interest-bearing demand deposits            $     592        N/A
NOW and money market deposits                         798       1.88%
Savings deposits                                       42       2.38%
Time deposits                                         494       2.63%

     The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities at December 31,
2001:  ($ in thousands)
                                                 At
                                            December 31,
            Time Certificates of Deposit        2001
                                                ----
            3 months or less                  $  --
            3-6 months                             100
            6-12 months                            310
            Over 12 months                         301
                                              --------
               Total                          $    711
                                              ========


VI.  RETURN ON EQUITY AND ASSETS.

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

                                           Year Ended
                                       December 31, 2001
                                       -----------------
     Return on average assets                 (4.0)%
     Return on average equity                 (6.4)%
     Average equity to average assets ratio   63.1 %
     Dividend payout ratio                     --  %


ITEM 2.  DESCRIPTION OF PROPERTIES

     Our main office is located adjacent to Beaufort Plaza at 2348 Boundary
Street, Beaufort, South Carolina.  We purchased a former Wachovia Bank office
located at this site.  The office is a one-story banking facility with
approximately 7,600 square feet.

     We began renovations of the main building in the fourth quarter of 2001.
We expect that the renovations will be completed in the third quarter of
2002.  During the renovation period, we plan to operate out of a modular
building that will be placed at the same Boundary Street location.

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


ITEM 3.  LEGAL PROCEEDINGS

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


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

     None.


                                  PART II

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

     (a)  The Company closed its initial public offering of securities on
December 31, 2000.  The proceeds of the Company's stock sale were held in an
escrow account until July 6, 2001, shortly before the Bank opened for
business.  There is currently no public trading market for the Company's
common stock.  As of March 25, 2002, the Company had approximately 763
shareholders of record who owned an aggregate of 652,705 shares.

     (b)  The Company has paid no dividends on its common stock since its
organization.  The principal source of the Company's cash flow, including
cash flow to pay dividends to its shareholders, is dividends that the Bank
pays to the Company as its sole shareholder.  Statutory and regulatory
limitations apply to the Bank's payment of dividends to the Company, as well
as to the Company's payment of dividends to its shareholders.  For a complete
discussion of restrictions on dividends, see "Part I-Item 1. Description of
Business-Supervision and Regulation-Payment of Dividends."


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

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

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

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

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

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

NET INTEREST INCOME

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

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

                                            Year Ended
                                         December 31, 2001
                                 --------------------------------
                                             Interest
                                 Average     Income/       Yield/
                                 Balance     Expense        Cost
                                 -------     -------       ------
     Federal funds sold          $ 2,007     $    47        2.34%
     Securities                    4,614         266        5.76%
     Loans, net                    1,941         130        6.70%
                                 -------     -------        ----
          Total earning assets   $ 8,562     $   443        5.17%
                                 =======     =======        ----

     Interest bearing deposits   $ 1,334     $    29        2.17%
     Other borrowings              1,347          96        7.13%
                                 -------     -------        ----
          Total interest
          -bearing liabilities   $ 2,681     $   125        4.66%
                                 =======     =======        ----
     Net yield on earning assets                            3.71%
                                                            ====

     For the year ended December 31, 2001, the yield on earning assets
amounted to 5.17%, while the cost of funds was 4.66%.  If one discounts the
cost of borrowings, which occurred prior to commencement of banking
operations, the cost of funds would have been only 2.17%.  Net yield on
earning assets for the year ended December 31, 2001 amounted to 3.71%.

NON-INTEREST INCOME

     Non-interest income for the year ended December 31, 2001 amounted to
$22,649.  As a percentage of average assets, non-interest income amounted to
..25%.

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

                                            Year Ended
                                         December 31, 2001
                                 --------------------------------
     Service fee on deposit accounts        $  21,978
     Miscellaneous, other                         671
                                            ---------
          Total non-interest income         $  22,649
                                            =========

NON-INTEREST EXPENSE

     Non-interest expense for the year ended December 31, 2001 amounted to
$801,049.  As a percentage of total average assets, non-interest expenses
amounted to 8.92%.  This percentage is very high because the majority of the
expenses are fixed in nature.  As the Company grows, however, those fixed
expenses will not maintain their significant impact on the income statement.
Below are the major components of non-interest expenses for the year ended
December 31, 2001.

                                            Year Ended
                                         December 31, 2001
                                 --------------------------------
     Salaries and benefits                  $ 460,562
     Data processing, ATM                      42,512
     Advertising and public relations          41,178
     Depreciation, amortization                28,606
     Other operating expenses                 228,191
                                            ---------
          Total non-interest expense        $ 801,049
                                            =========

ALLOWANCE FOR LOAN LOSSES

     During 2001, the allowance for loan losses increased to $76,850 and, as
of December 31, 2001, it amounted to 1.21% of gross loans.  As of December
31, 2001, management considers the allowance for loan losses to be adequate
to absorb possible future losses.  However, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses
or that additional provisions to the allowance will not be required.

INTEREST RATE SENSITIVITY

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

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

     The asset mix of the balance sheet is continually evaluated in terms of
several variables:  yield, credit quality, appropriate funding sources and
liquidity.  To effectively manage the liability mix of the balance sheet,
there should be a focus on expanding the various funding sources.  The
interest rate sensitivity position at December 31, 2001 is presented in the
following table.  The difference between rate sensitive assets and rate
sensitive liabilities, or the interest rate sensitivity gap, is shown at the
bottom of the table.  Since all interest rates and yields do not adjust at
the same pace, the gap is only a general indicator of rate sensitivity.

                                   After     After     After
                                   3 mos     6 mos     1 yr
                        Within      but       but      but
                          3       within    within    within  After
                        months     6 mos    1 year    5 yrs   5 yrs    Total
                        -------   -------   -------   ------  ------   ------
                                        (In thousands, except ratios)
EARNING ASSETS:
  Loans                 $ 1,052   $   536   $   918   $2,708  $1,139   $6,353
  Available-for-sale
   securities             --        --        1,109    --        180    1,289
  Federal funds sold        255     --        --       --      --         255
                        -------   -------   -------   ------  ------   ------
  Total earning assets  $ 1,307   $   536   $ 2,027   $2,708  $1,319   $7,897
                        =======   =======   =======   ======  ======   ======

SUPPORTING SOURCES OF FUNDS:
  Interest bearing
   demand deposits
   and savings          $ 1,292   $ --      $ --      $--     $--      $1,292
  Certificates,
   less than $100M        --          100       310      301   --         711
  Certificates
   of deposit               137       104        69      383   --         693
  FHLB borrowings         1,000     --        --       --      --       1,000
                        -------   -------   -------   ------  ------   ------
  Total interest
   bearing liabilities  $ 2,429   $   204   $   379   $  684  $    0   $3,696
                        =======   =======   =======   ======  ======   ======
Interest rate
 sensitivity gap         (1,122)      332     1,648    2,024   1,319    4,201
Cumulative gap           (1,122)     (790)      858    2,882   4,201    4,201
Interest rate
 sensitivity gap ratio     0.54      2.63      5.35     3.96    N.A.     2.14
Cumulative interest rate
  sensitivity gap ratio    0.54      0.70      1.28     1.78    2.14     2.14

     As evidenced by the table above, at December 31, 2001, the Company was
liability sensitive up to six months, and asset sensitive thereafter.  In a
declining interest rate environment, a liability sensitive position (a gap
ratio of less than 1.0) is generally more advantageous since liabilities are
repriced sooner than assets.  Conversely, in a rising interest rate
environment, an asset sensitive position (a gap ratio over 1.0) is generally
more advantageous as earning assets are repriced sooner than the liabilities.
With respect to the Company, an increase in interest rates would reduce
income for one year and increase income thereafter.  Conversely, a decline in
interest rates would increase income for one year and decrease income
thereafter.  This, however, assumes that all other factors affecting income
remain constant.

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

LIQUIDITY

     Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to maintain sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations.  These funds can be obtained by converting assets to cash or by
attracting new deposits.  The Company's primary source of liquidity is its
ability to maintain and increase deposits through the Bank.  From
commencement of banking operations, July 9, 2001 through December 31, 2001,
the Bank was able to attract $3.5 million deposits, none brokered.

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

                                             December 31, 2001
                                             -----------------
     Cash and cash equivalents                    $  464
     Securities                                    1,289
     CDs, over $100,000 to total deposits ratio    20.1%
     Brokered deposits                                0%

     Cash and cash equivalents are the primary source of liquidity.  At
December 31, 2001, cash and cash equivalents amounted to $.5 million,
representing 4.7% of total assets.  Securities available for sale which
provides a secondary source of liquidity represented approximately 12.9% of
total assets.

     At December 31, 2001, large denomination certificates accounted for
20.1% of total deposits. Large denomination CDs are generally more volatile
than other deposits.  As a result, management continually monitors the
competitiveness of the rates it pays on its large denomination CDs and
periodically adjusts its rates in accordance with market demands.
Significant withdrawals of large denomination CDs may have a material adverse
effect on the Bank's liquidity.  Management believes that since a majority of
the above certificates were obtained from Bank customers residing in Beaufort
County, South Carolina, the volatility of such deposits is lower than if such
deposits were obtained from depositors residing outside of Beaufort County,
as outside depositors are believed to be more likely to be interest rate
sensitive.

     Brokered deposits are deposit instruments, such as certificates of
deposit, deposit notes, bank investment contracts and certain municipal
investment contracts that are issued through brokers and dealers who then
offer and/or sell these deposit instruments to one or more investors.  As of
December 31, 2001, the Company had no brokered deposits in its portfolio.

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

CAPITAL ADEQUACY

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

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

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

     In 1996, a new rule was adopted by the Federal Reserve Board, the OCC
and the FDIC that added a measure of interest rate risk to the determination
of supervisory capital adequacy.  In connection with this new rule, those
three agencies issued a joint policy statement to bankers, effective June 26,
1996,  to provide guidance on sound practices for managing interest rate
risk.  In the policy statement, the agencies emphasized the necessity of
adequate oversight by a bank's board of directors and senior management and
of a comprehensive risk management process.  The policy statement also
describes the critical factors affecting the agencies' evaluations of a
bank's interest rate risk when making a determination of capital adequacy.
The agencies' risk assessment approach used to evaluate a bank's capital
adequacy for interest rate risk relies on a combination of quantitative and
qualitative factors.  Banks that are found to have high levels of exposure
and/or weak management practices will be directed by the agencies to take
corrective action.

     The table below illustrates the Bank's and Company's regulatory capital
ratios at December 31, 2001:

                                                             Minimum
                                                            regulatory
          Bank                          December 31, 2001   requirement
          ----                          -----------------   -----------
          Tier 1 Capital                      67.6%             4.0%
          Tier 2 Capital                       1.0%             N/A
                                              ----              ---
            Total risk-based capital ratio    68.6%             8.0%
                                              ====              ===
          Leverage ratio                      58.7%             3.0%
                                              ====              ===

          Company - Consolidated
          ----------------------
          Tier 1 Capital                      67.8%             4.0%
          Tier 2 Capital                       1.0%             N/A
                                              ----              ---
            Total risk-based capital ratio    68.8%             8.0%
                                              ====              ===
          Leverage ratio                      58.8%             3.0%
                                              ====              ===

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


ITEM 7.  FINANCIAL STATEMENTS

     The following Financial Statements of the Company are incorporated
herein by reference to Exhibit 13.1 of this Annual Report on Form 10-KSB for
the year ended December 31, 2001:

     Independent Auditors' Report

     Consolidated Balance Sheets as of December 31, 2001 and 2000

     Consolidated Statements of Operations for the Years Ended December 31,
     2001 and 2000

     Consolidated Statement of Changes in Shareholders' Equity for the Years
     Ended December 31, 2001 and 2000

     Consolidated Statement of Cash Flows for the Years Ended December 31,
     2001 and 2000

     Notes to Consolidated Financial Statements


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

     None.



                                      PART III

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

     Set forth below is information regarding the directors and executive
officers of Islands Bancorp.  Under the articles of incorporation of Islands
Bancorp, the board of directors of the Company is divided into three classes
of directors who serve staggered three-year terms.  The board of directors
consists of 14 members with each class containing as nearly equal a number of
members as possible.  The members of one class are elected at each annual
meeting of shareholders and hold office until the third annual meeting
following their election and until their successors are elected and
qualified.

     The President and Chief Executive Officer and each of the directors of
Islands Bancorp hold these same positions with the Bank.  Directors of the
Bank serve for a term of one year and are elected by Islands Bancorp each
year at the Bank's annual meeting of shareholders.  The Bank's officers are
appointed by and hold office at the will of its board of directors.

     The following table sets forth for each director and executive officer
of the Company (1) the person's name, (2) his or her age at December 31,
2001, (3) the year he or she was first elected as a director of the Company,
and (4) his or her positions with the Company other than as a director and
his or her other business experience for the past five years.

                          DIRECTOR  POSITION WITH THE COMPANY
NAME (AGE)                 SINCE    AND BUSINESS EXPERIENCE
-----------------------   --------  -------------------------------------

CLASS III DIRECTORS:
(Term Expiring 2002*)

Avery E. Cleland (41)       1999    Chairman, President and owner of Cleland
                                    Construction Co., Inc. (subdivision,
                                    shopping mall, highway and public utility
                                    construction); Chairman of Carolina
                                    Asphalt Paving, Inc.; President of AE
                                    Cleland Construct, Inc.; President of
                                    Cleland Asphalt, Inc.; President of Thom
                                    Bee Inv., Inc.

Carl E. Lipscomb (64)**     2002    Vice President of Argus Corp. (custom
                                    home construction and home renovation);
                                    President and Chief Executive Officer of
                                    Lipscomb Construction, Hilton Head, South
                                    Carolina (custom home construction in the
                                    Beaufort County area).

Dr. Narayan Shenoy (63)**   2002    Anesthesiologist; Partner in Critical
                                    Health Systems, Inc., Columbia, South
                                    Carolina.

J. Frank Ward (54)          1999    Realtor, Coastal Carolina Realty, Inc.;
                                    Sales Coordinator and Realtor,
                                    Renaissance Marketing, LLC, Beaufort,
                                    South Carolina from February 1998 to
                                    March 2002; prior to 1998, New Car Sales
                                    Manager, Toyota Center in West
                                    Columbia/Lexington, South Carolina.

Bruce K. Wyles (47)         1999    Dentist, sole proprietorship, Beaufort,
                                    South Carolina; Partner, B.K.W. Squared.

*  Each Class III director will stand for re-election at the 2002 annual
   meeting of shareholders and, if   elected, will serve a three-year term
   expiring in 2005.

** These directors were elected by the board in March 2002 to fill vacant
   director positions created by an increase in number of directors.

CLASS II DIRECTORS:
(Term Expiring 2004)

Paul M. Dunnavant, III (38) 1999    Treasurer of Islands Bancorp; Chief
                                    Financial Officer and Treasurer of Amick
                                    Farms, Inc., Batesburg, South Carolina
                                    (integrated poultry processing); Manager
                                    of Beaufort Properties, Inc.; Treasurer
                                    of Team Amick Motor Sports, LLC.

Daryl A. Ferguson (63)***   2002    Co-Chairman of Hungarian Telephone
                                    Company, Budapest, Hungary and Stamford,
                                    Connecticut (telecommunications); served
                                    as President and Chief Operating Officer
                                    of Citizens Utilities in Stamford,
                                    Connecticut from 1990 to 2000.

Stancel E.
 Kirkland, Sr. (61)***      2002    Country Chef, LLC (convenience shore,
                                    restaurant operation); Managing Member of
                                    Bull Point Plantation, Seabrook, South
                                    Carolina (developer of residential
                                    communities); Attorney, Partner in the
                                    Kirkland Law Firm, Columbia, South
                                    Carolina, 1971 to 1999 and presently of
                                    Counsel.

Edward J. McNeil, Jr. (47)  1999    Secretary of Islands Bancorp; President
                                    of Internal Medicine Healthcare, P.A.;
                                    practicing physician with Internal
                                    Medicine Health Care in Beaufort from
                                    January 1997 to December 1997 and from
                                    October 1999 to Present; and with
                                    Southeast Health Care Association from
                                    January 1995 to December 1996; Physician,
                                    Low Country Medical Group, Beaufort,
                                    South Carolina, from January 1998 to
                                    October 1999.

Frances K. Nicholson (47)   1999    Managing Partner of Nicholson Investments
                                    LLC (real estate leasing and securities
                                    portfolio company); Managing Partner of
                                    Big Nickel Properties, LLC.

***  Because these Class II directors were elected by the board in March 2002
     to fill vacant director positions, they will stand for election at the
     2002 annual meeting of shareholders and, if elected, will serve a two-
     year term expiring in 2005.

CLASS I DIRECTORS:
(Term Expiring 2003)

William B. Gossett (58)     1999    President and Chief Executive Officer of
                                    Islands Bancorp; previously President and
                                    Chief Executive Officer of Liberty
                                    National Bank, Longwood, Florida.

Louis O. Dore (56)          1999    Attorney, Louis O. Dore, P.A., Beaufort,
                                    South Carolina.

Martha B. Fender (56)       1999    Vice President of Islands Bancorp;
                                    President and Owner of Coastal Carolina
                                    Realty, Inc.; Beaufort, South Carolina
                                    (real estate sales).

D. Martin Goodman (55)      1999    Chairman of the Board of Islands Bancorp;
                                    Area Manager of the University of South
                                    Carolina Small Business Development
                                    Center in Beaufort, South Carolina; Co-
                                    owner, with his wife, of Ollie's Seafood
                                    Restaurants in Beaufort, South Carolina.
___________________________

     In addition to the executive officers listed above who also serve as
directors, Patsy Masters serves as Cashier and Chief Operations Officer of
the Bank.  At the Board of Directors meeting following the 2002 Annual
Meeting of Shareholders, the board expects to elect Ms. Masters to serve as
Chief Financial Officer of the Company.  Prior to joining the Company, Ms.
Masters was a vice president with Wachovia Bank, where her experience
included branch management, human resources, and consumer lending.

     The Company is filing this Annual Report on Form 10-KSB pursuant to
Section 15(d) of the Securities and Exchange Act and is not subject to
filings required by Section 16 of the Securities and Exchange Act.


ITEM 10.  EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

     SUMMARY COMPENSATION TABLE. The following table presents the total
compensation paid by the Company during fiscal years 2001, 2000 and 1999
(since the Company's inception in July of 1999) to its chief executive
officer.  No other executive officer of the Company earned over $100,000 in
salary and bonus during fiscal years 2001, 2000 and 1999.

                                               Annual Compensation
                                               -------------------
                                               Salary        Bonus
   Name and Position             Year            ($)          ($)
   -----------------             ----          ------        -----
   William B. Gossett,           2001         $130,000      $27,500
   President and Chief           2000         $132,917        --
   Executive Officer             1999         $ 56,250(2)     --

(1) We have omitted information on "perks" and other personal benefits
because the aggregate value of these items does not meet the minimum amount
required for disclosure under the Securities and Exchange Commission's
regulations.

(2) Consists of salary paid to Mr. Gossett for services as president and
chief executive officer from August 1, 1999 to December 31, 1999 at an
annualized rate of $135,000.

     EMPLOYMENT AGREEMENT.  On July 27, 1999, the Company entered into an
employment agreement with William B. Gossett pursuant to which Mr. Gossett
serves as President and Chief Executive Officer of Islands Bancorp and, upon
its organization, the Bank, for a term of five years.  The agreement
automatically renews for additional two-year terms unless either party
notifies the other party of its intent not to renew at least 180 days prior
to the end of the then current term.

     Mr. Gossett's initial annual base salary under the agreement was
$135,000.  Effective August 1, 2000, his annual salary became $130,000.  He
also received a bonus of $27,500 upon the opening of the Bank.  For each year
following the first full calendar year of the Bank's operations, Mr. Gossett
is also entitled to a bonus of five percent of the Bank's net income, if the
board of directors determines the bonus is appropriate in light of its
analysis of various performance criteria.

     In addition to his salary and bonus compensation, Mr. Gossett is
provided with an automobile, or an automobile allowance; life insurance of
$300,000 payable to his spouse and heirs; and reimbursement for automobile
expenses, club dues, business expenses, and moving and relocation expenses.
He also participates in the Bank's retirement, medical and other benefit
programs.

     Mr. Gossett is eligible to participate in any long-term equity incentive
program of Islands Bancorp and is eligible for the grant of stock options,
restricted stock and other awards under such program or any similar program
adopted by Islands Bancorp.  As soon as an appropriate stock option plan is
adopted by the Company, Mr. Gossett will be granted options to purchase a
number of shares of the Islands Bancorp's common stock equal to three percent
of the number of shares sold in the Company's initial public offering of
securities completed December 31, 2000 at a purchase price of $10.00 per
share.  One-third of the shares covered by the option will vest on each of
the first, second and third anniversaries of the date the Bank opens for
business, subject to accelerated vesting upon a change in control of the
Company.

     The employment agreement with Mr. Gossett also provides that during the
term of his employment and for a period expiring on the earlier to occur of
(a) one year after termination of his employment for any reason other than
without cause, (b) six months after expiration of the employment agreement
where expiration results from Mr. Gossett's timely notification of his intent
not to renew the agreement, and (c) the expiration of the agreement where
expiration results from the Company's or the Bank's timely notification to
Mr. Gossett of its intent not to renew the agreement, Mr. Gossett will not
compete, directly or indirectly, with the Company or the Bank, or any of
their subsidiaries, or have more than a two percent passive investment in any
financial institution that maintains an office or branch within 25 miles of
each location where the Company or the Bank maintains an office or branch at
any time during Mr. Gossett's employment under the agreement.  The agreement
also provides that during the term of his employment and for a period
expiring on  the earlier to occur of one year after termination of his
employment for any reason and one year following the expiration of the
agreement, Mr. Gossett will not solicit employees of the Company or the Bank
for employment and will not solicit customers of the Bank to any other
financial institution.

     Upon termination of Mr. Gossett's employment by the Company or the Bank
without cause or for any reason following a change in control of the Company,
Mr. Gossett will be entitled to a lump sum severance payment equal to two
times his base salary in effect at the time, plus any accrued bonus, and all
of his outstanding options will immediately vest.

COMPENSATION OF DIRECTORS

     Neither the Company nor the Bank will compensate their directors until
the Company and the Bank have recovered all of their losses.  Thereafter, the
Company and the Bank will adopt director compensation policies that conform
to applicable law.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the number of shares of the Company's
common stock beneficially owned as of March 19, 2002 by (a) each director and
executive officer of the Company and (b) all executive officers and
directors, as a group.  The information shown below is based upon information
furnished to the Company by the named persons.  Unless otherwise indicated,
each person is the record owner and has sole voting and investment power with
respect to his or her shares.  Other than the directors and executive
officers listed below, we are unaware of any holder of more than 5% of the
Company's common stock.  Additionally, the address of each person is 2348
Boundary Street, Beaufort, South Carolina 39903-6240.

     Information relating to beneficial ownership of the Company is based
upon "beneficial ownership" concepts set forth in the rules promulgated under
the Securities Exchange Act.  Under these rules a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of a security, or
"investment power," which includes the power to dispose or to direct the
disposition of a security.  Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities.  A person is also
deemed to be a beneficial owner of any security as to which that person has
the right to acquire beneficial ownership within sixty (60) days from the
date of this report.  Except as otherwise indicated, each person is the sole
beneficial owner of the shares listed.

                            Number
   Name of                 of Shares  Percent of   Nature of Beneficial
Beneficial Owner             Held        Class         Ownership
----------------           ---------  ----------   --------------------
Avery E. Cleland            10,050        1.5

Louis O. Dore               11,050        1.7

Paul M. Dunnavant, III      12,100        1.9

Martha B. Fender            10,050        1.5

Daryl A. Ferguson           20,000        3.1

D. Martin Goodman           11,250        1.7      Includes 11,050 shares
                                                   held jointly with Mr.
                                                   Goodman's spouse and 200
                                                   shares held jointly with
                                                   his children.

William B. Gossett          30,250        4.6      Includes 27,550 shares
                                                   held jointly with Mr.
                                                   Gossett's spouse.

Stancel E. Kirkland, Sr.    20,000        3.1      Includes 4,000 shares held
                                                   jointly with Mr.
                                                   Kirkland's spouse.

Carl E. Lipscomb            20,000        3.1      Includes 19,200 shares
                                                   held jointly with Mr.
                                                   Lipscomb's spouse.

Edward J. McNeil, Jr.       11,050        1.7

Frances K. Nicholson        12,350        1.9

Narayan Shenoy              20,100        3.1

J. Frank Ward               11,270        1.7

Bruce K. Wyles              11,450        1.8      Includes 400 shares held
                                                   jointly with Mr. Wyles'
                                                   children.

ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP (14 PERSONS)    210,970       32.3


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     From time to time our directors, officers and their affiliates,
including members of their families or businesses and other organizations
with which they are associated, may have banking and other transactions in
the ordinary course of business with the Bank.  The Bank's policy is that any
loans or other transactions with those persons or entities (a) are made in
accordance with applicable law and the Bank's lending policies, (b) are made
on substantially the same terms, including price, interest rates and
collateral, as those prevailing at the time for comparable transactions with
other unrelated parties of similar standing, and (c) do not involve more than
the normal risk of collectibility or present other unfavorable features to
the Company and the Bank.  In addition, all future transactions with our
directors, officers and their affiliates are intended to be on terms no less
favorable than could be obtained from an unaffiliated third party, and must
be approved by a majority of our directors, including a majority of the
directors who do not have an interest in the transaction.


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

     (a)     Exhibits

Exhibit
Number                                   Exhibit
-------                                  -------
   3.1          Articles of Incorporation(1)

   3.2          Bylaws(1)

   4.1          Specimen Stock Certificate(1)

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

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

  10.2*         Form of Organizers Warrant Agreement(1)

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

  10.4          Reserved.

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

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

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

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

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

  13.1          Islands Bancorp Financial Statements as of December 31, 2001

  22.1          Subsidiaries of Islands Bancorp

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

  99.1          2002 Proxy Statement sent to Security Holders of Islands
                Bancorp
_________________________

*   Compensatory plan or arrangement.

(1)  Incorporated herein by reference to exhibit of same number to the
     Company's Registration Statement on Form SB-2, Registration No. 333-
     92653, filed December 13, 1999, as amended.

(2)  Incorporated herein by reference to exhibit of same number to the
     Company's Annual Report on Form 10-KSB filed March 30, 2001.

     (b)     Reports on Form 8-K filed in the fourth quarter of 2001:  None.


           SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
      PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.

     The Company's 2001 Annual Report to security holders is included in this
Annual Report on Form 10-KSB at exhibit 13.1, and the Company's Proxy
Statement for its annual meeting of shareholders is included in this Annual
Report on Form 10-KSB at exhibit 99.1.



                               SIGNATURES

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


                                    ISLANDS BANCORP


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

                                    Date:  March 19, 2002



                              POWER OF ATTORNEY

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

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

         Signature                     Title                Date
         ---------                     -----                ----
                                  Director
------------------------------                        -----------------
Avery E. Cleland


/s/ Louis O. Dore                 Director                 March 19, 2002
------------------------------
Louis O. Dore

/s/ Paul M. Dunnavant, III        Treasurer and Director   March 19, 2002
------------------------------
Paul M. Dunnavant, III


/s/ Martha B. Fender              Vice President and       March 19, 2002
------------------------------    Director
Martha B. Fender


/s/ Daryl A. Ferguson             Director                 March 19, 2002
------------------------------
Daryl A. Ferguson


/s/ D. Martin Goodman             Chairman of the Board    March 19, 2002
------------------------------    of Directors
D. Martin Goodman


/s/ William B. Gossett            President, Chief         March 19, 2002
------------------------------    Executive Officer and
William B. Gossett                Director*


/s/ Stancel E. Kirkland, Sr.      Director                 March 19, 2002
------------------------------
Stancel E. Kirkland, Sr.


/s/ Carl E. Lipscomb              Director                 March 19, 2002
------------------------------
Carl E. Lipscomb



/s/ Edward J. McNeil, Jr.         Secretary and Director   March 19, 2002
------------------------------
Edward J. McNeil, Jr.


/s/ Frances K. Nicholson          Director                 March 19, 2002
------------------------------
Frances K. Nicholson

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


/s/ J. Frank Ward                 Director                 March 19, 2002
------------------------------
J. Frank Ward


/s/ Bruce K. Wyles                Director                 March 19, 2002
------------------------------
Bruce K. Wyles

_____________________________
*  Principal executive, financial and accounting officer.



                               EXHIBIT INDEX


Exhibit
Number                                   Exhibit
-------                                  -------
   3.1          Articles of Incorporation(1)

   3.2          Bylaws(1)

   4.1          Specimen Stock Certificate(1)

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

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

  10.2*         Form of Organizers Warrant Agreement(1)

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

  10.4          Reserved.

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

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

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

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

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

  13.1          Islands Bancorp Financial Statements as of December 31, 2001

  22.1          Subsidiaries of Islands Bancorp

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

  99.1          2002 Proxy Statement sent to Security Holders of Islands
                Bancorp
_________________________

*   Compensatory plan or arrangement.

(1)  Incorporated herein by reference to exhibit of same number to the
     Company's Registration Statement on Form SB-2, Registration No. 333-
     92653, filed December 13, 1999, as amended.

(2)  Incorporated herein by reference to exhibit of same number to the
     Company's Annual Report on Form 10-KSB filed March 30, 2001.