Exhibit 13

C O N T E N T S

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CONSOLIDATED FINANCIAL STATEMENTS

	Balance sheets
	Statements of income
	Statements of changes in stockholders’ equity
	Statements of cash flows
	Notes to consolidated financial statements

ACCOMPANYING FINANCIAL INFORMATION

	Selected five year financial data
	Summary of quarterly financial data
	Distribution of assets, liabilities and stockholders’ equity, interest rates and interest differential
	Changes in net interest income
	Management’s discussion and analysis of consolidated financial condition and results of operations
	Stock market analysis and dividends

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Fulton Bancshares Corporation

McConnellsburg, Pennsylvania

We have audited the accompanying consolidated balance sheets of the Fulton Bancshares Corporation and its wholly-owned subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Fulton Bancshares Corporation and its wholly-owned subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 20 to the financial statements, the Corporation corrected errors in the accounting for the amortization and accretion of premiums and discounts on certain investments, which resulted in restatement of the prior years financial statements.


	/S/ Smith Elliott Kearns & Company, LLC

Chambersburg, Pennsylvania

March 2, 2005, except for Notes 14 and 15, as

to which the date is March 29, 2005

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

	2004			2003
				(As Restated)
ASSETS
Cash and due from banks	$	12,808,875		$	3,603,521

Interest-bearing deposits in other banks	55,079			249,181
Federal funds sold	3,500,000			0
Cash and cash equivalents	16,363,954			3,852,702

Investment securities available for sale	18,985,202			29,680,370
Federal Reserve, Atlantic Central Bankers Bank and Federal Home Loan Bank stocks	1,207,150			1,400,850
Loans, net of reserve for loan losses 2004-$ 1,821,164; 2003-$ 1,899,643	92,648,992			101,388,847

Premises and equipment	3,596,316			3,759,508
Cash surrender vale of life insurance	5,429,963			5,229,926
Accrued interest receivable	659,723			661,096
Real estate owned other than premises	1,534,000			206,199
Other assets	1,331,608			1,389,806
Total assets	$	141,756,908		$	147,569,304

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	16,524,406		$	13,927,479
Interest bearing	93,096,879			97,200,011
	109,621,285			111,127,490

Other borrowed funds	15,000,000			18,825,000
Accrued interest payable	243,221			254,599
Other liabilities	1,374,307			1,258,556
Total liabilities	126,238,813			131,465,645

Stockholders’ Equity
Common stock: par value $.625 per share; 4,000,000 shares authorized; 495,000 shares issued	309,375			309,375
Additional paid-in capital	2,051,337			2,051,337
Retained earnings	13,226,245			14,208,502
Accumulated other comprehensive income (loss)	20,349			(377,643		)
Treasury stock; shares at cost- 2004 - 2,210; 2003 - 2,185	(89,211		)	(87,912		)
	15,518,095			16,103,659
Total liabilities and stockholders’ equity	$	141,756,908		$	147,569,304

The Notes to Consolidated Financial Statements are an integral part of these statement

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2004, 2003 and 2002

	2004			2003			2002
				(As Restated)			(As Restated)

Interest Income
Interest and fees on loans	$	6,350,516		$	6,913,532		$	7,621,016
Interest and dividends on investment securities:
Other U.S. Government agencies	278,873			352,657			708,802
Mortgage-backed securities	91,624			126,030			197,870
Oligations of state and political subdivisions- tax exempt	207,462			75,232			102,247
FNMA and FHLMC preferred stock	585,207			820,877			686,714
Other interest and dividends	27,629			77,127			120,276
Interest on federal funds sold	13,160			0			11,976
Total interest income	7,554,471			8,365,455			9,448,901

Interest Expense
Interest on deposits	1,972,493			2,132,148			3,289,201
Interest on federal funds purchased	636			726			4,111
Interest on other borrowed money	917,822			1,042,110			977,695
Total interest expense	2,890,951			3,174,984			4,271,007

Net interest income before provision for loan losses	4,663,520			5,190,471			5,177,894

Provision for Loan Losses	260,841			1,265,000			255,000

Net interest income after provision for loan losses	4,402,679			3,925,471			4,922,894

Other Income (Loss)

Service charges on deposit accounts	172,526			217,159			203,426
Other service charges and fees	155,616			221,896			134,755
Earnings-Cash surrender value of life insurance	243,188			258,209			258,203
Trust services	6,366			19,453			24,843
Gain (loss) on sale of investment securities	(1,264,993		)	86,472			705
Gain on sale of OREO property	5,481			0			8,516
Gain on sale of loans	12,952			24,012			0
Other income	13,299			9,515			10,544
Total other income (loss)	(655,565		)	836,716			640,992

Other Expenses
Salaries, fees and employee benefits	1,682,754			1,707,844			1,727,652
Net occupancy expense of bank premises and furniture and equipment expense	806,466			833,377			746,394
Professional and loan-related fees	358,548			184,447			101,279
Data processing	289,143			259,915			259,508
FDIC insurance premiums	32,751			17,515			20,386
Other expenses	1,049,394			1,001,919			918,334
Total other expenses	4,219,056			4,005,017			3,773,553

Income (loss) before income taxes	(471,942		)	757,170			1,790,333
Applicable income tax (benefit)	(7,110		)	(9,977		)	335,405

Net income (loss)	$	(464,832	)	$	767,147		$	1,454,928

Earnings (loss) per common share	$	(0.94	)	$	1.56		$	2.95

The Notes to Consolidated Financial Statements are an integral part of these statements.

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2004, 2003 and 2002

								Accumulated
			Additional					Other						Total
	Common		Paid-In		Retained			Comprehensive			Treasury			Stockholders’
	Stock		Capital		Earnings			Income (Loss)			Stock			Equity
					(As Restated)			(As Restated)						(As Restated)

Balance, December 31, 2001	$	309,375	$	2,051,106	$	13,006,503		$	(60,571	)	$	(89,726	)	$	15,216,687

Comprehensive income:
Net income					1,454,928									1,454,928

Change in unrealized gain on investment securities available for sale, net of tax of $ 250,811								486,870						486,870

Total comprehensive income														1,941,798

Issuance of treasury stock (40 shares)			188								1,612			1,800

Cash dividends ($ 1.02 per share)					(502,626		)							(502,626		)

Balance, December 31, 2002	309,375		2,051,294		13,958,805			426,299			(88,114		)	16,657,659

Comprehensive income:
Net income					767,147									767,147

Change in unrealized (loss) on investment securities available for sale, net of tax of $ 185,338								(803,942		)				(803,942		)

Total comprehensive income (loss)														(36,795		)

Issuance of treasury stock (5 shares)			43								202			245

Cash dividends ($ 1.05 per share)					(517,450		)							(517,450		)

Balance, December 31, 2003	309,375		2,051,337		14,208,502			(377,643		)	(87,912		)	16,103,659

Comprehensive income:
Net loss					(464,832		)							(464,832		)

Change in unrealized gain on investment securities available for sale, net of tax of $ 23,786								397,992						397,992

Total comprehensive income (loss)														(66,840		)

Purchase of treasury stock (25 shares)			0								(1,299		)	(1,299		)

Cash dividends ($1.05 per share)					(517,425		)							(517,425		)

Balance, December 31, 2004	$	309,375	$	2,051,337	$	13,226,245		$	20,349		$	(89,211	)	$	15,518,095

The Notes to Consolidated Financial Statements are an integral part of these statement.

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003 and 2002

	2004			2003			2002
				(As Restated)			(As Restated)
Cash flows from operating activities
Net income (loss)	$	(464,832	)	$	767,147		$	1,454,928
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Compensation via treasury stock issued	0			245			1,800
Depreciation and amortization	369,695			385,655			333,070
Investment amortization	23,468			90,548			53,463
Provision for loan losses	260,841			1,265,000			255,000
Deferred income taxes	11,811			(378,030		)	(78,685		)
Increase in CSV- life insurance	(200,037		)	(219,131		)	(226,892		)
Loss (gain) on sale of investment securities	1,264,993			(86,472		)	(705		)
(Gain) on sale of OREO property	(5,481		)	0			(8,516		)
(Gain) on sale of student loans	(12,952		)	(24,012		)	0
(Increase) decrease in other assets	70,177			18,048			(329,997		)
(Increase) decrease in accrued interest receivable	1,372			282,447			(36,284		)
(Decrease) in accrued interest payable	(11,378		)	(59,125		)	(111,019		)
Increase in other liabilities	115,751			227,194			211,180
Net cash provided by operating activities	1,423,428			2,269,514			1,517,343

Cash flows from investing activities
Sales of investment securities available for sale	10,939,235			6,299,942			825,158
Maturities of investment securities available for sale	5,374,058			20,568,343			20,021,820
Purchases of investment securities available for sale	(6,532,381		)	(19,867,112		)	(27,077,051		)
Net (increase) decrease in loans	6,269,788			2,716,329			(4,077,176		)
Purchases of property and equipment	(206,504		)	(206,891		)	(596,779		)
Purchases of FRB, ACBB and FHLB stock	(507,000		)	(295,500		)	(1,123,600		)
Redemptions of FRB, ACBB and FHLB stock	700,700			666,600			452,500
Purchases of officers’ life insurance	0			(353,000		)	0
Proceeds from sale of OREO property	211,680			0			332,684
Proceeds from sale of student loans	688,177			1,683,784			0
Net cash provided (used) by investing activities	16,937,753			11,212,495			(11,242,444		)

Cash flows from financing activities
Net (decrease) in deposits	(1,506,205		)	(1,900,547		)	(4,013,003		)
Dividends paid	(517,425		)	(517,450		)	(502,626		)
Purchase of treasury stock	(1,299		)	0			0
Net increase (decrease) in line-of-credit borrowings	(3,825,000		)	(12,425,000		)	13,925,000
Net cash provided (used) by financing activities	(5,849,929		)	(14,842,997		)	9,409,371

Net increase (decrease) in cash and cash equivalents	12,511,252			(1,360,988		)	(315,730		)

Cash and cash equivalents at beginning of year	3,852,702			5,213,690			5,529,420

Cash and cash equivalents at end of year	$	16,363,954		$	3,852,702		$	5,213,690

The Notes to Consolidated Financial Statements are an integral part of these statements.

	2004		2003			2002
			(As Restated)			(As Restated)
Supplemental disclosure of cash flow information:

Cash paid during the year for:
Interest	$	2,902,329	$	3,324,108		$	4,382,026
Income taxes	$	0	$	424,500		$	645,000

Supplemental disclosure of cash flow information:
Unrealized holding gain (loss), net of tax	$	397,992	$	(803,942	)	$	486,870

Treasury stock issued as compensation	$	0	$	245		$	1,800

Other real estate acquired in settlement of loans	$	1,534,000	$	206,199		$	241,645

The Notes to Consolidated Financial Statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Nature of Operations

Fulton Bancshares Corporation’s primary activity consists of owning and supervising its subsidiaries:

• The Fulton County National Bank and Trust Company (“Bank”), which is engaged in providing banking and bank related services, principally in Fulton, southern Huntingdon, Bedford, and western Franklin Counties. Its seven branches are located in McConnellsburg (2), Warfordsburg, Hustontown, Orbisonia, St. Thomas and Breezewood.

• Fulton County Community Development Corporation was formed on June 7, 1996 to support efforts of the local downtown business revitalization project by making low interest loans to eligible small businesses for the purpose of facade improvement. Future projects are expected to include small business marketing, new business creation, small business education, and housing for low-to-moderate income individuals.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Fulton County National Bank and Trust Company and the Fulton County Community Development Corporation (collectively referred to as the “Corporation”). All significant intercompany transactions and accounts have been eliminated.

See Note 12 for parent company financial statements.

Basis of Accounting

The Corporation uses the accrual basis of accounting.

Prior Period Adjustments

Management has determined that the accounting treatment under SFAS 115 applied previously to investments in FNMA and FHLMC preferred stocks was incorrect.

These investments have a fixed rate of return and are callable. Initial evaluation of these investments indicated that there was an expected call date, and the characteristics of these investments were similar to debt securities. Therefore, the securities were treated as debt securities for accounting purposes, and premiums and discounts were amortized from the purchase date to the expected call date.

In December 2004, management evaluated these investments for possible impairment and considered whether to sell them. During this evaluation process, it was determined that the earlier interpretation that these equity investments should be accounted for as debt instruments was incorrect.

Therefore, the treatment as equity securities is preferable, which eliminates any purchase premiums or discounts, and requires that all unrealized holding gains and losses, net of tax, be reflected as a component of “other comprehensive income”. Consequently, changes were made to the Corporation’s prior years financial statements to restate them as follows:

		As originally reported			Change			As restated
Other assets:
12/31/2003	*	$	1,563,882		$	(174,076	)	$	1,389,806

Accumulated other comprehensive income (loss):
12/31/2001		(62,672		)	2,101			(60,571		)
12/31/2002		124,003			302,296			426,299
12/31/2003		(570,538		)	192,895			(377,643		)

Retained earnings:
12/31/2001		13,035,796			(29,293		)	13,006,503
12/31/2002		14,262,722			(303,917		)	13,958,805
12/31/2003		14,575,473			(366,971		)	14,208,502

Interest and dividends on preferred stock:
2002		1,102,811			(416,097		)	686,714
2003		883,930			(63,053		)	820,877

Income taxes:
2002		476,878			(141,473		)	335,405
2003		(9,977		)	0			(9,977		)

Net Income:
2002		1,729,552			(274,624		)	1,454,928
2003		830,201			(63,054		)	767,147

Earnings per share:
2002		3.51			(0.56		)	2.95
2003		1.68			(0.12		)	1.56

• After reclassification of $ 4,454 to accrued interest receivable. *

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Corporation to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term.

Investment Securities

The Corporation’s investments in securities are classified in three categories and accounted for as follows:

• Trading Securities. Securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income.

• Securities to be Held to Maturity. Bonds and notes for which the Corporation has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method over the period to maturity.

• Securities Available for Sale. Securities available for sale consist of equity securities, bonds and notes not classified as trading securities nor as securities to be held to maturity. These are securities that management intends to use as a part of its asset and liability management strategy and may be sold in response to changes in interest rates, resultant prepayment risk and other related factors.

Purchase premiums and discounts are amortized to earnings by the interest method from purchase date to maturity date. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in other comprehensive income. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. Fair values for investment securities are based on quoted market prices.

The Corporation has classified all of its investment securities as “available for sale” at December 31, 2004 and 2003, and during the years then ended.

Loans and Reserve for Possible Loan Losses

Loans are stated at the amount of unpaid principal, reduced by a reserve for loan losses and increased or decreased by net deferred loan origination fees and costs. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The reserve for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the reserve for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the reserve. The reserve is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations are performed regularly and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The reserve consists of specific and general loss components. The specific loss component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

Nonaccrual/Impaired Loans

The accrual of interest income on loans, including impaired loans, ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income unless fully collateralized. Subsequent payments received either are applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectibility of principal.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Consumer loans, comprised of smaller balance homogeneous loans, are collectively evaluated for impairment.

Loans Held for Sale

Loans originated and held for sale in the secondary market or to other parties are carried at the lower of cost or estimated fair value in the aggregate. Net realized losses, if any, are recognized through a valuation allowance by charges to income.

The Corporation sold a portion of its PHEAA loans in 2003, and sold the remainder of its PHEAA loans in 2004. However, there were no PHEAA loans held for sale at December 31, 2003.

From time to time, the Corporation originates loans with the intent to sell them in the secondary market. These loans are typically sold concurrent with the closing of the loan. In 2004 and 2003 the Corporation originated and sold 4 and 30 loans, respectively, to FHLB in the secondary market. There were no loans held for sale in the secondary market at December 31, 2004 or 2003.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on primarily the straight-line method over the estimated useful lives of the various assets as follows:

		Years

Computer software		3 - 5
Premises		15 - 50
Equipment and vehicles		3 - 25

Repairs and maintenance are charged to operations as incurred.

Real Estate Owned Other Than Premises

Other real estate owned includes foreclosed properties for which the institution has taken physical possession in connection with loan foreclosure proceedings. Assets received in foreclosure are recorded at the lower of the outstanding principal balance of the related loans or the estimated fair value of collateral held, less estimated costs to sell. Any adjustment required to write down the property to net realizable value is charged to the allowance for loan losses. Costs of holding and maintaining the property and subsequent adjustments to the carrying amount of the property are charged to expense when incurred.

Earnings per Share

Earnings per common share were computed based on weighted averages of shares of common stock outstanding as follows:

Year		Shares

2004		492,799
2003		492,810
2002		492,772

Federal Income Taxes

As a result of certain timing differences between financial statement and federal income tax reporting, including depreciation, loan losses, and deferred compensation, deferred income taxes are provided in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. See Note 9 for further details.

Statements of Cash Flows

For purposes of the Statements of Cash Flows, cash and cash equivalents include those amounts in the balance sheet captions “cash and due from banks” and “federal funds sold”. The Corporation has elected to present the net change in interest bearing deposits with banks, deposits, and loans in the Statements of Cash Flows.

Fair values of financial instruments

The Corporation meets the requirements for disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating fair values of financial instruments as disclosed herein:

Cash and Cash Equivalents. The carrying amounts of cash and short-term instruments approximate their fair value.

Securities Available for Sale. Fair values for investment securities are based on quoted market prices.

Federal Reserve, Atlantic Central Banker’s Bank, and Federal Home Loan Bank Stocks. The carrying amount for these stocks approximates their fair value since they are not actively traded and have no readily determinable market value.

Loans Receivable. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit and IRA’s are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings. The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Long-Term Borrowings. The fair values of the Corporation’s long-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest. The carrying amounts of accrued interest approximate their fair values.

Off-Balance-Sheet Instruments. The Corporation generally does not charge commitment fees. Fees for standby letters of credit and their off-balance-sheet instruments are not significant.

Advertising

The Corporation expenses advertising costs as incurred. Advertising expenses for the years ended December 31, 2004, 2003, and 2002, were $ 93,633, $ 93,876, and $ 93,217, respectively.

Comprehensive income

Comprehensive income is defined as the change in equity from transactions and other events from nonowner sources. It includes all changes in equity except those resulting from investments by stockholders and distributions to stockholders. Comprehensive income includes net income and certain elements of “other comprehensive income” such as foreign currency transactions; accounting for futures contracts; employers accounting for pensions; and accounting for certain investments in debt and equity securities.

The Corporation has elected to report its comprehensive income in the statement of stockholders’ equity. The only element of “other comprehensive income” that the Corporation has is the unrealized gain or loss on available for sale securities.

The components of the change in net unrealized gains (losses) on securities were as follows:

Comprehensive income	2004			2003			2002

Gross unrealized holding gains (losses) arising during the year	$	(843,215	)	$	(902,808	)	$	738,386
Reclassification adjustment for (gains) losses realized in net income	1,264,993			(86,472		)	(705		)
Net unrealized holding gains (losses) before taxes	421,778			(989,280		)	737,681
Tax effect	(23,786		)	185,338			(250,811		)
Net change	$	397,992		$	(803,942	)	$	486,870

Reclassifications

Certain reclassifications have been made to the 2003 and 2002 financial statements in order to conform to the 2004 presentation.

Note 2. Investments

The amortized cost and fair value of investment securities available for sale at December 31 were:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	2004

Obligations of U.S. Government corporations and agencies	$	8,234,049	$	4,647	$	43,334	$	8,195,362
Obligations of states and political subdivisions	5,394,721		65,929		5,804		5,454,846
Mortgage-backed securities	5,266,536		18,967		4,531		5,280,972
Other stock	59,064		0		5,042		54,022
	$	18,954,370	$	89,543	$	58,711	$	18,985,202

	2003

Obligations of U.S. Government corporations and agencies	$	9,237,758	$	50,640	$	14,654	$	9,273,744
Obligations of states and political subdivisions	5,395,500		77,886		10,444		5,462,942
Mortgage-backed securities	3,127,194		4,536		7,571		3,124,159
FNMA and FHLMC preferred stock	12,131,292		18,000		462,167		11,687,125
Other stock	132,000		5,400		5,000		132,400
	$	30,023,744	$	156,462	$	499,836	$	29,680,370

The amortized cost and fair value of investment securities available for sale at December 31, 2004, by contractual maturity, are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
	Cost		Fair Value

Due in one year or less	$	0	$	0
Due after one year through five years	8,333,843		8,297,140
Due after five years through ten years	2,266,542		2,314,388
Due after ten years	3,028,385		3,038,680
Mortgage-backed securities	5,266,536		5,280,972
Other stocks	59,064		54,022
	$	18,954,370	$	18,985,202

Proceeds from sales of securities available for sale during 2004 were $ 10,939,235. Gross gains and losses on those sales were $ 10,382 and $ 1,275,375, respectively. Proceeds from maturities of investment securities during 2004 were $ 5,374,058, resulting in no gains or losses. Included in stockholders’ equity at December 31, 2004 is $ 20,349 of unrealized holding gains on securities available for sale, net of $ 10,483 in deferred taxes.

As a result of an ongoing internal study and research throughout 2004, including consultations with our investment advisors, it was determined in the fourth quarter of 2004 that it was probable the Corporation would be unable to collect the purchase cost of its preferred stock investments in FNMA and FHLMC. The Corporation based that judgment on clear indications that interest rates were likely to continue to increase in the near-term (these investments are highly interest rate sensitive) and, because of final regulatory communications from the Office of the Comptroller of Currency that the Corporation must reduce its holdings of preferred stock, the Corporation could not hold the investments for a sufficient time to allow for any recovery in fair value. In prior periods, neither the clear indication of rising rates nor the final regulatory communication from the OCC was present.

Proceeds from sales of securities available for sale during 2003 were $ 6,299,942. Gross gains and losses on those sales were $ 151,028 and $ 64,556, respectively. Proceeds from maturities of investment securities during 2003 were $ 20,568,343, resulting in no gains or losses. Included in stockholders’ equity at December 31, 2003 is $ 377,643 of unrealized holding losses on securities available for sale, net of $ 34,270 in deferred taxes.

Proceeds from sales of securities available for sale during 2002 were $ 825,158. Gross gains and losses on those sales were $ 705 and $ 0, respectively. Proceeds from maturities of investment securities during 2002 were $ 20,021,820, resulting in no gains or losses. Included in stockholders’ equity at December 31, 2002 is $ 426,299 of unrealized holding gains on securities available for sale, net of $ 219,609 in deferred taxes.

Information pertaining to securities with gross unrealized losses at December 31, 2004, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	Less Than Twelve Months:				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
Obligations of U.S. Government corporations and agencies	$	36,469	$	6,460,463	$	6,865	$	986,100	$	43,334	$	7,446,563
Obligations of states and political subdivisions	0		0		5,804		1,251,033		5,804		1,251,033
Mortgage-backed securities	4,334		1,681,583		197		46,512		4,531		1,728,095
Other stock	42		2,023		5,000		52,000		5,042		54,023
	$	40,845	$	8,144,069	$	17,866	$	2,335,645	$	58,711	$	10,479,714

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given, to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (3) the intent and ability of the Corporation to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2004, 7 obligations of U. S. Government corporations and agencies, 2 obligations of states and political subdivisions, 7 mortgage-backed securities and 2 other stocks had unrealized losses. At December 31, 2004, no debt security had unrealized losses with depreciation of 5% or more from the Corporation’s amortized cost, while one marketable equity security had an unrealized loss of 9% from the Corporation’s cost basis. This unrealized loss relates primarily to a local financial institution in which there is a low volume of stock activity. In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance and first hand knowledge of the issuer’s operations and reputation.

The Corporation is required to maintain minimum investments in certain stocks, which are recorded at cost since they are not actively traded and therefore, have no readily determinable market value. Consequently, the Corporation owns the following equity securities at December 31:

	2004		2003
Federal Home Loan Bank	$	1,126,300	$	1,320,000
Atlantic Central Bankers Bank	10,000		10,000
Federal Reserve Bank	70,850		70,850
	$	1,207,150	$	1,400,850

Securities with a cost basis of $ 8,234,049 (fair value of $ 8,195,363) and $ 9,237,758 (fair value of $ 9,273,744) at December 31, 2004 and 2003, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

Note 3. Loans

Loans consist of the following at December 31 (in thousands):

	2004			2003

Real estate loans
Secured by farmland	$	12,754		$	13,359
Secured by 1-4 family residential	45,545			48,063
Secured by multifamily (5 or more) residential properties	563			351
Secured by nonfarm nonresidential	16,999			18,625
Loans to finance agricultural production:
Loans to farmers	5,715			8,850
Commercial and industrial loans	9,816			9,773
Loans to individuals for household, family and other personal expenditures	2,524			3,784
Obligations of state and political subdivisions in the U.S.	523			475
All other loans	31			9
	94,470			103,289
Less: reserve for loan losses	(1,821		)	(1,900		)
	$	92,649		$	101,389

Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows at December 31 (in thousands):

	90 Days or More						Nonaccrual
	Past Due						Status
	2004		2003		2002		2004		2003		2002
Loans secured by real estate	$	41	$	0	$	59	$	699	$	3,314	$	1,525

Personal loans	7		0		11		0		74		0

Commercial and other loans	0		0		0		1,030		771		71
Total	$	48	$	0	$	70	$	1,729	$	4,159	$	1,596

Foregone revenue on nonaccrual loans was as follows:

	2004		2003		2002

Interest income that would have been accrued at original loan rates	$	260,167	$	147,128	$	6,503
Amount recognized as interest income	177,971		3,198		0
Foregone revenue	$	82,196	$	143,930	$	6,503

At December 31, 2004, the total recorded investment in impaired loans, all of which had allowances determined in accordance with SFAS No. 114, amounted to approximately $ 1,857,000. The average recorded investment in impaired loans amounted to approximately $ 1,299,000 for the year ended December 31, 2004. The allowance for loan losses related to impaired loans amounted to approximately $ 925,000 at December 31, 2004. Interest income on impaired loans of $ 6,815 was recognized for cash payments received in 2004. The Bank has no commitments to loan additional funds to borrowers whose loans have been modified.

At December 31, 2003, the total recorded investment in impaired loans, all of which had allowances determined in accordance with SFAS No. 114, amounted to approximately $ 740,000. The average recorded investment in impaired loans amounted to approximately $ 1,064,000 for the year ended December 31, 2003. The allowance for loan losses related to impaired loans amounted to approximately $ 250,000 at December 31, 2003. Interest income on impaired loans of $ 1,043 was recognized for cash payments received in 2003. The Bank has no commitments to loan additional funds to borrowers whose loans have been modified. There was no recorded investment in impaired loans at December 31, 2002.

During 2004 and 2003, the Corporation sold its student loan portfolio. Proceeds from the sale of these loans were $ 688,177 and $ 1,683,784, which resulted in gains of $ 12,952 and $ 24,012 for the years ended December 31, 2004 and 2003, respectively.

During 2004 and 2003, the Corporation sold certain mortgage loans to the Federal Home Loan Bank (FHLB), but the Corporation continues to service these loans for FHLB. The outstanding balance of these loans was $ 2,737,322 and $ 2,228,413 at December 31, 2004 and 2003, respectively.

Note 4. Reserve for Loan Losses

Activity in the reserve for loan losses is summarized as follows:

	2004		2003		2002

Balance at beginning of period	$	1,899,643	$	1,030,713	$	845,045
Recoveries	24,135		15,036		7,441
Current year provision charged to income	260,841		1,265,000		255,000
Total	2,184,619		2,310,749		1,107,486
Losses	363,455		411,106		76,773
Balance at end of period	$	1,821,164	$	1,899,643	$	1,030,713

Note 5. Loans to Related Parties

The Corporation has granted loans to its officers and directors and to their associates. Corporate policy requires that related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $ 3,944,179 and $ 3,638,548 at December 31, 2004 and 2003, respectively. During 2004, $ 3,260,392 of new loans were made and repayments totaled $ 2,954,761. During 2003, $ 1,050,033 of new loans were made and repayments totaled $ 786,514.

Outstanding loans to employees totaled $ 754,733 and $ 1,148,163 at December 31, 2004 and 2003, respectively.

Note 6. Premises and Equipment

A summary of premises and equipment is as follows:

			Accumulated		Depreciated
	Cost		Depreciation		Cost
	2004
Premises and improvements (including land $ 500,207)	$	3,837,739	$	957,744	$	2,879,995
Equipment, furniture and fixtures	3,320,314		2,670,863		649,451
Vehicles	98,296		55,333		42,963
Deposits on equipment	23,907		0		23,907
	$	7,280,256	$	3,683,940	$	3,596,316

	2003
Premises and improvements (including land $ 500,207)	$	3,810,227	$	864,541	$	2,945,686
Equipment, furniture and fixtures	3,165,230		2,415,284		749,946
Vehicles	98,296		34,420		63,876
	$	7,073,753	$	3,314,245	$	3,759,508

Depreciation and amortization expense on property and equipment and other real estate owned amounted to $ 369,695, $ 385,655, and $ 333,070 for the years end December 31, 2004, 2003, and 2002, respectively.

During 2004, the Corporation entered into an agreement to purchase computer software. The total contract amount is $ 47,815 of which $ 23,907 had been paid at December 31, 2004.

Note 7. Financial Instruments With Off-Balance-Sheet Risk/Commitments

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the corporation has in particular classes of financial instruments.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amounts of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

	Contract or Notional Amount
	2004		2003
Financial instruments whose contract amounts represent credit risk at December 31:
Commitments to extend credit	$	11,142,000	$	12,389,000
Standby letters of credit and financial guarantees written	171,000		91,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, real estate, equipment, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The corporation holds collateral supporting those commitments when deemed necessary by management.

Note 8. Retirement Plan

The Corporation maintains a 401-K profit-sharing plan covering substantially all full-time employees. The plan allows contributions of up to 15% of eligible compensation by employees. Additional Corporation contributions can be made at the discretion of the board of directors. The Corporation’s contributions made to the plan were $ 85,168, $ 110,100, and $ 104,206 for the years ended December 31, 2004, 2003 and 2002, respectively.

Note 9. Federal Income Taxes

The components of federal income tax expense are summarized as follows:

	2004			2003			2002
Current year provision	$	(20,967	)	$	305,342		$	413,850
Deferred income taxes (benefits)	11,811			(378,030		)	(78,685		)
Income tax effect of securities transactions	2,046			62,711			240
Applicable income taxes (credits)	$	(7,110	)	$	(9,977	)	$	335,405

Federal income taxes were computed after reducing pretax accounting income for nontaxable interest and dividend income in the amount of $ 646,060, $ 670,932, and $ 593,555, for 2004, 2003, and 2002, respectively.

A reconciliation of the effective income tax rate to the federal statutory rate is as follows:

	2004		2003		2002
Applicable federal income tax rate	34.0	%	34.0	%	34.0	%
Reductions resulting from:
Nontaxable investment income and other items, net of nondeductible expenses	(35.5	) %	35.3	%	(14.8	)%
Effective income tax rate	(1.5	)%	(1.3	)%	19.2	%

Net deferred tax assets are included in other assets on the balance sheet as follows:

	2004			2003
Total deferred tax assets (net of allowance)	$	997,985		$	1,014,691
Total deferred tax liabilities	(231,330		)	(260,012		)
Net deferred tax asset	$	766,655		$	754,679

The Corporation has recorded a valuation allowance for the deferred tax assets related to realized and unrealized losses on FNMA and FHLMC preferred stocks as management believes that it is not likely that they will be ultimately realized.

During 2004 and 2003, these preferred stocks were sold at a loss of $ 1,271,012 and $ 97,972, respectively, which is considered a capital loss for federal income tax purposes that can only be realized when offset by capital gains and not ordinary income. This tax benefit of $ 432,144 for 2004 and $ 33,310 for 2003 can be carried forward for five years and will expire at December 31, 2009 and 2008, respectively.

The tax effects of each type of significant item that give rise to deferred taxes are:

	2004			2003
Capital loss carryover	$	432,144		$	33,310
Net unrealized (gains) losses on securities available for sale	(10,483		)	116,747
Deferred compensation	433,779			383,358
Allowance for loan losses	554,953			582,398
Depreciation	(220,847		)	(225,743		)
Foregone interest on non-accrual loans	9,253			48,936
Valuation allowance	(432,144		)	(184,327		)
Net deferred tax asset	$	766,655		$	754,679

Increase (decrease) in valuation allowance during year	$	247,817		$	184,327

Note 10. Leases

The Corporation is party to real estate leases with base monthly rental charges of $ 3,662. These charges are to be adjusted on specified dates and by agreed upon amounts or by the net change in the consumer price index. The leases expire on January 7, 2011 (as extended) and December 31, 2005, respectively. Each lease contains a provision for renewal under various terms at the Corporation’s option. In addition, the Corporation leases certain equipment on a 54 month lease which expires on April 30, 2009. Total rental expense charged to operations for the years ended December 31, 2004, 2003, and 2002 was $66,458, $68,131, and $ 64,195, respectively.

Based on the current monthly rent, future minimum rental payments for the next five years are as follows:

2005	$	66,408
2006	64,908
2007	64,908
2008	64,908
2009	49,932

Note 11. Deposits

Included in interest-bearing deposits at December 31 are NOW and Money Market Account balances totaling $ 18,304,499 and $ 20,476,269 at December 31, 2004 and 2003, respectively.

Time deposits of $ 100,000 and over aggregated $ 14,121,775 and $ 16,526,248 at December 31, 2004 and 2003, respectively. Interest expense on time deposits of $ 100,000 and over was $ 468,000, $ 504,000, and $ 1,009,000 for the years ended 2004, 2003, and 2002, respectively.

The amount of time deposits maturing over the next 5 years as of December 31, 2004 is as follows:

2005	$	29,992,624
2006	2,882,328
2007	9,261,695
2008	9,480,828
2009	3,956,520
	$	55,573,995

The Corporation accepts deposits of the officers and directors of the Corporation and its subsidiaries on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of deposits of officers and directors totaled approximately $ 3,441,000 and $ 3,137,000 at December 31, 2004 and 2003, respectively.

Overdrafts of $ 31,145 and $ 5,843 at December 31, 2004 and 2003, respectively, were reclassified as loans for financial reporting purposes.

Note 12. Fulton Bancshares Corporation (Parent Company Only) Financial Information

The following are the condensed balance sheets, income statements and statements of cash flows for the parent company as of and for the years ended December 31:

Balance Sheets

	2004			2003
Assets
Cash	$	94,293		$	23,049
Investment in Fulton County National Bank and Trust Company	15,340,870			15,917,169
Investment in Fulton County Community Development Corporation	27,202			31,196
Securities available for sale	54,023			132,400
Deferred taxes & other assets	1,714			0
Total assets	$	15,518,102		$	16,103,814

Liabilities
Accounts payable	$	7		$	19
Deferred taxes	0			136
Total liabilities	7			155

Stockholders’ Equity
Common stock: par value $.625 per share; 4,000,000 shares authorized; 495,000 shares issued	309,375			309,375
Additional paid-in capital	2,051,337			2,051,337
Retained earnings	13,226,245			14,208,502
Accumulated other comprehensive income (loss)	20,349			(377,643		)
Treasury stock; shares at cost- 2004 - 2,210; 2003 - 2,185	(89,211		)	(87,912		)
Total stockholders’ equity	15,518,095			16,103,659
	$	15,518,102		$	16,103,814

Statements of Income

Years Ended December 31

	2004			2003			2002
Cash dividends from wholly-owned subsidiary	$	605,000		$	575,000		$	555,000
Investment income	1,986			1,580			1,360
Gain on sale of investment securities	6,019			0			0
Equity in undistributed income of subsidiaries	(981,877		)	241,264			948,538
Legal, printing, supplies, amortization and other expense	(95,960		)	(50,697		)	(49,970		)
Net Income (loss)	$	(464,832	)	$	767,147		$	1,454,928

Statements of Cash Flows

Years Ended December 31

Cash flows form operating activities:
Net Income (loss)	$	(464,832	)	$	767,147		$	1,454,928
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed (income) loss of subsidiary	981,877			(241,264		)	(948,538		)
Gain on sale of investment securities	(6,019		)	0			0
Compensation-treasury stock issued	0			245			1,800
Increase (decrease) in accounts payable	(12		)	7			12
Net cash provided by operating activities	511,014			526,135			508,202

Cash flows form investing activities:
Sales of investment securities available for sale	78,954			0			0
Net cash provided by investing activities	78,954			0			0

Cash flows from financing activities
Dividends paid	(517,425		)	(517,450		)	(502,626		)
Purchase of treasury stock	(1,299		)	0			0
Net cash (used) by financing activities	(518,724		)	(517,450		)	(502,626		)

Net increase in cash and cash equivalents	71,244			8,685			5,576

Cash and cash equivalents at beginning of year	23,049			14,364			8,788

Cash and cash equivalents at end of year	$	94,293		$	23,049		$	14,364

Note 13. Compensating Balances

The Corporation is required to maintain certain compensating balances with its correspondent banks to cover processing costs and service charges. The balances with these correspondent banks may exceed federally insured limits, which management considers to be a normal business risk. Required compensating balances were $ 125,000 at December 31, 2004 and 2003.

Note 14. Dividends/Regulatory Matters/Contingencies

Dividends paid by Fulton Bancshares Corporation are generally provided from the Fulton County National Bank and Trust Company’s dividends to it. The Federal Reserve Board, which regulates bank holding companies, establishes guidelines which indicate that cash dividends should be covered by current year earnings and the debt to equity ratio of the holding company must be below thirty percent.

Fulton County National Bank and Trust Company, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Retained earnings available for the payment of dividends without approval of the Comptroller amounted to approximately $ 0, $ 1,171,000, and $ 1,946,000 at January 1, 2005, 2004, and 2003, respectively. The Corporation is also subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines, the Corporation is required to maintain minimum capital ratios. The “leverage ratio”, which compares capital to adjusted total balance sheet assets is required to be at least 4%. “Tier I” and “Tier II” capital ratios compare capital to risk-weighted assets and off-balance sheet activity. The Tier I ratio is required to be at least 4%. The combined Tier 1 and Tier II ratio is required to be at least 8%.

On March 23, 2005, the Bank’s Board of Directors entered into a “Stipulation and Consent to the Issuance of a Consent Order” (the “Order”) with the Office of the Comptroller of the Currency (OCC). The Order requires the Bank to implement and improve operating procedures and processes within stipulated timeframes. Under the Order, the Bank is required prospectively to maintain higher minimum capital ratios than the normal industry minimums.

At December 31 the Corporation’s actual ratios and required levels were as follows:

			Actual
	Required		2004		2003
Leverage (total adjusted capital/total average assets)	4.0	%	10.8	%	11.3	%
Tier 1 (Tier 1 core capital/risk weighted assets)	4.0	%	17.1	%	15.7	%
Total capital (total capital plus allowance for loan losses/risk weighted assets)	8.0	%	18.4	%	16.9	%

As of December 31, 2004, the most recent notification from the Comptroller of the Currency categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category, although the OCC has, through the Order, raised the Bank’s required ratios from the normal minimums shown above to the following:

Leverage		10.0	%
Tier I		14.0	%

Under the Order, the Bank must obtain OCC approval before any executive officers or directors can be added to the Bank’s management. The payment of dividends has also been temporarily suspended without prior OCC approval.

Effective March 22, 2005, similar restrictions have been placed on the holding company, Fulton Bancshares Corporation, by the Federal Reserve Bank. By letter dated March 15, 2005 the Corporation was deemed to be in “troubled” condition as that term is defined in 12C.F.R. 225.71(d) by the Federal Reserve Bank of Philadelphia, the Corporation’s primary regulator. The designation was due to serious concerns in a Federal Reserve Inspection Report commenced January 31, 2005 and concluded February 17, 2005 and the Office of the Comptroller of the Currency (OCC) Report of Examination on the Corporation’s wholly-owned bank subsidiary commenced August 10, 2004 and received in final form in February, 2005. The OCC, the Bank’s primary regulator, provided a letter of concern based on the preliminary findings of the Examination dated November 23, 2004. The concerns in the OCC Report of Examination were reflected in the Order referenced above.

The Order includes 24 articles that commence by requiring the Bank to form a Compliance Committee and develop an action plan (“Plan”) to comply with the remaining articles. The Plan requires the development of a strategic plan, the appointment of certain management and officers and the commission of a management and board supervision study. The Plan also requires the development of a three-year profit plan and capital plan, the requirement to maintain certain capital ratios, improvement in interest rate risk management, a consultant study of compliance with Truth-In-Lending and RESPA, and a review of the methodology of determining ALLL. The Plan further requires the Bank to engage and retain a qualified third-party loan review, to develop a criticized assets improvement program, to implement a loan portfolio management improvement program and to implement improved reporting and information systems for the loan portfolio. Further articles of the Plan require a qualified, independent consultant to assess compliance with the Bank Secrecy Act (“BSA”), Money Laundering Control Act, suspicious activities, and the rules and regulations of the Office of Foreign Assets and Control, the development of a BSA compliance program, a study of the audit function with emphasis on BSA compliance, and a written program on Suspicious Activity Reports. Other articles of the Plan require the development of a customer information security program, a disaster recovery plan, and a liquidity contingency plan. Finally, an article requires the Board to take all necessary steps to ensure that the Bank corrects each violation of law, rule or regulation cited in Reports of Examination. The remaining articles are administrative in nature.

The OCC has also informed the Bank of possible violations of laws and regulations with regard to the Bank Secrecy Act, the Truth-In-Lending Act, and the Real Estate Settlement Procedures Act which could result in future fines and penalties to the Bank and possible reimbursements. The amount of any future fines or reimbursements cannot be reasonably estimated at December 31, 2004.

Because of the possible regulatory violations and other OCC scrutiny, the Bank’s FDIC insurance premiums and OCC assessment fees will increase by approximately $ 168,000 in 2005.

Because compliance with the Order will require reallocation and increases in internal resources and the engagement of various vendors and consultants, the cost of compliance and the effect on results of operations is expected to be material; however the cost of compliance with the Order cannot be reasonably estimated at this time.

The Bank intends to take actions required by the Order to remediate the identified weaknesses by forming a Board Compliance Committee that will direct and monitor the completion of the specific requirements of Order by use of internal resources and the retention of qualified vendors and consultants.

In addition, on March 4, 2005, the Bank terminated its President. While no litigation has been initiated through March 23, 2005, litigation may ensue if certain matters are not amicably resolved between the Bank and its former President.

Note 15. Liabilities for Borrowed Money

At December 31, 2004 and 2003, the Corporation had an outstanding ten year, $ 15,000,000 loan with Federal Home Loan Bank of Pittsburgh. The interest rate can increase quarterly depending on market rates based on the 3 month LIBOR plus .1%, but any change is at the discretion of the FHLB. The rate is currently fixed at 5.93% at December 31, 2004 and 2003 and is payable monthly. The loan matures on July 12, 2010. There are significant penalties for prepayment.

The Corporation has established credit at Federal Home Loan Bank (FHLB) of Pittsburgh to improve liquidity. The Corporation may borrow up to approximately $ 57 million from FHLB under the terms of certain commitment agreements, less any borrowings outstanding. The rates and terms of the commitments are flexible and are not fixed until the funds are withdrawn, but funds may not be borrowed for more than one year. Borrowings were $ 0 and $ 3,825,000 at December 31, 2004 and 2003, respectively. The variable interest rate was 1.03% at December 31, 2003, and can change daily based on FHLB’s cost of funds. Collateral for the borrowings consists of certain investments and mortgages approximating $ 65 million at December 31, 2004.

On March 29, 2005, the Corporation was notified by Federal Home Loan Bank that it will be required to identify and deliver specific assets as collateral equal to outstanding borrowings, plus accrued interest and any penalties for early payment. This amount is approximately $ 16,063,000 at March 29, 2005.

Note 16. Real Estate Owned Other Than Premises

At December 31, 2004, real estate owned other than premises consisted of four related properties that the Corporation foreclosed on in 2004, which are carried at fair value less costs to sell of $ 1,534,000. At December 31, 2003, real estate owned other than premises consisted of four other properties that the Corporation foreclosed on in 2003. These properties, which were carried at $ 206,199, were sold in 2004. Net proceeds from the sales in 2004 were $ 211,680, which resulted in a gain of $5,481.

During 2002, the Corporation foreclosed on property with a value of $ 241,644, which was sold in 2002 for $ 154,471. Proceeds of $ 87,173 were also received from an insurance company to satisfy the balance due from the foreclosure.

The Corporation also sold a rental property in 2002. Net proceeds from the sale were $ 91,040, which resulted in a gain of $ 8,516.

Note 17. Fair Value of Financial Instruments

The estimated fair values of the Corporation’s financial instruments were as follows at December 31, 2004 and 2003:

	2004				2003
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(000 Omitted)
FINANCIAL ASSETS
Cash and due from banks	$	16,364	$	16,364	$	3,853	$	3,853
Securities available for sale	18,985		18,985		29,680		29,680
Federal Reserve, Atlantic Central Bankers Bank, and Federal Home Loan Bank stocks	1,207		1,207		1,401		1,401
Loans receivable (net)	92,649		93,409		101,389		101,529
Accrued interest receivable	660		660		661		661

FINANCIAL LIABILITIES
Time certificates	56,860		56,610		59,628		60,791
Other deposits	52,761		52,761		51,497		51,497
Accrued interest payable	243		243		255		255
Other borrowed funds	15,000		16,463		18,825		20,258

Note 18. Deferred Compensation and Other Benefit Programs

The Bank has adopted several benefit programs, some of which result in the deferral of payments for services rendered:

(1) The Supplemental Executive Retirement Plan - This Plan is funded by single premium life insurance on the CEO and certain other Corporation executives, with the Corporation as beneficiary. Actual payments to the executives will not begin until their retirement.

(2) The Director Emeritus Program - This plan, funded by life insurance, will allow the Corporation to reward its directors for longevity of service to the Board. Directors who qualify would be eligible at age 75 to receive $ 4,000 annually for up to 10 years under this program.

(3) The Director Deferred Compensation Plan - This plan, also funded by life insurance, will allow directors to defer up to 100% of directors fees annually. The amounts deferred will be paid out over a period of up to 10 years beginning when the director reaches the age of 75.

(4) The Officer Supplemental Life Insurance Plan provides for officer life insurance coverage to named third parties of generally double their current salary level, and is also funded by single premium life insurance.

As a result of these plans, the following items are recognized in the financial statements:

	2004		2003		2002
Asset
Cash surrender value of life insurance	$	5,429,963	$	5,229,926	$	4,657,795

Liabilities
Supplemental executive retirement plan	860,524		798,930		653,785
Deferred directors fees liability	415,296		328,592		272,818

Income
Earnings on cash surrender value of life insurance	243,188		258,209		258,203

Expenses
Life insurance expense	39,553		39,078		31,311
Supplemental executive retirement expense	61,594		145,145		151,839
Deferred directors fees	87,166		63,711		54,695
Director emeritus fees	12,000		12,000		12,000
Payments made to retired director	1,685		1,685		1,685

Note 19. Concentrations of Credit Risk

The Corporation grants agribusiness, commercial and residential loans to customers primarily in Fulton County, Pennsylvania and adjoining counties in Pennsylvania and Maryland. Although the Corporation has a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon the agribusiness economic sector at December 31, 2004 (approximately 20% of loan portfolio and 119% of stockholders’ equity).

Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but generally includes equipment and real estate.

The Corporation maintains deposit balances at correspondent banks, which provide check collection and item processing services to the corporation. At times, the balances with these correspondent banks may exceed federally insured limits, which management considers to be a normal business risk.

The Corporation also had a significant concentration in FNMA and FHLMC preferred stocks, representing 37% of total investments and 72% of stockholders’ equity, at December 31, 2003. All of these investments were sold in 2004.

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

SELECTED FIVE-YEAR FINANCIAL DATA

Income Statement (000 omitted)	2004			2003			2002			2001			2000
				(As Restated)			(As Restated)			(As Restated)			(As Restated)

Interest income	$	7,555		$	8,365		$	9,449		$	10,142		$	9,946
Interest expense	2,891			3,175			4,271			5,432			5,210
Provision for loan losses	261			1,265			255			15			45
Net interest income after provision for loan losses	4,403			3,925			4,923			4,695			4,691
Securities gains (losses)	(1,265		)	86			1			57			6
Other operating income	609			751			640			582			516
Other operating expense	4,219			4,005			3,774			3,450			3,370
Income (loss) before income taxes (benefit)	(472		)	757			1,790			1,884			1,843
Applicable income tax (benefit)	(7		)	(10		)	335			428			434
Net income (loss)	$	(465	)	$	767		$	1,455		$	1,456		$	1,409

Per share amounts based on weighted averages shares outstanding	492,799			492,810			492,772			492,747			494,054

Income (loss) before income taxes (benefit)	$	(0.95	)	$	1.54		$	3.63		$	3.82		$	3.73
Income taxes (benefit)	(0.01		)	(0.02		)	0.68			0.87			0.88
Net Income (loss)	(0.94		)	1.56			2.95			2.95			2.85
Cash dividend paid	1.05			1.05			1.02			0.95			0.86
Book value	31.49			32.68			33.80			30.88			28.75

Year-End Balance Sheet (000 omitted)
Total assets	$	141,757		$	147,569		$	162,492		$	150,828		$	140,480
Loans	94,470			103,288			108,267			104,501			102,905
Reserve for loan losses	(1,821		)	(1,899		)	(1,031		)	(845		)	(847		)
Net loans	92,649			101,389			107,236			103,656			102,058
Total investment securities	20,192			31,081			39,447			31,899			24,643
Deposits-noninterest bearing	16,524			13,927			16,156			13,486			13,025
Deposits-interest bearing	93,097			97,200			96,870			103,552			92,107
Total deposits	109,621			111,127			113,025			117,038			105,132
Liabilities for borrowed money	15,000			18,825			31,250			17,325			20,000
Total stockholders’ equity	15,518			16,104			16,658			15,217			14,204

Ratios
Average equity/average assets	11.23		%	11.05		%	10.19		%	10.17		%	9.82		%
Return on average equity	(2.85		)%	4.52		%	9.18		%	9.92		%	10.71		%
Return on average assets	(0.32		)%	0.50		%	0.94		%	1.01		%	1.05		%

The 2000-2003 amounts have been restated to correct the accounting on certain investment discounts – See Note 1, Prior Period Adjustments.

Net Income
As originally reported	N/A	$	830		$	1,730		$	1,486		$	1,439
As restated	N/A	767			1,455			1,456			1,409
Change	N/A	$	(63	)	$	(275	)	$	(30	)	$	(30	)
Net Income per Share
As originally reported	N/A	$	1.68		$	3.51		$	3.02		$	2.91
As restated	N/A	1.56			2.95			2.95			2.85
Change	N/A	$	(.12	)	$	(.56	)	$	(.07	)	$	(.06	)

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

SUMMARY OF QUARTERLY FINANCIAL DATA

The unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 are as follows:

	2004											2003 (As restated)
($ 000 omitted except per	Quarter Ended											Quarter Ended
share)	Mar. 31		June 30			Sept. 30			Dec. 31			Mar. 31			June 30			Sept. 30			Dec. 31

Interest income (1)	$	1,915	$	1,877		$	1,879		$	1,884		$	2,245		$	2,035		$	2,114		$	1,971
Interest expense	734		730			717			710			849			807			776			743
Net interest income	1,181		1,147			1,162			1,174			1,396			1,228			1,338			1,228
Provision for loan losses	0		261		(2)	0			0			30			1,235		(3)	0			0
Net interest income after
Provision for loan losses	1,181		886			1,162			1,174			1,366			(7		)	1,338			1,228
Securities gains (losses)	4		6			0			(1,275		)(4)	0			150			0			(64		)
Other income	159		163			134			153			194			199			183			175
Other expenses	1,014		1,089			1,004			1,112			969			970			1,002			1,064
Operating income before income taxes	330		(34		)	292			(1,060		)	591			(628		)	519			275
Applicable income taxes	48		(7		)	(13		)	(35		)	124			(230		)	70			26
Net income (restated – 2003)	$	282	$	(27	)	$	305		$	(1,025	)	$	467		$	(398	)	$	449		$	249
Net income – originally reported												507			282			(230		)	271
Change												$	(40	)	$	(680	)	$	679		$	(22	)

Net income applicable to common stock
Per share data:
Net income (restated – 2003)	$	0.57	$	(0.05	)	$	0.62		$	(2.08	)	$	.95		$	(0.81	)	$	0.91		$	0.51
Originally reported												1.03			.57			(.47		)	.55
Change												$	(.08	)	$	(1.38	)	$	1.38		$	(.04	)

(1) Restated for correct accounting on certain investment discounts – See Note 1 Prior Period Adjustment.

(2) The amount and timing of the provision for loan loss was the result of regulatory examination commenced August 10, 2004. See Allowance for Loan Losses and Related Provisions discussed in Management’s Discussion and Analysis.

(3) The amount and timing of the provision for loan loss was the result of regulatory examination commenced July 14, 2003. See Allowance for Loan Loss and Related Provisions discussion on Management’s Discussion and Analysis.

(4) Loss on sale of Preferred Stocks – See Note 2. Investments and Management’s Discussion and Analysis – Other Income and Expense.

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
Years Ended December 31,

	2004							2003							2002
(000 omitted)	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
ASSETS
Investment securities:
Taxable interest income	$	25,479		$	981	3.9	%	$	32,341		$	1,377	4.3	%	$	34,783		$	1,714	4.9	%
Nontaxable interest income	5,395			207		3.8	%	1,657			75		4.5	%	2,240			102		4.6	%
Total investment securities	30,874			1,189		3.9	%	33,998			1,452		4.3	%	37,023			1,816		4.9	%
Loans (net of unearned discounts)	99,808			6,351		6.4	%	107,140			6,913		6.5	%	105,219			7,621		7.2	%
Other short-term investments	1,129			15		1.3	%	0			0		0.0	%	723			12		0.0	%
Total interest earning assets	131,811			7,554		5.7	%	141,138			8,365		5.9	%	142,965			9,449		6.6	%
Allowance for loan losses	(1,700		)					(1,159		)					(920		)
Cash and due from banks	4,122							3,748							3,667
Bank premises and equipment	3,694							3,869							3,861
Other assets	7,464							6,025							5,990
Total assets	$	145,391						$	153,621						$	155,563
LIABILITIES AND STOCHOLDERS’ EQUITY
Interest bearing demand deposits	13,202			71		0.5	%	11,925			76		0.6	%	11,431			85		0.7	%
Savings deposits	24,188			169		0.7	%	22,579			198		0.9	%	18,438			237		1.3	%
Time deposits	58,816			1,732		2.9	%	61,069			1,858		3.0	%	74,238			2,967		4.0	%
Borrowings	16,202			918

FULTON BANCSHARES CORP 10-K/A