Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Annual Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company's future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

· Local and regional economic conditions and the impact they may have on the Company and its customers and the Company's assessment of that impact.

· Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

· The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

· Inflation, interest rate, market and monetary fluctuations.

· Political instability.

· Acts of war or terrorism.

· The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

· Changes in consumer spending, borrowings and savings habits.

· Technological changes.

· Acquisitions and integration of acquired businesses.

· The ability to increase market share and control expenses.

· The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply.

· The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

· Changes in the Company's organization, compensation and benefit plans.

· The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

· Greater than expected costs or difficulties related to the integration of new lines of business.

· The Company's success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

The Company

Colony Bankcorp, Inc. (Colony) is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly-owned subsidiaries (collectively referred to as the Company), a broad array of products and services throughout 18 Georgia markets. The Company offers commercial, consumer and mortgage banking services.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's financial position and/or results of operations. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results of operations, and they require management to make estimates that are difficult and subjective.

Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses quarterly based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for loans is based on reviews of individual credit relationships and historical loss experience. The allowance for losses relating to impaired loans is based on the loan's observable market price, the discounted cash flows using the loan's effective interest rate, or the value of collateral for collateral dependent loans.

Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger nonhomogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogeneous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of risk associated with the commercial and consumer levels and the estimated impact of the current economic environment.

Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

Overview

The following discussion and analysis presents the more significant factors affecting the Company's financial condition as of December 31, 2007 and 2006, and results of operations for each of the years in the three-year period ended December 31, 2007. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.

Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34 percent federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Results of Operations

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 noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company's ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets. Net income totaled $8.55 million, or $1.19 diluted per common share in 2007 compared to $10.15 million, or $1.41 diluted per common share in 2006 and $8.98 million, or $1.25 diluted per common share in 2005.

Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:

                                           2007         2006         2005

Taxable-Equivalent Net Interest Income   $ 42,817     $ 42,158     $ 37,381
Taxable-Equivalent Adjustment                 359          270          227

Net Interest Income                        42,458       41,888       37,154
Provision for Possible Loan Losses          5,931        3,987        3,444
Noninterest Income                          7,817        7,350        6,152
Noninterest Expense                        31,579       29,882       26,076

Income Before Income Taxes                 12,765       15,369       13,786
Income Taxes                                4,218        5,217        4,809

Net Income                               $  8,547     $ 10,152     $  8,977

Earnings per Common Share:
Basic                                    $   1.19     $   1.41     $   1.25
Diluted                                  $   1.19     $   1.41     $   1.25

Return on Average Assets                     0.71 %       0.87 %       0.87 %

Return on Average Equity                    10.60 %      14.10 %      13.78 %

Net income for 2007 decreased $1.61 million, or 15.81 percent, compared to 2006. The decrease was primarily the result of a $1.95 million increase in provision for loan losses and an increase of $1.70 million in noninterest expense. The impact of these items was partly offset by a $0.57 million increase in net interest income, an increase of $0.47 million in noninterest income and a decrease of $1 million in income tax expense. Net income for 2006 increased $1.18 million, or 13.09 percent, compared to 2005. The increase was primarily the result of a $4.74 million increase in net interest income and an increase of $1.20 million in noninterest income. The impact of these items was partly offset by a $3.81 million increase in noninterest expense, an increase of $0.54 million in provision for loan losses and an increase of $0.41 million in income tax expense.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 84.45 percent of total revenue during 2007 and 85.07 percent during 2006.

Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The Company's loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, ended with a prime interest rate of 4.75 percent, 4.25 percent, 4.00 percent, 5.25 percent, 7.25 percent, 8.25 percent and 7.25 percent, respectively, as of year-end 2001, 2002, 2003, 2004, 2005, 2006 and 2007. The federal funds rate moved similar to prime rate with an interest rate of 1.75 percent, 1.25 percent, 1.00 percent, 2.25 percent, 4.25 percent, 5.25 percent and 4.25 percent, respectively, as of year-end 2001, 2002, 2003, 2004, 2005, 2006 and 2007. With the current housing and real estate concerns along with recessionary fears, it is anticipated that the Federal Reserve will continue reducing interest rates during 2008. The impact of further interest rate cuts will put further pressure on the Company's net interest margin.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The Company's consolidated average balance sheets along with an analysis of taxable-equivalent net interest earnings are presented in the Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Part II (Continued)
Item 7 (Continued)

Rate/Volume Analysis

The rate/volume analysis presented hereafter illustrates the change from year to
year for each component of the taxable equivalent net interest income separated
into the amount generated through volume changes and the amount generated by
changes in the yields/rates.

                                    Changes From                              Changes From
                                  2006 to 2007 (a)                          2005 to 2006 (a)
($ in thousands)         Volume         Rate          Total        Volume         Rate          Total

Interest Income
Loans, Net-Taxable      $   2,855     $   3,028     $   5,883     $   6,633     $  10,156     $  16,789

Investment Securities
Taxable                       704           627         1,331           680         1,208         1,888
Tax-Exempt                    278            (7 )         271            75            19            94
Total Investment
Securities                    982           620         1,602           755         1,227         1,982

Interest-Bearing
Deposits in
Other Banks                     6             4            10            (1 )          48            47
Federal Funds Sold           (613 )          56          (557 )          86           683           769
Other
Interest-Earning
Assets                          6            24            30            11            91           102
Total Interest Income       3,236         3,732         6,968         7,484        12,205        19,689

Interest-Expense
Interest-Bearing
Demand and
Savings Deposits               72           328           400           108         1,257         1,365
Time Deposits               1,090         4,631         5,721         3,258         9,397        12,655
Total Interest
Expense
On Deposits                 1,162         4,959         6,121         3,366        10,654        14,020

Other
Interest-Bearing
Liabilities
Federal Funds
Purchased                      29             1            30             4             9            13
Subordinated
Debentures                    272          (145 )         127           242           368           610
Other Debt                     18            13            31           (32 )         301           269

Total Interest
Expense                     1,481         4,828         6,309         3,580        11,332        14,912
Net Interest Income
(Loss)                  $   1,755     $  (1,096 )   $     659     $   3,904     $     873     $   4,777

(a) Changes in net interest income for the periods, based on either changes in average balances or changes in average rates for interest-earning assets and interest-bearing liabilities, are shown on this table. During each year there are numerous and simultaneous balance and rate changes; therefore, it is not possible to precisely allocate the changes between balances and rates. For the purpose of this table, changes that are not exclusively due to balance changes or rate changes have been attributed to rates.

Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and our allowance for loan losses.

Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to U.S. dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks. Interest rate risk is addressed by our Asset & Liability Management Committee (ALCO) which includes senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure.

Interest rates play a major part in the net interest income of financial institutions. The repricing of interest earnings assets and interest-bearing liabilities can influence the changes in net interest income. The timing of repriced assets and liabilities is Gap management and our Company has established its policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

Our exposure to interest rate risk is reviewed at least quarterly by our Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of assumed changes in interest rates. In order to reduce the exposure to interest rate fluctuations, we have implemented strategies to more closely match our balance sheet composition. The Company has engaged SunTrust Bank to run a quarterly asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 3-7 year range.

The Company maintains about 37 percent of its loan portfolio in adjustable rate loans that reprice with prime rate changes, while the bulk of its other loans mature within 3 years. The liabilities to fund assets are primarily in short-term certificates of deposit that mature within one year. This balance sheet composition has allowed the Company to be relatively constant with its net interest margin the past several years, though the unprecedented 475 basis point decrease by U.S. Federal Reserve in 2001, 50 basis point decrease in 2002 and 25 basis point decrease in 2003 resulted in significant net interest margin pressure. During 2004 interest rates increased 125 basis points, during 2005 interest rates increased 200 basis points, during 2006 interest rates increased 100 basis points and during 2007 interest rates decreased 100 basis points. The shift to increased rates the prior three years resulted in improved and stable net interest margins; however, the significant rate decrease the last four months of 2007 resulted in margin compression for the Company. Net interest margin decreased to 3.75 percent for 2007 compared to 3.84 percent for 2006 and 3.81 percent for 2005. We anticipate some contraction in the net interest margin for 2008 given the Federal Reserve's present declining rate forecast for 2008. Should the Federal Reserve's stance be further rate cuts, the Company would be challenged with net interest rate compression.

Taxable-equivalent net interest income for 2007 increased $0.66 million, or 1.56 percent, compared to 2006, while taxable-equivalent net interest income for 2006 increased by $4.78 million, or 12.78 percent, compared to 2005. The fluctuation between the comparable periods resulted from the positive impact of growth in the average volume of earning assets and a negative impact from the increasing average interest rates. The average volume of earning assets during 2007 increased almost $43.9 million compared to 2006 while over the same period the net interest margin decreased to 3.75 from 3.84 percent. Similarly, the average volume of earning assets during 2006 increased $117.8 million compared to 2005 while over the same period the net interest margin increased to 3.84 percent from 3.81 percent. Growth in average earning assets during 2007 and 2006 was primarily in loans. The reduction in the net interest margin in 2007 was primarily the result of the Federal Reserve reducing interest rates 100 basis points the last four months of the year along with sluggish loan growth in 2007.

The average volume of loans increased $34.6 million in 2007 compared to 2006 and increased $93.0 million in 2006 compared to 2005. The average yield on loans increased 32 basis points in 2007 compared to 2006 and increased 111 basis points in 2006 compared to 2005. Funding for this growth was primarily provided by deposit growth. The average volume of deposits increased $30.6 million in 2007 compared to 2006 and increased $112.9 million in 2006 compared to 2005. Interest-bearing deposits made up 89.6 percent of the growth in average deposits in 2007 and 95.5 percent of the growth in average deposits in 2006. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 92.5 percent in 2007, 92.6 percent in 2006 and 92.2 percent in 2005. This deposit mix, combined with a general increase in interest rates, had the effect of (i) increasing the average cost of total deposits by 49 basis points in 2007 compared to 2006 and increasing the average cost of total deposits by 112 basis points in 2006 compared to 2005, and (ii) mitigating a portion of the impact of increasing yields on earning assets on the Company's net interest income.

The Company's net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.34 percent in 2007 compared to 3.50 percent in 2006 and 3.56 percent in 2005. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Quantitative and Qualitative Disclosures About Interest Rate Sensitivity included elsewhere in this report.

Provision for Possible Loan Losses

The provision for possible loan losses is determined by management as the amount to be added to the allowance for possible loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for possible loan losses totaled $5.93 million in 2007 compared to $3.99 million in 2006 and $3.44 million in 2005. See the section captioned "Allowance for Possible Loan Losses" elsewhere in this discussion for further analysis of the provision for possible loan losses.

Part II (Continued)
Item 7 (Continued)

Noninterest Income

The components of noninterest income were as follows:

                                       2007        2006        2005

Service Charges on Deposit Accounts   $ 4,771     $ 4,580     $ 4,128
Other Charges, Commissions and Fees       921         831         708
Other                                     974       1,171         822
Mortgage Fee Income                       967         768         494
Securities Gains                          184           -           -

                                      $ 7,817     $ 7,350     $ 6,152

Total noninterest income for 2007 increased $0.47 million, or 6.35 percent, compared to 2006 while total noninterest income for 2006 increased $1.20 million, or 19.47 percent, compared to 2005. The increase in 2007 noninterest income compared to 2006 was primarily in mortgage fee income and service charges on deposits accounts, while the increase in 2006 noninterest income compared to 2005 was primarily in mortgage fee income, service charges on deposit accounts and other. Changes in these items and the other components of noninterest income are discussed in more detail below.

. . .