10-K

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

x	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2005.
	or
o	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from              to

Fulton Bancshares Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania	33-85626	25-1598464
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

100 Lincoln Way East, McConnellsburg, Pennsylvania	17233
(Address of principal executive offices)	(Zip Code)

(717) 485-3144
(Registrant’s telephone number, including area code)

Securities registered under Section 12 (b) of the Exchange Act:
None

Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $.625 par value

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x

Indicate by check mark if the registrant is not required to file report pursuant to Section 13 or 15(d) of the Act. Yes  o  No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o     Accelerated filer o     Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.    Yes  o  No  x

The aggregate market value of voting stock held by non-affiliates of the registrant is $18,159,311 as of December 31, 2005.

The number of shares of the Issuer’s common stock, par value $.625 per share, outstanding as of December 31, 2005 was 492,790.

FULTON BANCSHARES CORPORATION

INDEX

Part I
Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 8.	Financial Statements and Supplementary Data	14
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	14
Item 9A.	Controls and Procedures	14
Item 9B.	Other Information	14
Part III
Item 10.	Directors and Executive Officers of the Registrant	15
Item 11.	Executive Compensation	16
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20
Item 13.	Certain Relationships and Related Transactions	21
Item 14.	Principal Accountant Fees and Services	21
Part IV
Item 15.	Exhibits, Financial Statement Schedules	23
Signatures		24

2

PART I

Item 1. Business.

Description of the Corporation

Fulton Bancshares Corporation (the “Corporation”), a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Corporation was incorporated on March 29, 1989 under the business corporation law of the Commonwealth of Pennsylvania for the purpose of becoming a bank holding company. Since commencing operations, the Corporation’s business has consisted primarily of managing and supervising the Fulton County National Bank and Trust Company (the “Bank”), and its principal source of income has been dividends paid by the Bank. The Corporation has two wholly-owned subsidiaries - the Bank, and Fulton County Community Development Corporation (“FCCDC”), which 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. FCCDC had no activity in 2004 and 2005.

The principal executive office of the Corporation is located at 100 Lincoln Way East, McConnellsburg, Fulton County, Pennsylvania 17233. The telephone number of the Company is (717) 485-3144.

Description of the Bank

The Bank was organized on February 24, 1887 as a Pennsylvania state chartered banking institution. It converted to a national banking association on September 5, 1933, and is presently under the supervision of the Office of the Comptroller of the Currency (the “Comptroller”). The Bank is a member of the Federal Reserve System. Customers’ deposits held by the Bank are insured by the FDIC to the maximum extent permitted by law. The Bank’s legal headquarters are located at 100 Lincoln Way East, McConnellsburg, Fulton County, Pennsylvania 17233.

The Bank engages in a full service commercial and consumer banking business, including the acceptance of time and demand deposits and the making of secured and unsecured commercial and consumer loans, and offers trust services through its affiliation with Sentry Trust Company. The Bank’s primary service area is located in Fulton County, Pennsylvania. Specifically, the main office of the Bank is located in McConnellsburg, the county seat. Within the defined service area of the Bank’s main office, the banking business is highly competitive. In addition to local community banks, the Bank competes with regionally-based commercial banks, all of which have greater assets, capital and lending limits. The Bank also competes with savings banks, savings and loan associations, money market funds, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and with the issuers of commercial paper and other securities.

In order to compete effectively in this market and to obtain business from individuals, small and medium-sized businesses and professionals, the Bank offers specialized services such as extended hours of operation and personal and business checking accounts at competitive rates, in addition to traditional commercial and consumer banking and trust services. The Bank accepts time, demand, and savings deposits, statement savings accounts, NOW accounts, money market accounts, certificates of deposit, and club accounts. The Bank makes secured and unsecured commercial, consumer, mortgage, and construction loans. Consumer loans include revolving credit lines. The following support services are offered by the Bank to make financial management more efficient and convenient for its customers: bank by mail, direct deposit, drive-in banking, Federal Tax Depository, automatic teller machines, night deposit services, notary public services, payroll deduction plan, bond coupon collections, safe deposit boxes, signature guarantees, travelers checks, cashiers checks, treasury securities, U.S. Savings Bonds, individual retirement accounts

3

(IRA’s), and utility and municipal payments. The Bank offers its customers access to discount brokerage services, mutual funds, and other alternative investment products through its affiliation with Sentry Trust Company. The Bank also offers telephone and internet banking to its customers. The Bank expects to experience modest growth in 2006.

Supervision and Regulation—The Corporation

The Corporation is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and to supervision by the Federal Reserve Board. The Bank Holding Company Act requires the Corporation to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any institution, including another bank. The Bank Holding Company Act prohibits acquisition by the Corporation of more than five percent (5%) of the voting shares of, or interest in, all or substantially all of the assets of any bank located outside of Pennsylvania unless such acquisition is specifically authorized by the laws of the state in which such bank is located.

A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in nonbanking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Corporation is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Corporation and any or all of its subsidiaries.

Federal law prohibits acquisitions of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the Management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. A person or group holding revocable proxies to vote 25% or more of the stock of a bank or its holding company would presumably be deemed to control the institution for purposes of this federal law.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower.

The Federal Reserve Board permits bank holding companies to engage in activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Corporation does not at this time engage in any of the permissible activities described below, nor does the Corporation have any current plans to engage in these activities in the foreseeable future.

Legislation and Regulatory Changes

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Corporation and its subsidiary, the Bank. Certain changes of potential significance to the Corporation are discussed below.

4

Recent Legislation

USA PATRIOT ACT

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering

SARBANES-OXLEY ACT

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because the Corporation’s common stock is registered with the SEC, it is currently subject to this Act.

AMERICAN JOBS CREATION ACT

In 2004, the American Jobs Creation Act was enacted as the first major corporate tax act in years. The act addresses a number of areas of corporate taxation including executive deferred compensation restrictions. The impact of the act on the Corporation and the Bank is not expected to be significant.

Supervision and Regulation—The Bank

The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. The operations of the Bank are also subject to regulations of the Comptroller, the Federal Reserve Board, and the FDIC. The primary supervisory authority of the Bank is the Comptroller, which regulates and examines the Bank. The Comptroller has authority to prevent national banks from engaging in unsafe or unsound practices in conducting their businesses.

Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations and the establishment of branches. Under Pennsylvania law, the Bank may establish or acquire branch offices, subject to certain limitations, in any county of the state. National bank branches, however, may be established within the permitted area only after approval by the Comptroller.

5

As a subsidiary bank of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by the Bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary Bank maintains a correspondent relationship.

FDIC

Under the Federal Deposit Insurance Act, the Comptroller possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or would otherwise be in violation of the law. Moreover, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (“FIRA”) generally expanded the circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency, restricts lending by a bank to its executive officers, directors, principal shareholders or related interests thereof and restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts management personnel from borrowing from another institution that has a correspondent relationship with their bank.

Additionally, FIRA requires that no person may acquire control of a bank unless the appropriate federal supervisory agency has been given sixty (60) days prior written notice and within that time has not disapproved the acquisition or otherwise extended the period for disapproval. Control for purposes of FIRA, means the power, directly or indirectly, to direct the management or policies or to vote twenty-five percent (25%) or more of any class of outstanding stock of a financial institution or its respective holding company. A person or group holding revocable proxies to vote twenty-five percent (25%) or more of the outstanding common stock of a financial institution or holding company such as the Company, would presumably be deemed to control the institution for purposes of FIRA.

CRA

Under the Community Reinvestment Act of 1977, as amended (“CRA”), the Comptroller is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the Comptroller make publicly available the evaluation of a bank’s record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation will include a descriptive rating and a statement describing the basis for the rating, which is publicly disclosed.

BSA

Under the Bank Secrecy Act (“BSA”), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $ 10,000 or multiple transactions of which the Bank is aware in any one day that aggregate in excess of $ 10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report.

6

FDICIA

Capital Categories

In December of 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) became law. Under FDICIA, institutions must be classified, based on their risk-based capital ratios into one of five defined categories, as illustrated below:

	Total Risk— Based Ratio		Tier 1 Risk-Based Ratio		Tier 1 Leverage Ratio		Under a Capital Order or Directive
CAPITAL CATEGORY
Well capitalized		³10.0		³6.0		³5.0		No
Adequately capitalized		³ 8.0		³4.0		³4.0		*
Undercapitalized		<8.0		<4.0		<4.0		*
Significantly Undercapitalized		<6.0		<3.0		<3.0
Critically Undercapitalized		< 2.0

*3.0 for those banks having the highest available regulatory rating.

As of December 31, 2005, the most recent notification from the Comptroller of the Currency categorizes the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations.

FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits.

In addition to banking and securities laws, regulations and regulatory agencies, the Company also is subject to various other laws, regulations, and regulatory agencies throughout the United States. Furthermore, various proposals, bills, and regulations have been and are being considered in the United States Congress, and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Company. It cannot be predicted whether new legislation or regulations will be adopted and, if so, how they would affect the Company.

References under the caption “Supervision and Regulation” to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto.

Future Legislation

Changes to the laws and regulations in the state where the Corporation and the Bank do business can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. The Corporation cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Corporation.

7

Effects of Inflation

Inflation has some impact on the Corporation’s, the Bank’s, and FCCDC’s operating costs. Unlike many industrial companies, however, substantially all of the Bank’s and FCCDC’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s, the Bank’s, and FCCDC’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.

Monetary Policy

The earnings of the Corporation, the Bank, and FCCDC are affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. An important function of the Federal Reserve System is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits.

The Bank is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation, the Bank, and FCCDC cannot be predicted.

Environmental Regulation

There are several federal and state statutes which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the Bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the Bank. Currently, the Corporation, the Bank, and FCCDC are not party to any pending legal proceeding pursuant to any environmental statute, nor is the Corporation, the Bank, or FCCDC aware of any circumstances which may give rise to liability under any such statute.

Concentrations

The Bank is neither dependent upon deposits from nor exposed to loan concentrations to a single customer, the loss of which would have a material adverse effect on the financial condition of the Bank. Although the Bank has a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon the agribusiness economic sector (approximately 20% of loan portfolio and107% of stockholders’ equity as of December 31, 2005).

Competitive Business Conditions

The Corporation’s current primary service area is generally characterized as Fulton County, Pennsylvania. The bank competes with local commercial banks as well as numerous regionally based commercial banks, all of which have assets, capital, and lending limits larger than the bank. The bank competes with respect to its lending activities as well as in attracting demand, savings, and time deposits with other commercial banks, savings banks, regulated small loan companies, credit unions and other money market funds. The business of the bank is not seasonal in nature.

8

Employees

As of December 31, 2005, the Corporation through its subsidiary had 50 full-time equivalent employees. None of these employees are represented by a collective bargaining agreement, and the Company believes it enjoys good relations with its personnel.

Available Information

The Corporation’s reports, proxy statements and other information are available for inspection and copying at the Public Reference Room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC, 20549, at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Corporation is an electronic filer with the Commission. The Commission maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission’s website is http://www.sec.gov.

Upon a stockholder’s written request, a copy of the Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as required to be filed with the SEC pursuant to Securities Exchange Act Rule 13a-1, may be obtained, without charge, from Debra Goodling, Fulton Bancshares Corporation, 100 Lincoln Way East, McConnellsburg, PA 17233. The Corporation has not yet made arrangements to have these filings available on its website at www.fnbctc.com.

Important Factors relating to Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statement. Further, such forward- looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

The business and profitability of a financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies. The actions and policy directives of the FRB determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. FRB policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies, both foreign and domestic, are not predictable and are beyond the Corporation’s control. In addition, these conditions and policies can impact the Corporation’s customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Company operates, which can have an adverse impact on the Corporation’s ability to maintain its revenue streams.

As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within

9

its risk management processes. This risk can be accentuated by volatility and reduction in liquidity and those markets which in turn can impact the Corporation’s ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on its ability to access the financial markets for its funding needs.

As noted in “Supervision and Regulation”, the Corporation is regulated by and subject to various regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation’s profitability.

The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or lack of compliance with the procedures on which they rely either within the Corporation or within the broader financial systems infrastructure.

As with any financial institution, the Corporation and its affiliates are also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation’s services. Ultimately, the Corporation’s businesses and their success are dependent on the Corporation’s ability to attract and retain high quality employees.

Item 1A.Risk Factors

The Corporation is subject to the conditions established in the Federal Reserve Bank’s Memorandum of Understanding (MOU) and the Office of the Comptroller of the Currency’s (OCC) Stipulation and Consent Order.

The Corporation and the Bank are required to comply with the MOU and the Consent Order or face monetary penalties and/or closure of the institution’s banking operation. The direct costs of compliance with the Consent Order and the MOU are legal and consulting fees, higher FDIC insurance rates, increased examination fees, and staffing costs, which all decrease earnings and reduce the capital base. Other costs include significant dedication of resources that shift the focus of the organization away from growing the customer base to ensuring that past problems of noncompliance with laws and regulations are addressed and controls are put in place to prevent future noncompliance. In addition, the Corporation and the Bank are required to maintain higher levels of capital than other financial institutions without similar regulatory issues. The management team has been actively engaged in addressing the specific issues raised in the MOU and the Consent Order but has not yet received written documentation from its regulators to indicate that the actions taken are sufficient.

The Corporation’s business is subject to interest rate risk and variations in interest rates may negatively affect its financial performance.

Changes in the interest rate environment may reduce profits. The primary source of income for the Corporation is the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect the Corporation’s net interest spread, asset quality, loan origination volume and overall profitability.

10

The Corporation is subject to lending risk.

As of December 31, 2005, approximately 20% of the Corporation’s loan portfolio consisted of agricultural and agricultural related loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because the Corporation’s loan portfolio contains a significant number of agricultural and agricultural related loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation’s allowance for possible loan losses may be insufficient.

The Corporation maintains an allowance for possible loan losses, which is a reserve established through a provision for possible loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible loan losses, the Corporation will need additional provisions to increase the allowance for possible loan losses. Any increases in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation’s profitability depends significantly on economic conditions in Fulton County, Pennsylvania.

The Corporation’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in Fulton County, Pennsylvania. The local economic conditions in this area has a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.

11

There is no assurance that the Corporation will be able to successfully compete with others for business.

The Corporation competes for loans, deposits and investment dollars with other regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders. Many competitors have substantially greater resources than the Corporation does, and operate under less stringent regulatory environments. The differences in resources and regulations may make it harder for the Corporation to compete profitably, reduce the rates that it can earn on loans and investments, increase the rates it must offer on deposits and other funds, and adversely affect its overall financial condition and earnings.

The Corporation’s ability to pay dividends depends primarily on dividends from the Bank, which is subject to regulatory limits.

The Corporation is a bank holding company and its operations are conducted by the Bank. Its ability to pay dividends depends on its receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of the Bank to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. The payment of dividends has been temporarily suspended without prior OCC approval and there is no assurance that the Bank will be permitted to pay dividends in the future. The Corporation’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.

The Corporation may not be able to attract and retain skilled people.

The Corporation’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

The Corporation is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the Corporation’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Corporation they may result in significant financial liability and/or adversely affect the market perception of the Corporation and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

The main administrative office of the Bank, which also includes a drive-up facility, is located in McConnellsburg, Pennsylvania. The Bank currently has seven branch offices one of which is located at Penn’s Village on Route 16 at the east end of McConnellsburg, Pennsylvania. This branch office opened

12

on May 11, 1981. In addition, the Bank installed an ATM at the Penn’s Village Shopping Center in March, 1989.

The Bank also serves the communities surrounding the Pennsylvania/Maryland border through its branch office located in Warfordsburg, Pennsylvania. This branch opened for business on April 4, 1983. On the same day, a third branch office was opened in Hustontown, Pennsylvania, which services northern Fulton County. Finally, to service the southern end of Huntington County, the Bank acquired a branch in Shade Gap, Pennsylvania, on September 26, 1988.

On July 15, 1999, the Bank opened a branch, including an ATM, at the Sandy Ridge Mall in Orbisonia, PA. To service the western portion of Franklin County, the Bank opened a branch, including an ATM, on Route 30 in St. Thomas, PA on November 15, 1999. On February 11, 2002, the Bank opened a branch in Breezewood, Pennsylvania, including an ATM, to service eastern Bedford County.

On January 7, 1997 ATM’s were opened at the Warfordsburg and Hustontown branches. In June, 1998 the Bank opened an ATM at the Shade Gap branch and added an ATM to its main office drive-up facility. The main office, Warfordsburg, Hustontown, Orbisonia and Breezewood branches are owned by the Bank. The Penn’s Village branch is rented. The Shade Gap branch is still owned by the Bank, however the branch and ATM are closed.

Item 3.Legal Proceedings.

Fulton Bancshares Corporation is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of the Corporation’s management, Fulton Bancshares Corporation has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Corporation’s operations or financial position.

Item 4.Submission of Matters to Vote of Security Holders.

Not applicable.

PART II

Item 5.Market for Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of Equity Securities.

The Corporation’s common stock is traded on a limited basis in the local over-the-counter market under the symbol FULB. As of December 31, 2005, the approximate number of shareholders of record was 562. Market prices at the end of each quarter are based on the latest sales prices.

The stock market analysis and dividends for 2005 and 2004 on page 51 of the annual shareholders report for the year ended December 31, 2005 is incorporated herein by reference.

Dividend restrictions are detailed in Note 14 of the annual shareholders report and are incorporated herein by reference.

The Corporation has no securities authorized for issuance under any equity compensation plans.

The Corporation made no sales of unregistered securities within the past three yearsnor has the Corporation made any repurchases within the past year.

Item 6.Selected Financial Data.

The selected five-year financial data on page 31 of the annual shareholders’ report for the year ended December 31, 2005 is incorporated herein by reference.

13

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Information required by Item 7 is included in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, on pages 35 through 51of the annual shareholders’ report which are incorporated herein by reference.

Item 7A.Quantitative and Qualitative Disclosure About Market Risk.

Information required by Item 7 is included in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, on page 50of the annual shareholders’ report which are incorporated herein by reference.

Item 8.Financial Statements and Supplementary Data.

The financial statements and supplementary data, some of which is required under Guide 3 (statistical disclosures by bank holding companies) are shown on pages 3 through 34 of the annual shareholders’ report for the year ended December 31, 2005 and are incorporated herein by reference. Additional required schedules are included in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, on pages 35 through 51of the annual shareholders’ report which are incorporated herein by reference.

Item 9.Disagreements on Accounting and Financial Disclosures.

Not applicable.

Item 9A.Controls and Procedures.

Disclosure Controls and Procedures

The Corporation’s Principal Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2005. Based on such evaluation, such officers have concluded that, as of December 31, 2005, the Corporation’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic filings under the Exchange Act.

Internal Controls Over Financial Reporting

The Corporation made no significant changes in its internal controls or in other factors that could significantly affect these controls during the fourth quarter of the year ended December 31, 2005, including any corrective actions with regard to significant deficiencies and material weaknesses.

Item 9B.Other Information.

Not applicable.

14

PART III

Item 10. Directors and Executive Officers of the Registrant

The Corporation has adopted a code of ethics that applies to all directors, officers, and employees (including its chief executive officer, chief financial officer, and any person performing similar functions). The Corporation has filed a copy of this Code of Ethics as Exhibit 14 to its Form 10-K for fiscal year ended December 31, 2003. The Corporation has also made the Code of Ethics available on its website at http://www.fcnbtc.comhttp://www.fcnbtc.com.

Principal Officers of the Corporation

The following table provides information, as of December 31, 2005, about the Corporation’s principal officers:

				Principal Occupation for the Past Five Years
				And Position Held with Fulton Bancshares
	Name	Age		and Subsidiaries
Martin R. Brown(1)			53	Chairman of the Board of the Corporation and the Bank. President, M. R. Brown Funeral Home, Inc., President, M. R. Brown Management, Inc., Managing Partner, Sandy Ridge Market, LLC
Clair R. Miller (1)			69	Vice Chairman of the Board of the Corporation and the Bank. President, Clair R. Miller, Inc. and President, Fairview Estates, Inc.
George W. Millward (1)			56	Interim President and Chief Executive Officer of the Corporation and the Bank. President, Millward Consulting, LLC
Debra A. Goodling (1)			47	Interim Chief Financial Officer of the Corporation and the Bank. Former President, Shipley Stores, LLC, former Chief Financial Officer, Shipley Group, LLC.
Alice Clark			43	Vice President and Secretary of the Corporation and the Bank.

(1)Messrs. Brown, Miller, Millward and Ms. Goodling are not employees of the Corporation.

15

Information about Continuing Directors

		Director of
		Corporation		Principal Occupation for the Past Five
		and Bank		Years and Position Held with the
	Name and Age	Since		Corporation and the Bank
Martin R. Brown, 53			2003/2003	President, M. R. Brown Funeral Home, Inc. President, M. R. Brown Management, Inc., Managing Partner, Sandy Ridge Market, LLC, Chairman of the Board of Directors Of the Corporation and the Bank
David L. Seiders, 66			1996/1996	Farmer
Robert L. Thomas, 51			2003/2003	Managing Partner, Thomas Brothers Family Partnership, LLC, Franklin County Commissioner, Chairman of the Audit Committee
Cecil B. Mellott, 69			1989/1986	President, Mellott Wood Preserving, Inc., President, MELCO Lumber Company, Inc.
Clair R. Miller, 69			1997/1997	President, Clair R. Miller, Inc., President, Fairview Estates, Inc., Vice Chairman of The Board of Directors of the Corporation And the Bank
Robert C. Snyder, 74			1989/1969	Retired Insurance Agent
Ellis L. Yingling, 73			1989/1974	Fulton County Commissioner and Retired Service Station Owner
Stanley J. Kerlin, Esq., 51			2005/2005	Attorney at Law

The Corporation has an Audit Committee comprised of directors who meet the NASDAQ standards for independence. The Audit Committee operates under a written charter adopted by the Board of Directors. Members of the Audit Committee, during 2005, were Robert L. Thomas, Chairman, Robert C. Snyder, Ellis L. Yingling, and Stanley J. Kerlin, Esq. The principal duties of the Audit Committee, as set forth in its charter, include reviewing significant audit and accounting principles, policies and practices, reviewing performance of internal auditing procedures, reviewing reports of examination received from regulatory authorities, and recommending, annually, to the Board of Directors the engagement of an independent certified public accountant. The Corporation has no “audit committee financial expert”. The Corporation has not identified a potential board member that would qualify as an “audit committee financial expert” at this time. However, the Board of Directors believes that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the committee. The committee has the authority to engage legal counsel or other experts or consultants as it deems appropriate to carry out its responsibilities.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’s directors, executive officers and shareholders who beneficially own more than 10% of the Corporation’s outstanding equity stock to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Corporation with the Securities and Exchange Commission. Based on a review of copies of the reports we received and on the statements of the reporting persons, we believe that all Section 16(a) filing requirements were complied with in a timely fashion during 2005.

Item 11. Executive Compensation

The following table summarizes the total compensation for each of the last three years for the Corporation’s Chief Executive Officers:  Clyde H. Bookheimer served through March 4, 2005; George W. Millward was hired as Interim President and CEO as of July 1, 2005. Between the time that Clyde H.

16

Bookheimer left the Corporation and George W. Millward was hired, David W. Cathell was the acting senior executive officer for the Corporation, except during a brief period of time in April of 2005, when Robert J. McCormack was consulting with the Corporation and seeking approval to become CEO.

											Long Term Compensation
											Awards			Payouts
											Securities
							Other				Underlying
	Annual Compensation						Annual				Options/			LTIP			All Other
Name and Principal Position	Year	Salary		Bonus			Compensation				SARs			Payouts			Compensation
Clyde H. Bookheimer	2005	$	28,080		$	0		$	2,000	(1)		$	0		$	0		$	15,937	(2)
President and Chief Executive Officer	2004	135,200			0			9,235		(1)		0			0			61,911		(2)
	2003	132,600			0			937		(1)		0			0			80,774		(2)
David W. Cathell	2005	59,621			0			11,444		(3)		0			0			0
Chief Financial Officer
Robert J. McCormack	2005	0			0			15,270		(3)		0			0			0
Consultant
George W. Millward	2005	0			0			165,772		(4)		0			0			0
Interim President and Chief
Executive Officer

(1)Other Annual Compensation for Mr. Bookheimer includes use of bank owned vehicle and board fees.

(2)All Other Compensation includes retirement plan and supplemental retirement plan contributions.

(3)Other Annual Compensation for Messrs. Cathell and McCormack is consulting fees.

(4)Other Annual Compensation for Mr. Millward includes $ 1,093 in reimbursement for meals, $ 6,619 in reimbursement for lodging, $ 5,066 in reimbursement for travel, and $153,000 in consulting fees.

Board Compensation Committee Report on Executive Compensation

The Corporation seeks to offer competitive compensation opportunities for all employees based on the individual’s contribution and person performance. The Compensation Committee, comprised of three non-employee directors, administers the compensation program. The Compensation Committee also seeks to establish a fair compensation policy to govern executive officers’ base salaries and bonus plans and to attractive and motivate competent, dedicated, and ambitious managers whose efforts will enhance the Corporation’s products and services, resulting in improved profitability.

The Compensation Committee annually reviews the compensation of the Bank’s President and Chief Executive Officer.

The Board of Directors does not deem Section 162(m) of the Internal Revenue Code to be applicable to the Corporation at this time.

Chief Executive Officer Compensation

On March 4, 2005, the Bank terminated its President, Clyde H. Bookheimer. The Boards of Directors of Fulton Bancshares Corporation and The Fulton County National Bank and Trust Company entered into a Settlement Agreement and General Release with the former President, which became effective on June 15, 2005. Please see Note 14 in the financial statements (Exhibit 13) for a summary of the terms of the Settlement Agreement.

In concert with the termination of the President and CEO, the Board of Directors entered a search process which culminated in the hiring of George W. Millward as Interim President and CEO on July 1, 2005, under a contract which pays him $1,500 per day for each day he is engaged on Bank business and reimburses him for normal expenses of travel, lodging and meals. Mr. Millward was approved by the Office

17

of the Comptroller of the Currency (OCC) and Federal Reserve Bank as required under the Consent Order and Memorandum of Understanding (MOU). He will continue to serve in the role of Interim President and CEO of the Corporation and the Bank until the consummation of the merger with Franklin Financial.

Additionally, the former Chief Financial Officer, David W. Cathell, resigned effective September 30, 2005. Debra A. Goodling was hired as Interim CFO as of October 24, 2005, under a contract which pays her $9,500 per month and reimburses her for normal expenses of travel, lodging and meals. Ms. Goodling was approved by the OCC and Federal Reserve Bank as required under the Consent Order and MOU.

The Board of Directors met as a whole to handle the above situations. The Compensation Committee of the Board did not meet separately during 2005. Members of the Board of Directors who served as Compensation Committee were Cecil B. Mellott, Clair R. Miller, Robert C. Snyder, Ellis L. Yingling, Martin R. Brown, David L. Seiders, Robert L. Thomas, and Stanley J. Kerlin, Esq.

Deferred Compensation and Other Benefit Programs

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

(1)The Supplemental Executive Retirement Plan is funded by single premium life insurance on certain Corporation executives, with the Corporation as beneficiary. Payments to the executives will not begin until their retirement, except in the case of a change of control.

(2)The Director Emeritus Program, funded by life insurance, allowed the Corporation to reward directors for longevity of service to the Board. Directors who qualified were eligible at age 75 to receive $4,000 annually for up to 10 years under this program. No additional directors will be added to the Directors Emeritus program.

(3)The Director Deferred Compensation Plan, also funded by life insurance, allows 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.

18

Directors’ Compensation

The directors of the Corporation do not receive any additional compensation for their services, beyond the compensation paid to them as directors of the Bank. All directors of the Corporation are directors of the Bank. Clyde H. Bookheimer, who was also a salaried officer of the Corporation and the Bank before his resignation, received $2,000 in fees for attendance at board meetings in the first quarter of 2005.

In total, the non-employee directors of the Corporation and the Bank received $58,667 for all services rendered in 2005.

Shareholder Return Performance Graph

A line graph is set forth below. The graph compares the yearly changes in the cumulative total shareholder return on the Corporation’s common stock against the cumulative total return of the NASDAQ Stock Index and the Peer Group Index for the period of five fiscal years commencing January 1, 2000 and ending December 31, 2005. The shareholder return shown on the graph below is not necessarily indicative of future performance.

Fulton Bancshares Corporation

	Period Ending
Index	12/31/00	12/31/01	12/31/02	12/31/03	12/31/04	12/31/05
Fulton Bancshares Corporation	100.00	100.22	139.50	155.79	132.92	119.47
NASDAQ Composite	100.00	79.18	54.44	82.09	89.59	91.54
SNL All-OTC-BB and Pink Banks Index	100.00	104.80	130.37	179.12	213.86	231.99

19

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Beneficial Owners of the Corporation’s Stock

Principal Owners

The following table sets forth, as of December 31, 2005, the name and address of each person who owns of record or who is known by the Board of Directors to be the beneficial owner of more than five percent of the Corporation’s outstanding common stock, the number of shares beneficially owned by such persons and the percentage of the Corporation’s outstanding common stock so owned.

Name and Address	Shares Beneficially Owned (1)		Percentage of Outstanding Common Stock Beneficially Owned
Raleigh V. and Inez G. Barnett		33,938		6.89	%
Waterfall, PA 16689
CEDE & Co.		164,754		33.43	%
New York, NY 10274

(1)See footnote below for the definition of “beneficially owned”.

Beneficial Ownership of Officers and Directors

The following table sets forth as of December 31, 2005, the amount and percentage of the common stock of the Corporation beneficially owned by each director and all officers and directors of the Corporation as a group.

Name of Individual Or Identity of Group	Amount and Nature of Beneficial Ownership(1)(2)			Percentage of Class (3)
Cecil B. Mellott		16,557	(4)		3.36	%
Clair R. Miller		5,000	(5)		1.01	%
Robert C. Snyder		6,000			1.22	%
Ellis L. Yingling		8,000	(6)		1.62	%
Martin R. Brown		2,900	(7)		—
David L. Seiders		1,178			—
Robert L. Thomas		500	(8)		—
Stanley J. Kerlin, Esq.		1,700	(9)		—
All Officers and Directors as A Group (9 persons)		41,857			8.49	%

(1)The securities beneficially owned by an individual are determined in accordance with the definitions of “beneficial ownership” set forth in the General Rules and Regulations of the Securities and Exchange Commission and may include securities owned by or for the individual’s spouse and minor children and any other relative who has the same home, as well as securities that the individual has, or shares, voting or investment power or has the right to acquire beneficial ownership within 60 days after December 31, 2005. Beneficial ownership may be disclaimed as to certain of the securities.

(2)Information furnished by the directors, officers and the Corporation.

(3)Less than 1% unless otherwise indicated.

(4)Includes 2,779 shares held individually by Mr. Mellott and 13,778 shares held jointly with his spouse.

(5)Includes 660 shares held individually by Mr. Miller and 4,340 shares held jointly with his spouse.

(6)Includes 1,936 shares held individually by Mr. Yingling and 6,064 shares held jointly with his spouse.

(7)Includes 700 shares held individually by Mr. Brown and 2,200 shares held jointly with his spouse.

(8)Includes 400 shares held individually by Mr. Thomas and 100 shares held jointly with his brother.

(9)Includes 1,500 shares held individually by Mr. Kerlin and 200 shares held individually by his sons.

20

Item 13.Certain Relationships and Related Transactions

Certain Transactions

There have been no material transactions between the Corporation and the Bank, nor any material transactions proposed, with any director or executive officer of the Corporation and the Bank, or any associate of the foregoing persons. The Corporation and the Bank have had and intend to continue to have banking and financial transactions in the ordinary course of business with directors and officers of the Corporation and the Bank and their associates on comparable terms and with similar interest rates as those prevailing from time to time for other customers of the Corporation and the Bank.

Total loans outstanding from the Corporation and the Bank at December 31, 2005, to the Corporation’s and the Bank’s officers and directors as a group, and to members of their immediate families and companies in that they had an ownership interest of 10% or more was $4,533,652 or approximately 30.42% of the total equity capital of the Bank. 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.

Item 14.Principal Accountant Fees and Services

Aggregate fees billed to Fulton Bancshares Corporation and its subsidiaries by Smith Elliott Kearns & Company, LLC for services rendered are presented below:

	Years Ended December 31,
	2005			2004
Audit fees		$	41,776		$	39,932
Audit related fees		12,190			12,730
Tax fees		7,980			5,025
All other fees		9,983			4,135

Audit Fees include fees billed for professional services rendered for the audit of annual financial statement and fees billed for the review of financial statements included in Fulton Bancshares Corporation Forms 10-Q or services that are normally provided by Smith Elliott Kearns & Company, LLC in connection with the statutory and regulatory filings or engagements.

Audit related fees include fees billed for assurance and related services by Smith Elliott Kearns & Company, LLC that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under the Audit fees section of the table above. These include fees for ACH and trust audits and agreed upon procedures.

Tax fees include fees billed for professional services rendered by Smith Elliott Kearns & Company, LLC for tax compliance, tax advice, and tax planning. These include preparation of federal and state tax returns.

All other fees include fees billed for products and services provided by Smith Elliott Kearns & Company, LLC, other than the services reported under the Audit fees, Audit related fees, or Tax fees sections of the table above. These include fees for services related to the Bank’s employee benefit programs.

The Audit Committee has a policy for the pre-approval of services provided by the independent auditors. The policy requires the Audit Committee to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit related services, tax services, and other services. Under the policy, pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case by

21

case basis. For each proposed service, the independent auditor is required to provide detailed back-up documentation at the time of approval. None of the services related to the Audit related fees, Tax fees, or All other fees described above was approved by the Audit Committee pursuant to the waiver of pre-approval provisions set forth in applicable rules of the SEC. Smith Elliott Kearns & Company, LLC assisted the Corporation and the Bank with the preparation of their federal and state tax returns, and provided assistance in connection with regulatory matters, charging the Bank for such services at the customary hourly rates. These non-audit services were approved by the Corporation’s and the Bank’s Board of Directors after due consideration of the effect of the performance thereof on the independence of the accountants and after the conclusions of the Board of Directors of the Corporation and the Bank that there was no effect on the independence of the accountants.

22

PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)  (1)—List of Financial Statements. The following consolidated financial statements of Fulton Bancshares Corporation and its subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 2005, are incorporated by reference in Item 8:

Consolidated balance sheets—December 31, 2005 and 2004

Consolidated statements of income—Years ended December 31, 2005, 2004, and 2003

Consolidated statements of stockholders’ equity—Years ended December 31, 2005, 2004, and 2003

Consolidated statements of cash flows—Years ended December 31, 2005, 2004, and 2003

Notes to consolidated financial statements—December 31, 2005

       (2) List of Financial Statement Schedules. All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(b) Listing of Exhibits

3	(i)	Articles of Incorporation (Incorporated by reference to the registrant’s Form 10-K/A for the year ended December 31, 2004).
	(ii)	Bylaws (Incorporated by reference to the registrant’s Form 10-K/A for the year ended December 31, 2004).
10.1	Salary Continuation Agreement/Supplemental Executive Retirement Plan for the Chief Executive Officer: Clyde H. Bookheimer (Incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002).
10.2	Director Deferred Compensation Plan Agreement applicable to Cecil B. Mellott, David L. Seiders, Clair R. Miller, Ellis L. Yingling, Martin R. Brown and Robert C. Snyder (Incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002).
10.3	Director Emeritus Retirement Agreement applicable to Raleigh Barnett, K.G. Richards and Merill Kerlin (Incorporated by reference to the registrant’s Form 10-K for the year ended December 31, 2002).
10.4	Salary Continuation Agreement/Supplemental Executive Retirement Plan for Alice Clark, Vice President (Incorporated by reference to the registrant’s Form 10-K/A for the year ended December 31, 2004).
10.5	Survivor Income Agreement for Sharon Sowers.
10.6	Survivor Income Agreement for Alice Clark.
10.7	Survivor Income Agreement for Neil L. Berkstresser.
13	Annual Report to security holders.
14	Code of Ethics (Incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003).
21	Subsidiaries of the registrant
23	Consent of independent registered public accounting firm
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

23

SIGNATURES

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

	FULTON BANCSHARES CORPORATION
	(Registrant)
	By	/s/ GEORGE W. MILLWARD
		Interim Principal Executive Officer
Dated: March 13, 2006
	By	/s/ DEBRA A. GOODLING
		Interim Chief Financial Officer

In accordance with the requirements of Section 13 or 15(d) of the Securities Act of 1934, this report was signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

	Signature		Title		Date
/S/ DAVID L. SEIDERS		Director		March 13, 2006
David L. Seiders
/S/ CECIL B. MELLOTT		Director		March 13, 2006
Cecil B. Mellott
/S/ ROBERT C. SNYDER		Director		March 13, 2006
Robert C. Snyder
/S/ ELLIS L. YINGLING		Director		March 13, 2006
Ellis L. Yingling
/S/ CLAIR R. MILLER		Director & Vice Chairman		March 13, 2006
Clair R. Miller
/S/ MARTIN R. BROWN		Director & Chairman		March 13, 2006
Martin R. Brown
/S/ ROBERT L. THOMAS		Director		March 13, 2006
Robert L. Thomas
/S/ STANLEY J. KERLIN, ESQ.		Director		March 13, 2006
Stanley J. Kerlin, Esq.

24

EX-10.5

Exhibit 10.5

FULTON COUNTY NATIONAL BANK & TRUST COMPANY

MCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS AGREEMENT is made this 4^th day of August, 2000 by and between The Fulton County National Bank and Trust Company (the “Company”), and Sharon M. Sowers (the ‘Executive”).

INTRODUCTION

To encourage the Executive to remain an employee of the Company, the Company is willing to provide benefits to the Executive’s beneficiary if the Executive dies prior to terminating employment.  The Company will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive’s life.

AGREEMENT

The Executive and the Company agree as follows:

Article 1

Entitlement to Benefit

1.1Pre-Termination Survivor Income Benefit.  If the Executive dies before otherwise terminating employment with the Company, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2.

1.2Disability Continuation.  If the Executive terminates employment due to disability and then dies before recovering from such disability, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2.  Whether the Executive is disabled or has recovered from a disability shall be determined by the Company in its sole discretion.

1.3Suicide.  No benefits shall be payable if the Executive commits suicide within twenty-six months after the date of this Agreement.

Article 2

Survivor Income Benefit

2.1Amount of Benefits.  The survivor income benefit shall be two times base annual salary at the time of death, divided by the Tax Factor. Base annual salary should not exceed $ 117,000 for purposes of this calculation.

2.1.1Tax Factor.  One minus the Company’s marginal income tax rate for the fiscal year in which the Executive’s death occurs.

2.2Form of Benefits.  The survivor income benefit shall be paid to the Executive’s beneficiary in a lump sum within sixty (60) days after the Executive’s death.

Article 3

Beneficiaries

3.1Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive’s lifetime.  The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. if the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive’s surviving spouse, if any, and if none, to the Executive’s surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executive’s estate.

3.2Facility of Payment.  If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 4

Claims and Review Procedures

4.1Claims Procedure.  The Company shall notify the Executive’s beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement.  If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (I) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.

4.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 5

Conversion to Split Dollar

If the Executive voluntarily terminates employment after age 59, unless the Executive elects otherwise by written notice to the Company, the Split Dollar Insurance Agreement attached as the Addendum to this Agreement shall automatically take effect as of the Executive’s termination of employment.  The Company shall take all actions necessary to implement the Split Dollar Insurance Agreement.

Article 6

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.

Article 7

Miscellaneous

7.1Exclusive Agreement/Binding Effect.  This Agreement is the entire agreement between the Company and the Executive, written or oral, related to the Company’s obligation to pay any survivor income benefits to the Executive’s beneficiaries or survivors.  This Agreement supersedes all, prior agreements, understandings and negotiations.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees.

7.2No Guaranty of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

7.3Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under the Agreement.

7.4Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the Commonwealth of Pennsylvania, except to the extent preempted by the laws of the United States of America.

7.5Unfunded Plan.  The beneficiary is a general unsecured creditor of the Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The beneficiary’s rights to such benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and designated beneficiary have no preferred or secured claim.

IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.

EXECUTIVE:	COMPANY
	The Fulton County National Bank and Trust Co.
/S/ Sharon M. Sowers	By:	Clyde H. Bookheimer
Sharon M. Sowers	Title:		President

THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY

SURVIVOR INCOME AGREEMENT

BENEFICIARY DESIGNATION

I designate the following as beneficiary of any death benefits under The Fulton County National Bank and Trust Company Survivor Income Agreement:

Primary:	Ronald J. Sowers
Contingent:	Matthew Sowers and Wyatt Sowers

Note:To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary, in the event of the dissolution of our marriage.

Signature	/S/ Sharon M. Sowers
Date	8/4/00

Accepted by the Company this 4^th day of August, 2000.

By	/S/ Clyde H. Bookheimer
Title	President

SPLIT DOLLAR ADDENDUM TO

MILTON COUNTY NATIONAL BARK & TRUST COMPANY

MCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS ADDENDUM is part of the Survivor Income Agreement between Fulton County National Bank & Trust Company (the “Company”), and Sharon Sowers (the “Executive”).

INTRODUCTION

Under the terms of the Survivor Income Agreement between the Executive and the Company, the parties desire divide the death proceeds of a life insurance policy on the Executive’s life.

Article 1

General Definitions

The following terms shall have the meanings specified.

“Policy” means insurance policy number issued by the Insurer.

Article 2

Policy Ownership/Interests

2.1Company Ownership.  The Company owns the Policy and shall have the right to exercise all incidents of ownership and to receive the Policy values in excess of the Executive’s interest described in Section 2.2.

2.2Executive’s Interest.  The Executive shall have the right to designate the beneficiary of the death proceeds of the Policy in an amount equal to the lesser of (i) two times the most recent base annual salary or (ii) the excess of the total death proceeds over the cash surrender value of the Policy on the day before the Executive’s death.  The Executive shall also have the right to elect and change settlement options that may be permitted for such beneficiaries.

Article 3

Premiums

3.1Premium Payment.  The Company shall pay any premiums due on the Policy.

3.2Imputed Income.  The Company shall then impute income to the Executive in an amount equal to the current term rate for the Executive’s age multiplied by the aggregate death benefit payable to the Executive’s beneficiary.  The “current term rate” is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.

Article 4

Assignment

The Executive may assign without consideration all interests in the Policy and in this Addendum to any person, entity or trust.

Article 5

Insurer

The Insurer shall be bound only by the terms of the Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all persons.  The Insurer shall not be bound by or be deemed to have notice of the provisions of this Addendum.

Article 6

Claims Procedure

6.1Claims Procedure. The Company shall notify the Executive’s beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or non-eligibility for benefits under the Addendum. If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth(1) the specific reasons for such denial, (2) a specific reference to the provisions of the Addendum on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Addendum’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is

expected to be made, and may extend the time for up to an additional ninety-day period..

6.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Addendum on which the decision is based.  If; because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 7

Amendments and Termination

The Company may amend this Addendum at any time prior to the Executive’s death by written notice to the Executive. Either party may terminate this Addendum at any time prior to the Executive’s death by written notice to the other party.

Upon termination of this Addendum, the Executive may purchase the Policy from the Company for an amount equal to the Policy’s cash surrender value as of the date of the termination.

Article 8

Miscellaneous

8.1Binding Effect. This Addendum shall bind the Executive and the Company, their beneficiaries, survivors, executors, administrators and transferee; and any Policy beneficiary.

8.2No Guaranty of Employment.  This Addendum is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

8.3Applicable Law.  The Addendum and all rights hereunder shall be governed by and construed according to the laws of Pennsylvania, except to the extent preempted by the laws of the United States of America.

The parties’ signatures on the Death Benefit Agreement witness their agreement to the terms of this Addendum.

EX-10.6

Exhibit 10.6

FULTON COUNTY NATIONAL BANK & TRUST COMPANY

MCCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS AGREEMENT is made this 14 day of February, 1996, by and between The Fulton County National Bank & Trust Company (the “Company”), and Alice G. Clark (the “Executive”).

INTRODUCTION

To encourage the Executive to remain an employee of the Company, the Company is willing to provide benefits to the Executive’s beneficiary if the Executive dies prior to terminating employment.  The Company will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive’s life.

AGREEMENT

The Executive and the Company agree as follows:

Article 1

Entitlement to Benefit

1.1Pre-Termination Survivor Income Benefit.  If the Executive dies before otherwise terminating employment with the Company, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2.

1.2Disability Continuation.  If the Executive terminates employment due to disability and then dies before recovering from such disability, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2.  Whether the Executive is disabled or has recovered from a disability shall be determined by the Company in its sole discretion.

1.3Suicide.  No benefits shall be payable if the Executive commits suicide within twenty six months after the date of this Agreement.

Article 2

Survivor Income Benefit

2.1Amount of Benefits.  The survivor income benefit shall be two times base annual salary at the time of death, divided by the Tax Factor.  Base annual salary should not exceed $ 82,000 for purposes of this calculation.

2.1.2Tax Factor.  One minus the Company’s marginal income tax rate for the fiscal year in which the Executive’s death occurs.

2.2Form of Benefits.  The survivor income benefit shall be paid to the Executive’s beneficiary in a lump sum within sixty (60) days after the Executive’s death.

Article 3

Beneficiaries

3.1Beneficiary Designations.  The Executive shall designate a beneficiary by filing a written designation with the Company.  The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive’s lifetime.  The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved.  If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive’s surviving spouse, if any, and if none, to the Executive’s surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executive’s estate.

3.2Facility of Payment.  If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Company may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 4

Claims and Review Procedures

4.1Claims Procedure.  The Company shall notify the Executive’s beneficiary in wilting, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement.  If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.

4.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based.  If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 5

Conversion to Split Dollar

If the Executive voluntarily terminates employment after age 59, unless the Executive elects otherwise by written notice to the Company, the Split Dollar Insurance Agreement attached as the Addendum to this Agreement shall automatically take effect as of the Executive’s termination of employment.  The Company shall take all actions necessary to implement the Split Dollar Insurance Agreement.

Article 6

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.

Article 7

Miscellaneous

7.1Executive Agreement / Binding Effect.  This Agreement is the entire agreement between the Company and the Executive, written or oral, related to the Company’s obligation to pay any survivor income benefits to the Executive’s beneficiaries or survivors.  This Agreement supersedes all prior agreements, understandings and negotiations.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees.

7.2No Guaranty of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

7.3Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

7.4Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of Pennsylvania, except to the extent preempted by the laws of the United States of America.

7.5Unfunded Plan.  The beneficiary is a general unsecured creditor of the Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The beneficiary’s rights to such benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Anyinsurance on the Executive’s life is a general asset of the Company to which the Executive and designated beneficiary have no preferred or secured claim.

IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement,

EXECUTIVE:	COMPANY:
/S/ Alice G. Clarke	The Fulton County National Bank & Trust Co.
Alice 0. Clark	By:	/S/ Clyde H. Bookheimer
	Title:	President

SPLIT DOLLAR ADDENDUM TO

FULTON COUNTY NATIONAL BANK & TRUST COMPANY

MCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS ADDENDUM is part of the Survivor Income Agreement between Fulton County National Bank & Trust Company (the “Company”), and Alice Clark (the “Executive”)

INTRODUCTION

Under the terms of the Survivor Income Agreement between the Executive and the Company, the parties desire to divide the death proceeds of a life insurance policy on the Executive’s life.

Article 1

General Definitions

The following terms shall have the meanings specified.

1.1“Insurer” means The Mutual Group Insurance Company.

1.2“Policy” means insurance policy number                          issued by the Insurer.

Article 2

Policy Ownership/Interests

2.1Company Ownership. The Company owns the Policy and shall have the right to exercise all incidents of ownership and to receive the Policy values in excess of the Executive’s interest described in Section 2.2.

2.2Executive’s Interest. The Executive shall have the right to designate the beneficiary of the death proceeds of the Policy in an amount equal to the lesser of (i) two times the most recent base annual salary or (ii) the excess of the total death proceeds over the cash surrender value of the Policy on the day before the Executive’s death.  The Executive shall also have the right to elect and change settlement options that may be permitted for such beneficiaries.

Article 3

Premiums

3.1Premium Payment. The Company shall pay any premiums due on the Policy.

3.2Imputed Income. The Company shall then impute income to the Executive in an amount equal to the current term rate for the Executive’s age multiplied by the aggregate death benefit payable to the Executive’s beneficiary.  The “current term rate” is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.

Article 4

Assignment

The Executive may assign without consideration all interests in the Policy and in this Addendum to any person, entity or trust.

Article 5

Insurer

The Insurer shall be bound only by the terms of the Policy.  Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all persons.  The Insurer shall not be bound by or be deemed to have notice of the provisions of this Addendum.

Article 6

Claims Procedure

6.1Claims Procedure. The Company shall notify the Executive’s beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Addendum.  If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Addendum on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Addendum’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.

6.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Addendum on which the decision is based.  If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 7

Amendments and Termination

The Company may amend this Addendum at any time prior to the Executive’s death by written notice to the Executive.  Either party may terminate this Addendum at any time prior to the Executive’s death by written notice to the other party.

Upon termination of this Addendum, the Executive may purchase the Policy from the Company for an amount equal to the Policy’s cash surrender value as of the date of the termination.

Article 8

Miscellaneous

8.1Binding Effect.  This Addendum shall bind the Executive and the Company, their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.

8.2No Guaranty of Employment.  This Addendum is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

8.3Applicable Law. The Addendum and all rights hereunder shall be governed by and construed according to the laws of Pennsylvania, except to the extent preempted by the laws of the United States of America.

The parties’ signatures on the Death Benefit Agreement witness their agreement to the terms of this Addendum.

BENEFICIARY DESIGNATION

FTJLTON COUNT NATIONAL BANK & TRUST COMPANY

SURVIVOR INCOME AGREEMENT

I designate the following as beneficiary of benefits under the Survivor Income Agreement.

Primary:	Chet Clark
Contingent:	Chet III; Elizabeth; and Sara
	Divided Equally

Note:To name a trust as beneficiary, please provide the name of the trustee and the exact date of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Company.  I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary, in the event of the dissolution of our marriage.

Signature			/S/ Alice G. Clark
Date	2/14/96
Accepted by the Company this 14th dayof February, 1996.
By		/S/ Clyde H. Bookheimer
Title		President		/

EX-10.7

Exhibit 10.7

FULTON COUNTY NATIONAL BANK & TRUST COMPANY

MCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS AGREEMENT is made this 27^th day of March, 1996. by and between The Fulton County National Bank & Trust Company ( the “Company”), and Neil L. Berkstresser (the “Executive”).

INTRODUCTION

To encourage the Executive to remain an employee of the Company, the Company is willing to provide benefits to the Executive’s beneficiary if the Executive dies prior to terminating employment.  The Company will pay the benefits from its general assets, but only so long as one of its general assets is a life insurance policy on the Executive’s life.

AGREEMENT

The Executive and the Company agree as follows:

Article 1

Entitlement to Benefit

1.1Pre-Termination Survivor Income Benefit.  If the Executive dies before otherwise terminating employment with the Company, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2.

1.2Disability Continuation.  If the Executive terminates employment due to disability and then dies before recovering from such disability, the Company shall pay to the Executive’s designated beneficiary the survivor income benefit described in Article 2. Whether the Executive is disabled or has recovered from a disability shall be determined by the Company in its sole discretion.

1.3Suicide.  No benefits shall be payable if the Executive commits suicide within twenty six months after the date of this Agreement.

Article 2

Survivor Income Benefit

2.1Amount of Benefits.  The survivor income benefit shall be one times base annual salary at the time of death, divided by the Tax Factor.  Base annual salary should not exceed $ 38,000 for purposes of this calculation.

2.1.2Tax Factor.  One minus the Company’s marginal income tax rate for the fiscal year in which the Executive’s death occurs.

2.2Form of Benefits.  The survivor income benefit shall be paid to the Executive’s beneficiary in a lump sum within sixty (60) days after the Executive’s death.

Article 3

Beneficiaries

3.1Beneficiary Designations.  The Executive shall designate a beneficiary by filing a written designation with the Company.  The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive’s lifetime.  The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolve.  If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive’s surviving spouse, if any, and if none, to the Executive’s surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executive’s estate.

3.2Facility of Payment.  If a benefit is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Company may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 4

Claims and Review Procedures

4.1Claims Procedure.  The Company shall notify the Executive’s beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement.  If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (l) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.

4.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based. If,because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 5

Conversion to Split Dollar

If the Executive voluntarily terminates employment after age 59, unless the Executive elects otherwise by written notice to the Company, the Split Dollar Insurance Agreement attached as the Addendum to this Agreement shall automatically take effect as of the Executive’s termination of employment.  The Company shall take all actions necessary to implement the Split Dollar Insurance Agreement.

Article 6

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.

Article 7

Miscellaneous

7.1Exclusive Agreement/Binding Effect.  This Agreement is the entire agreement between the Company and the Executive, written or oral, related to the Company’s obligation to pay any survivor income benefits to the Executive’s beneficiaries or survivors.  This Agreement supersedes all prior agreements, understandings and negotiations.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees.

7.2No Guaranty of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

7.3Tax Withholding.  The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

7.4Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of Pennsylvania, except to the extent preempted by the laws of the United States of America.

7.5Unfunded Plan.  The beneficiary is a general unsecured creditor of the Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The beneficiary’s rights to such benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive’s life is a general asset of the Company to which the Executive and designated beneficiary have no preferred or secured claim.

IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.

EXECUTIVE:	COMPANY:
	The Fulton County National Bank & Trust Co.
/S/ Neil L. Berkstresser	By:	/S/ Clyde H. Bookheimer
Neil L. Berstresser	Title: President

BENEPICIARY DESIGNATION

FULTON COUNT NATIONAL BANK & TRUST COMPANY

SURVIVOR INCOME AGREEMENT

I designate the following as beneficiary of benefits under the Survivor Income Agreement

Primary:	Betty June Berkstresser (spouse)
Contingent:

Note:To name a trust as beneficiary, please provide the name of the trustee and the exactdate of the trust agreement.

I understand that I may change these beneficiary designations by filing a new written designation with the Company.  I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary, in the event of the dissolution of our marriage.

Signature:		/S/ Neil L. Berkstresser
Date:			3/27/96
Accepted by the Company the 27th day of March, 1996
By:	/S/ Clyde H. Bookheimer
Title:			President

SPLIT DOLLAR ADDENDUM TO

MILTON COUNTY NATIONAL BARK & TRUST COMPANY

MCCONNELLSBURG, PA

SURVIVOR INCOME AGREEMENT

THIS ADDENDUM is part of the Survivor Income Agreement between Fulton County National Bank & Trust Company (the “Company”), and Neil L. Berkstresser (the “Executive”).

INTRODUCTION

Under the terms of the Survivor Income Agreement between the Executive and the Company, the parties desire divide the death proceeds of a life insurance policy on the Executive’s life.

Article 1

General Definitions

The following terms shall have the meanings specified.

1.1“Insurer” means The Mutual Group insurance Company.

1.2“Policy” means insurance policy number                 issued by the Insurer.

Article 2

Policy Ownership/Interests

2.1Company Ownership.  The Company owns the Policy and shall have the right to exercise all incidents of ownership and to receive the Policy values in excess of the Executive’s interest described in Section 2.2.

2.2Executive’s Interest.  The Executive shall have the right to designate the beneficiary of the death proceeds of the Policy in an amount equal to the lesser of (i) one times the most recent base annual salary or (ii) the excess of the total death proceeds over the cash surrender value of the Policy on the day before the Executive’s death.  The Executive shall also have the right to elect and change settlement options that may be permitted for such beneficiaries.

Article 3

Premiums

3.1Premium Payment.  The Company shall pay any premiums due on the Policy.

3.2Imputed Income.  The Company shall then impute income to the Executive in an amount equal to the current term rate for the Executive’s age multiplied by the aggregate death benefit payable to the Executive’s beneficiary.  The “current term rate” is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.

Article 4

Assignment

The Executive may assign without consideration all interests in the Policy and in this Addendum to any person, entity or trust.

Article 5

Insurer

The Insurer shall be bound only by the terms of the Policy.  Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all persons.  The Insurer shall not be bound by or be deemed to have notice of the provisions of this Addendum.

Article 6

Claims Procedure

6.1Claims Procedure. The Company shall notify the Executive’s beneficiary in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Addendum.  If the Company determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Addendum on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Addendum’s claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed.  If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.

6.2Review Procedure.  If the beneficiary is determined by the Company not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company.  Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits.  Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents.  The Company shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Addendum on which the decision is based.  If, because of the need for a hearing. the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the beneficiary.

Article 7

Amendments and Termination

The Company may amend this Addendum at any time prior to the Executive’s death by written notice to the Executive.  Either party may terminate this Addendum at any time prior to the Executive’s death by written notice to the other party.

Upon termination of this Addendum, the Executive may purchase the Policy from the Company for an amount equal to the Policy’s cash surrender value as of the date of the termination.

Article 8

Miscellaneous

8.1Binding Effect.  This Addendum shall bind the Executive and the Company, their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.

8.2No Guaranty of Employment.  This Addendum is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

8.3Applicable Law. The Addendum and all rights hereunder shall be governed by and construed according to the laws of Pennsylvania, except to the extent preempted by the laws of the United States of America.

The parties’ signatures on the Death Benefit Agreement witness their agreement to the terms of this Addendum.

SPLIT DOLLAR POLICY ENDORSEMENT

THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY

SPLIT DOLLAR ADDENDUM

Policy No. 594721 Insured: Neil L. Berkstresser

Supplementing and amending the application for insurance to Clarica Life Insurance Company-US (formerly, The Mutual Group Life Insurance Company) (“Insurer”) on December 22, 1995 the applicant requests and directs that;

BENEFICIARIES

1.THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY, a nationally-chartered commercial bank located in McConnellsburg, Pennsylvania (the “Company”), shall be the direct beneficiary of Policy values in excess of the Executive’s interest described in paragraph 2 below.

2.The Insured or the Insured’s transferee shall be the beneficiary of the death proceeds of the Policy in an amount equal to the lesser of (i) one time the most recent base annual salary, or (ii) the excess of the total death proceeds over the cash surrender value of the Policy on the day before the Insured’s death.

OWNERSHIP

3.The Owner of the policy shall be the Company. The Owner shall have all ownership rights in the Policy except as may be specifically granted to the Insured or the Insured’s transferee in paragraph (4) of this endorsement.

4.The Insured or the Insured’s transferee shall have the right to assign his or her rights and interests in the Policy with respect to that portion of the death proceeds designated in paragraph (2) of this endorsement, and to exercise all settlement options with respect to such death proceeds.

MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY

Upon the death of the Insured, the interest of any collateral assignee of the Owner of the Policy designated in (3) above shall be limited to the portion of the proceeds described in paragraph (1) above.

OWNERS AUTHORITY

The Insurer is hereby authorized to recognize the Owner’s claim to rights hereunder without investigating the reason for any action taken by the Owner, including its statement of the amount of premiums it has paid on the Policy. The signature of the Owner shall be sufficient for the exercise of any rights under this Endorsement and the receipt of the Owner for any sums received by it shall be a full discharge and release therefore to the Insurer. The Insurer may rely on a sworn statement in form satisfactory to it furnished by the Owner, its successors or assigns, as to theft interest, and any payments made pursuant to such statement shall discharge the Insurer accordingly. The owner accepts and agrees to this split dollar endorsement.

Any transferee’s rights shall be subject to this Endorsement.

The undersigned is signing in a representative capacity and warrants that he or she has the authority to bind the entity on whose behalf this document is being executed.

Signed at McConnellsburg, Pennsylvania, this 30thday of April, 2001.

THE FULTON COUNTY NATIONAL
BANK AND TRUST COMPANY

By:	/S/DoriAnn J. Hoffman
Title:		Senior Vice President

ACCEPTANCE AND BENEFICIARY DESIGNATION

The Insured accepts and agrees to the foregoing and, subject to the rights of the Owner as stated above, designates the following as beneficiary(s) of the portion of the proceeds described in paragraph (2) above:

Primary Beneficiary:	/S/Betty J. (R) Berkstresser
Relationship:	Spouse
Contingent Beneficiary (if the Primary is deceased):
Relationship:
Signed McConnellsburg, Pennsylvania, this 30th day of April, 2001.
THE INSURED:
/S/Neil L. Berkstresser
Neil L. Berkstresser
		RECORDED MAY 16 2001
		CLARICA LIFE INSURANCE COMPANY-U.S.
			BY:.	/S/Melody R.J. Jensen

EX-13

Exhibit 13

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets	3
Statements of income	4
Statements of changes in stockholders’ equity	5
Statements of cash flows	6-7
Notes to consolidated financial statements	8-30
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data	31
Summary of quarterly financial data	32
Distribution of assets, liabilities and stockholders’ equity, interest rates and interest differential	33
Changes in net interest income	34
Management’s discussion and analysis of consolidated financial condition and results of operations	35-51
Stock market analysis and dividends	51

1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
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, 2005 and 2004 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2005. 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. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

	/S/ Smith Elliott Kearns & Company, LLC
	Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
February 16, 2006

2

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004

	2005			2004
ASSETS
Cash and due from banks	$	4,225,655		$	12,808,875
Interest bearing deposits in other banks	665,164			55,079
Federal funds sold	7,850,000			3,500,000
Cash and cash equivalents	12,740,819			16,363,954
Investment securities available for sale	34,791,977			18,985,202
Federal Reserve, Atlantic Central Bankers Bank
and Federal Home Loan Bank stocks	988,250			1,207,150
Loans, net of reserve for loan losses
2005—$1,354,090; 2004—$1,821,164	78,425,613			92,648,992
Premises and equipment	3,509,192			3,596,316
Cash surrender value of life insurance	5,609,639			5,429,963
Accrued interest receivable	626,704			659,723
Real estate owned other than premises	670,850			1,534,000
Other assets	1,768,065			1,331,608
Total assets	$	139,131,109		$	141,756,908
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	18,365,151		$	16,524,406
Interest bearing	89,120,642			93,096,879
	107,485,793			109,621,285
Other borrowed funds	15,000,000			15,000,000
Accrued interest payable	269,707			243,221
Other liabilities	1,473,834			1,374,307
Total liabilities	124,229,334			126,238,813
Stockholders’ Equity
Common stock: par value $.625 per share; 4,000,000 shares
authorized; 495,000 shares issued 492,790 shares outstanding	309,375			309,375
Additional paid-in capital	2,051,337			2,051,337
Retained earnings	12,938,141			13,226,245
Accumulated other comprehensive income (loss)	(307,867		)	20,349
Treasury stock; at cost—2,210 shares	(89,211		)	(89,211		)
	14,901,775			15,518,095
Total liabilities and stockholders’ equity	$	139,131,109		$	141,756,908

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

3

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2005, 2004, and 2003

	2005			2004			2003
Interest Income
Interest and fees on loans	$	5,738,951		$	6,350,516		$	6,913,532
Interest and dividends on investment securities:
Other U.S. Government agencies	299,977			278,873			352,657
Mortgage-backed s ecurities	586,586			91,624			126,030
Obligations of state and political subdivisions—tax exempt	207,375			207,462			75,232
FNMA and FHLMC preferred stock	0			585,207			820,877
Other interest and dividends	36,761			27,629			77,127
Interest on federal funds sold	254,063			13,160			0
Total interest income	7,123,713			7,554,471			8,365,455
Interest Expense
Interest on deposits	1,998,927			1,972,493			2,132,148
Interest on federal funds purchased	0			636			726
Interest on other borrowed money	901,109			917,822			1,042,110
Total interest expense	2,900,036			2,890,951			3,174,984
Net interest income before provision for loan losses	4,223,677			4,663,520			5,190,471
Provision for Loan Losses	316,667			260,841			1,265,000
Net interest income after provision for loan losses	3,907,010			4,402,679			3,925,471
Other Income (Loss)
Service charges on deposit accounts	166,881			172,526			217,159
Other service charges and fees	179,961			155,616			221,896
Earnings—Cash surrender value of life insurance	225,016			243,188			258,209
Trust services	2,807			6,366			19,453
Gain (loss) on sale of investment securities	0			(1,264,993		)	86,472
Gain on sale of OREO property	19,263			5,481			0
Gain on sale of premises and equipment	9,347			0			0
Gain on sale of loans	0			12,952			24,012
Other income	9,556			13,299			9,515
Total other income (loss)	612,831			(655,565		)	836,716
Other Expenses
Salaries , fees and employee benefits	1,968,058			1,682,754			1,707,844
Net occupancy expense of bank premises and furniture and equipment expense	837,025			806,466			833,377
Professional and loan-related fees	850,445			358,548			184,447
Data processing	311,627			289,143			259,915
FDIC insurance premiums	194,064			32,751			17,515
Other expenses	1,006,225			1,049,394			1,001,919
Total other expenses	5,167,444			4,219,056			4,005,017
Income (loss) before income taxes	(647,603		)	(471,942		)	757,170
Applicable income tax (benefit)	(359,499		)	(7,110		)	(9,977		)
Net income (loss)	$	(288,104	)	$	(464,832	)	$	767,147
Earnings (loss) per common share	$	(0.58	)	$	(0.94	)	$	1.56

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

4

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2005, 2004, and 2003

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Treasury Stock		Total Stockholders’ Equity
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
Comprehensive income:
Net loss					(288,104		)							(288,104		)
Change in unrealized (loss) on investment securities available for sale, net of tax of $169,081									(328,216		)			(328,216		)
Total comprehensive income (loss)														(616,320		)
Cash dividends														0
Balance, December 31, 2005	$	309,375	$	2,051,337	$	12,938,141			($307,867		)	($89,211	)	$	14,901,775

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

5

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004, and 2003

	2005			2004			2003
Cash flows from operating activities
Net income (loss)	$	(288,104	)	$	(464,832	)	$	767,147
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Compensation via treasury stock issued	0			0			245
Depreciation and amortization	350,171			369,695			385,655
Investment amortization	7,701			23,468			90,548
Provision for loan losses	316,667			260,841			1,265,000
Deferred income taxes	(183,290		)	11,811			(378,030		)
Increase in CSV- life insurance	(179,676		)	(200,037		)	(219,131		)
Loss (gain) on sale of investment securities	0			1,264,993			(86,472		)
(Gain) on sale of premises and equipment	(9,347		)	0			0
(Gain) on sale of OREO property	(19,263		)	(5,481		)	0
(Gain) on sale of student loans	0			(12,952		)	(24,012		)
(Increase)decrease in other assets	(84,092		)	70,177			18,048
Decrease in accrued interest receivable	33,019			1,372			282,447
Increase (decrease) in accrued interest payable	26,486			(11,378		)	(59,125		)
Increase in other liabilities	99,527			115,751			227,194
Net cash provided by operating activities	69,799			1,423,428			2,269,514
Cash flows from investing activities
Sales of inves tment securities available for sale	0			10,939,235			6,299,942
Maturities of investment securities available for sale	11,426,380			5,374,058			20,568,343
Purchases of investment securities available for sale	(27,738,154		)	(6,532,381		)	(19,867,112		)
Net decreas e in loans	13,906,716			6,269,788			2,716,329
Purchases of property and equipment	(279,191		)	(206,504		)	(206,891		)
Purchases of FRB, ACBB and FHLB stock	(73,500		)	(507,000		)	(295,500		)
Redemptions of FRB, ACBB and FHLB stock	292,400			700,700			666,600
Purchases of officers’ life insurance	0			0			(353,000		)
Proceeds from sale of OREO property	882,413			211,680			0
Proceeds from sale of fixed assets	25,494			0			0
Proceeds from sale of student loans	0			688,177			1,683,784
Net cash provided (used) by investing activities	(1,557,442		)	16,937,753			11,212,495
Cash flows from financing activities
Net (decrease) in deposits	(2,135,492		)	(1,506,205		)	(1,900,547		)
Dividends paid	0			(517,425		)	(517,450		)
Purchase of treasury stock	0			(1,299		)	0
Net (decrease) in line-of-credit borrowings	0			(3,825,000		)	(12,425,000		)
Net cash (used) by financing activities	(2,135,492		)	(5,849,929		)	(14,842,997		)
Net increase (decrease) in cash and cash equivalents	(3,623,135		)	12,511,252			(1,360,988		)
Cash and cash equivalents at beginning of year	16,363,954			3,852,702			5,213,690
Cash and cash equivalents at end of year	$	12,740,819		$	16,363,954		$	3,852,702

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

6

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEM ENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2005, 2004, and 2003

	2005			2004		2003
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	2,873,550		$	2,902,329	$	3,324,108
Income taxes	$	0		$	0	$	424,500
Supplemental disclosure of cash flow information:
Unrealized holding gain (loss), net of tax	$	(328,216	)	$	397,992	$	(803,942	)
Treasury stock issued as compensation	$	0		$	0	$	245
Other real estate acquired in settlement of loans	$	0		$	1,534,000	$	206,199

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

7

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 may 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.

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 and 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.

8

Note 1.   Significant Accounting Policies (Continued)

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, 2005 and 2004, 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, or at the direction of regulators. 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 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 doubtful or substandard. For 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

9

Note 1.   Significant Accounting Policies (Continued)

placement on nonaccrual status is reversed and charged against current income unless fully collateralized. Subsequent payments received 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 comparing the contractual principal and interest payments to 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.

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 2005, 2004 and 2003 the Corporation originated and sold 0, 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, 2005, 2004, or 2003.

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.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Depreciation is calculated primarily using 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.

10

Note 1.   Significant Accounting Policies (Continued)

Earnings per Share

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

Year	Shares
2005	492,790
2004	492,799
2003	492,810

Federal Income Taxes

As a result of certain timing differences between financial statement and federal income tax reporting, including depreciation, loan losses, nonaccrual interest, contributions, 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 Bankers 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.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

11

Note 1.   Significant Accounting Policies (Continued)

discounted cash flow analyses at 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.

Cash surrender value of life insurance.The carrying amounts of cash surrender value of life insurance approximate their fair values.

Deposits.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, 2005, 2004, and 2003, were $49,724; $93,633; and $ 93,876, respectively.

12

Note 1.Significant Accounting Policies (Continued)

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:

	2005		2004			2003
Gross unrealized holding gains (losses) arising during the year	($497,297	)	($843,215		)	($902,808	)
Reclassification adjustment for (gains) losses realized in net income	0		1,264,993			(86,472	)
Net unrealized holding gains (losses) before taxes	(497,297	)	421,778			(989,280	)
Tax effect	169,081		(23,786		)	185,338
Net change	($328,216	)	$	397,992		($803,942	)

Note 2.Investments

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

	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
			2005
Obligations of U.S. Government corporations and agencies	$	13,937,757		$	0		$	172,892	$	13,764,865
Obligations of states and political subdivisions	5,393,856			26,138			29,489		5,390,505
Mortgage-backed securities	15,867,764			14,126			318,428		15,563,462
Other stock	59,064			14,500			420		73,144
	$	35,258,441		$	54,765		$	521,229	$	34,791,977

			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

13

Note 2.   Investments (Continued)

The amortized cost and fair value of investment securities available for sale at December 31, 2005, 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		Fair
	Cost		Value
Due in one year or less	$	3,000,000	$	2,970,463
Due after one year through five years	9,784,811		9,642,664
Due after five years through ten years	5,921,802		5,914,506
Due after ten years	625,000		627,738
Mortgage-backed securities	15,867,764		15,563,462
Other stocks	59,064		73,144
	$	35,258,441	$	34,791,977

Proceeds from the maturities of investment securities during 2005 were $ 11,426,380, resulting in no gains or losses. Included in stockholders’ equity at December 31, 2005 is $ 307,867 of unrealized holding losses on securities available for sale, net of $ 158,598 in deferred taxes.

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.

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.

14

Note 2.   Investments (Continued)

Information pertaining to securities with gross unrealized losses at December 31, 2005 and 2004, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	Less Than Twelve Months:					2005 Over Twelve Months					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
Obligations of U.S. Government corporations and agencies		$	25,967	$	5,672,952		$	146,925	$	8,091,913		172,892		$	13,764,865
Obligations of states and political subdivisions		11,955		1,635,500			17,534		1,238,349			29,489		2,873,849
Mortgage-backed securities		284,297		10,533,823			34,131		1,366,463			318,428		11,900,286
Other stock		0		0			420		1,644			420		1,644
		$	322,219	$	17,842,275		$	199,010	10,698,369			$	521,229	$	28,540,644

	Less Than Twelve Months:					2004 Over Twelve Months					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair 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, 2005, 13 obligations of U.S. Government corporations and agencies, 5 obligations of states and political subdivisions, 19 mortgage-backed securities and 1 other stock had unrealized losses. At December 31, 2005, no debt security had unrealized losses with depreciation of 5% or more of the Corporation’s amortized cost. At December 31, 2005, one marketable equity security, with a cost basis of $2,064 had an unrealized loss of $420, exceeding 20% of the Corporation’s cost basis. This unrealized loss existed for more than 12 months. It is a thinly traded stock of a local financial institution.

15

Note 2.   Investments (Continued)

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:

	2005		2004
Federal Home Loan Bank	$	907,400	$	1,126,300
Atlantic Central Bankers Bank	10,000		10,000
Federal Reserve Bank	70,850		70,850
	$	988,250	$	1,207,150

Securities with a cost basis of $ 10,588,673 (fair value of $ 10,426,881) and $ 8,234,049 (fair value of $ 8,195,363) at December 31, 2005 and 2004, 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):

	2005			2004
Real estate loans
Secured by farmland	$	10,924		$	12,754
Secured by 1-4 family residential	38,101			45,545
Secured by multifamily (5 or more) residential properties	417			563
Secured by nonfarm nonresidential	14,873			16,999
Loans to finance agricultural production:
Loans to farmers	5,018			5,715
Commercial and industrial loans	7,284			9,816
Loans to individuals for household, family and other personal expenditures	2,213			2,524
Obligations of state and political subdivisions in the U.S.	873			523
All other loans	77			31
	79,780			94,470
Less: reserve for loan losses	(1,354		)	(1,821		)
	$	78,426		$	92,649

16

Note 3.   Loans (Continued)

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 Past Due								Nonaccrual Status
	2005		2004			2003			2005		2004		2003
Loans secured by real estate	$	207		$	41		$	0	$	915	$	699	$	3,314
Personal loans	0			7			0		30		0		74
Commercial and other loans	123			0			0		649		1,030		771
Total	$	330		$	48		$	0	$	1,594	$	1,729	$	4,159

Foregone revenue on nonaccrual loans was as follows (in thousands):

	2005		2004		2003
Interest income that would have been accrued at original loan rates	$	180	$	260	$	147
Amount recognized as interest income	124		178		3
Foregone revenue	$	56	$	82	$	144

At December 31, 2005, the total recorded investment in impaired loans, all of which had allowances determined in accordance with SFAS No. 114, amounted to approximately $2,457,000. The average recorded investment in impaired loans amounted to approximately $ 2,157,000 for the year ended December 31, 2005. The allowance for loan losses related to impaired loans amounted to approximately $ 176,896 at December 31, 2005. Interest income on impaired loans of $ 59,289 was recognized for cash payments received in 2005. The Bank has no commitments at December 31, 2005 to loan additional funds to borrowers whose loans have been modified.

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 at December 31, 2004 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 at December 31, 2003to loan additional funds to borrowers whose loans have been modified.

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.

The Corporation has 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 $ 2,518,510 and $ 2,737,322 at December 31, 2005 and 2004, respectively.

17

Note 4.Reserve for Loan Losses

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

	2005		2004		2003
Balance at beginning of period	$	1,821,164	$	1,899,643	$	1,030,713
Recoveries	10,655		24,135		15,036
Current year provision charged to income	316,667		260,841		1,265,000
Total	2,148,486		2,184,619		2,310,749
Losses	794,396		363,455		411,106
Balance at end of period	$	1,354,090	$	1,821,164	$	1,899,643

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 $ 4,533,652 and $ 3,944,179 at December 31, 2005 and 2004, respectively. During 2005, $ 2,483,178 of new loans were made, repayments totaled $ 1,758,424, and changes in officer status resulted in a $ 135,281 reduction in officer loan balances.  During 2004, $ 3,260,392 of new loans were made and repayments totaled $ 2,954,761.

Outstanding loans to employees totaled $ 758,872 and $ 754,733 at December 31, 2005 and 2004, respectively.

18

Note 6. Premises and Equipment

A summary of premises and equipment is as follows:

			Accumulated		Depreciated
	Cost		Depreciation		Cost
			2005
Premises and improvements (including land $500,207)	$	3,833,345	$	1,046,551	$	2,786,793
Equipment, furniture and fixtures	3,551,121		2,910,360		640,761
Vehicles	98,296		76,314		21,983
Deposits on equipment	59,655		0		59,655
	$	7,542,417	$	4,033,225	$	3,509,192
			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

Depreciation and amortization expense on property and equipment and other real estate owned amounted to $ 350,171; $ 369,695; and $ 385,655, for the years end December 31, 2005, 2004, and 2003, respectively.

During 2005, the Corporation entered into an agreement to purchase computer software and hardware. The total contract amount is $ 84,855, of which $ 59,655 had been paid at December 31, 2005.

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
	2005		2004
Financial Instruments whose contract amounts represent credit risk at December 31:
Commitments to extend credit	$	10,174,000	$	11,142,000
Standby letters of credit and financial guarantees written	21,000		171,000

19

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

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 $ 25,849; $ 85,168; and $ 110,100, for the years ended December 31, 2005, 2004 and 2003, respectively.

Note 9. Federal Income Taxes

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

	2005			2004			2003
Current year provision	$	(176,209	)	$	(20,967	)	$	305,342
Deferred income taxes (benefits)	(183,290		)	11,811			(378,030		)
Income tax effect of securities transactions	0			2,046			62,711
Applicable income taxes (benefits)	$	(359,499	)	$	(7,110	)	$	(9,977	)

Taxable losses were incurred in 2005 and 2004, which were carried back to prior years to generate refunds of $ 176,209 and $ 20,967, respectively.

Federal income taxes were computed after reducing pretax accounting income for nontaxable interest and dividend income in the amount of $ 235,522, $ 646,060, and $ 670,932, for 2005, 2004, and 2003, respectively.

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

	2005		2004		2003
Applicable federal income tax rate	(34.0	)%	(34.0	)%	34.0	%
Changes resulting from:
Nontaxable investment income and other items, net of nondeductible expenses/losses	(21.5	)%	32.5	%	(35.3	)%
Effective income tax rate	(55.5	)%	(1.5	)%	(1.3	)%

20

Note 9. Federal Income Taxes (Continued)

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

	2005			2004
Total deferred tax assets (net of allowance)	$	1,305,744		$	997,985
Total deferred tax liabilities	(186,718		)	(231,330		)
Net deferred tax asset	$	1,119,026		$	766,655

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 it is not likely they will be ultimately realized through future offsetting capital gains.

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.

At December 31, 2005, the Corporation also had a contribution carryover of $ 1,858 that could not be realized for tax purposes due to net losses in 2005. A valuation allowance was not established for this amount as management believes the benefit will ultimately be realized. This tax benefit can be carried forward for five years and will expire on December 31, 2010.

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

	2005			2004
Capital loss carryover	$	432,144		$	432,144
Net unrealized (gains) losses on securities available for sale	158,598			(10,483		)
Deferred compensation	472,097			433,779
Allowance for loan losses	626,252			554,953
Depreciation	(186,718		)	(220,847		)
Foregone interest on non-accrua loans	46,939			9,253
Contribution carryover	1,858			0
Valuation allowance	(432,144		)	(432,144		)
Net deferred tax asset	$	1,119,026		$	766,655
Increase (decrease) in valuation allowance during year	$	0		$	247,817

Note 10. Leases

The Corporation is party to real estate leases with base monthly rental charges of $ 3,775. 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, 2006, respectively. Each lease contains a provision for renewal under various terms at the Corporation’s option. In addition, the Corporation leases certain equipment on 54 month leases which expire on January 12, 2009 and April 8, 2010. Total rental expense charged to operations for the years ended December 31, 2005, 2004, and 2003 was $64,177; $66,458; and $ 68,131, respectively.

21

Note 10. Leases (Continued)

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

2006	$	72,948
2007	72,948
2008	72,948
2009	62,883
2010	50,856

Note 11. Deposits

Included in interest bearing deposits at December 31 are NOW and Money Market Account balances totaling $ 17,958,548 and $ 18,304,499 at December 31, 2005 and 2004, respectively.

Time deposits of $ 100,000 and over aggregated $ 13,995,273 and $ 14,121,775 at December 31, 2005 and 2004, respectively. Interest expense on time deposits of $ 100,000 and over was $ 480,000; $ 468,000; and $ 504,000 for the years ended December 31, 2005, 2004, and 2003, respectively.

The amount of time deposits maturing over the next 5 years as of December 31, 2005 is as follows:

2006	$	28,820,272
2007	11,366,614
2008	9,251,035
2009	3,710,323
2010	891,137
	$	54,039,381

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 $ 3,681,032 and $ 3,441,064 at December 31, 2005 and 2004, respectively.

Overdrafts of $76,967 and $ 31,145 at December 31, 2005 and 2004, respectively, were reclassified as loans for financial reporting purposes.

22

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

	2005			2004
Assets
Cash	$	21,729		$	94,293
Investment in Fulton County National Bank and Trust Company	14,771,949			15,340,870
Investment in Fulton County Community Development Corporation	1,769			27,202
Securities available for sale	73,144			54,023
Deferred taxes and prepaid expenses	33,184			1,714
Total assets	$	14,901,775		$	15,518,102
Liabilities
Accounts payable	$	0		$	7
Total liabilities	0			7
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	12,938,141			13,226,245
Accumulated other comprehensive income (loss)	(307,867		)	20,349
Treasury stock; shares at cost—2,210 shares	(89,211		)	(89,211		)
Total stockholders’ equity	14,901,775			15,518,095
	$	14,901,775		$	15,518,102

Statements of Income

Years Ended December 31

	2005			2004			2003
Cash dividends from wholly-owned subsidiary	$	25,000		$	605,000		$	575,000
Investment income	1,593			1,986			1,580
Gain on sale of investment securities	0			6,019			0
Equity in undistributed income (loss) of subsidiaries	(253,518		)	(981,877		)	241,264
Legal, printing, supplies, amortization and other expense	(92,454		)	(95,960		)	(50,697		)
	(319,379		)	(464,832		)	767,147
Applicable income tax (benefit)	(31,275		)	0			0
Net Income (loss)	$	(288,104	)	$	(464,832	)	$	767,147

23

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

Statements of Cash Flows

Years Ended December 31

	2005			2004			2003
Cash flows form operating activities:
Net Income (loss)	$	(288,104	)	$	(464,832	)	$	767,147
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed (income) loss of subsidiary	253,518			981,877			(241,264		)
Gain on sale of investment securities	0			(6,019		)	0
Compensation-treasury stock issued	0			0			245
Increase (decrease) in accounts payable	(7		)	(12		)	7
Increase in prepaid expenses	(37,971		)	0			0
Net cash provided (used) by operating activities	(72,564		)	511,014			526,135
Cash flows from investing activities:
Sales of investment securities available for sale	0			78,954			0
Net cash provided by investing activities	0			78,954			0
Cash flows from financing activities
Dividends paid	0			(517,425		)	(517,450		)
Purchase of treasury stock	0			(1,299		)	0
Net cash (used) by financing activities	0			(518,724		)	(517,450		)
Net increase in cash and cash equivalents	(72,564		)	71,244			8,685
Cash and cash equivalents at beginning of year	94,293			23,049			14,364
Cash and cash equivalents at end of year	$	21,729		$	94,293		$	23,049

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 a normal business risk. Required compensating balances were $ 125,000 at December 31, 2005 and 2004.

Note 14. Regulatory Matters and Contingencies

On March 23, 2005, the Bank’s Board of Directors entered into a “Stipulation and Consent to the Issuance of a Consent Order” (the “Consent Order”) with the Office of the Comptroller of the Currency (OCC). The Consent 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

24

Note 14.Regulatory Matters and Contingencies (Continued)

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.

Under the Consent 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.

Similar restrictions have been placed on the holding company, Fulton Bancshares Corporation, by the Federal Reserve Bank. The Corporation is considered to be in “troubled” condition, as that term is defined in Regulation Y, 12 C.F.R.225.71(d). 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 the 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 Consent Order referenced above.

On May 9, 2005 the Board of Directors of the Corporation signed a Memorandum of Understanding (“MOU”) dated May 9, 2005 issued by Federal Reserve Bank (“Reserve Bank”). The principle elements of the MOU are as follows:  The Corporation may not issue dividends nor incur debt not in the ordinary course of business without approval of the Reserve Bank, the Corporation may not repurchase its own stock without approval of the Reserve Bank, the Corporation must appoint a compliance committee and conduct an assessment of the external audit firm’s ability to audit an organization, such as the Corporation, which is subject to the Sarbanes Oxley Act and the Corporation is required to ensure that its wholly owned subsidiary, The Fulton County National Bank & Trust Company, complies with the supervisory actions imposed by the Office of the Comptroller of the Currency.

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, 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 continues to take actions required by the Order to remediate the identified weaknesses through the Board Compliance Committee that directs and monitors 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. The Boards of Directors of Fulton Bancshares Corporation and The Fulton County National Bank and Trust Company entered into a Settlement Agreement and General Release with its former President which became effective on June 15, 2005. The terms of the Settlement Agreement are summarized as follows.

25

Note 14.Regulatory Matters and Contingencies (Continued)

The former President’s termination on March 4, 2005 from employment as an officer or employee of the Bank remained in effect. The former President resigned as a member of the Boards of Directors and any other officer or employment position he held with the Corporation and the Bank, effective June 15, 2005. The former President acknowledged his March 4, 2005 separation from employment by the Corporation and the Bank and agreed that he will not challenge the legal validity of that separation. The former President agreed not to seek employment with the Corporation or the Bank.

The principal balances of a loan to the former President and two other loans in the aggregate approximate amount of $ 185,000 were paid to the Bank in full with interest and other charges as required by the applicable loan documents. In addition, the former President assigned Pittsburgh Steelers ticket licensing rights for six seats to the Bank.

The Bank agreed to no longer take the position under the Salary Continuation Agreement, known generically as a Supplemental Employee Retirement Plan, dated September 1, 1995 and subsequently amended (together, “SERP”) that the former President’s termination was for cause, thereby allowing the former President to apply to the OCC and the Federal Deposit Insurance Corporation (“FDIC”) for permission to obtain such part of his SERP as the regulators or the courts determine that the Bank must pay. If the SERP payments are not approved by the OCC and FDIC, and such regulatory disapproval is upheld by any subsequent judicial review, then the Bank agreed to pay the former President only one year of severance pay at his final annual salary, if authorized by the regulators to do so. The former President agreed to not challenge the legal validity of the Bank’s payment under the SERP of the amount determined by the regulators or a final valid court order. The Bank agreed to not file a civil action requesting the return by the former President of monies paid to him under the Bank’s 401(k) plan or the SERP.

The Directors as individuals and shareholders released the former President from liability related to his employment with the Corporation and the Bank. The former President released the Corporation, Bank, and Directors from any liability related to termination of his employment with the Corporation and the Bank.

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 I and Tier II ratio is required to be at least 8%. 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 the Order, the Bank is required to maintain higher minimum capital ratios than the normal industry minimums:  14% Tier I capital to risk-weighted assets and 10% Tier I capital to adjusted total assets.

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

	Industry			Consent Order			Actual
	Requirements			Requirements			2005		2004
Leverage (total adjusted capital/total average assets)		4.0	%		10.0	%	10.9	%	10.8	%
Tier 1 (Tier 1 core capital/risk weighted assets)		4.0	%		14.0	%	18.1	%	17.1	%
Total capital (total capital plus allowance for loan losses/risk weighted assets)		8.0	%				19.4	%	18.4	%

26

Note 14.Regulatory Matters and Contingencies (Continued)

As of December 31, 2005, the most recent notification form 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.

Note 15. Liabilities for Borrowed Money

At December 31, 2005 and 2004, 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, 2005 and 2004 and interest is payable monthly. The loan matures on July 12, 2010. There are significant penalties for prepayment. 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. The amount of investments collateralizing the ten year borrowing is approximately $ 18,423,000, which exceeds the required collateral of $ 16,067,000 at December 31, 2005.

The Corporation has established credit at Federal Home Loan Bank (FHLB) of Pittsburgh. The Corporation may borrow up to approximately $ 54,577,000 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. The interest rate is variable and can change daily based on FHLB’s cost of funds. There were no borrowings from this line at December 31, 2005 and 2004. Eligible collateral for the borrowings consisted of certain investments and mortgages approximating $ 54,755,000 at December 31, 2005.

The Corporation also has established a line of credit for Fed Funds purchases with the Atlantic Central Bankers Bank. The Corporation may borrow up to $4,000,000 under the terms of the borrowing agreements. The terms of Fed Funds purchases are generally overnight and the rates can change daily. At December 31, 2005, the Corporation had no borrowings from this line.

Note 16. Real Estate Owned Other Than Premises

At December 31, 2005, real estate owned other than premises consisted of one property that the Corporation foreclosed on in 2004, which is carried at fair value less costs to sell of $ 670,850. Net proceeds from sales of other real estate owned in 2005 were $ 882,413, which resulted in a net gain of $ 19,263, after writing down the fair value of the remaining property by $ 50,000.

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

27

Note 17. Fair Value of Financial Instruments

The estimated fair values of the Corporation’s financial instruments were as follows at December 31, 2005 and 2004:

	2005				2004
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(000 Omitted)
FINANCIAL ASSETS
Cash and cash equivalents	$	4,256	$	4,256	$	16,364	$	16,364
Securities available for sale	34,792		34,792		18,985		18,985
Federal Reserve, Atlantic Central Bankers Bank, and Federal Home Loan Bank stocks	988		988		1,207		1,207
Loans receivable (net)	78,426		80,668		92,649		93,409
Cash surrender value of life insurance	5,610		5,610		5,430		5,430
Accrued interest receivable	627		627		660		660
FINANCIAL LIABILITIES
Time certificates	55,684		54,969		56,860		56,610
Other deposits	51,802		51,802		52,761		52,761
Accrued interest payable	270		270		243		243
Other borrowed funds	15,000		15,702		15,000		16,463

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 certain Corporation executives, with the Corporation as beneficiary. Actual payments to the executives will not begin until their retirement, except in the case of a change of control.

(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 qualified were eligible at age 75 to receive $ 4,000 annually for up to 10 years under this program. No additional directors will be added to the Director Emeritus program.

(3)The Director Deferred Compensation Plan—This plan, also funded by life insurance, allows 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.

28

Note 18. Deferred Compensation and Other Benefit Programs (Continued)

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

	2005		2004		2003
Asset
Cash surrender value of life insurance	$	5,609,639	$	5,429,963	$	5,229,926
Liabilities
Supplemental executive retirement plan	884,598		860,524		798,930
Deferred directors fees liability	503,921		415,296		328,592
Income
Earnings on cash surrender value of life insurance	225,016		243,188		258,209
Expenses
Life insurance expense	45,341		39,553		39,078
Supplemental executive retirement expense	24,074		61,594		145,145
Deferred directors fees	89,012		87,166		63,711
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, 2005 (approximately 20% of the loan portfolio and 107% 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 a normal business risk.

Note 20. Subsequent Events

On January 23, 2006, the Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Franklin Financial Services Corporation (“Franklin”) pursuant to which the Corporation will merge with and into Franklin (the “Merger”) with Franklin being the surviving corporation in the Merger. In connection with the Merger, the Corporation will also cause its wholly-owned subsidiary, the Bank, to merge with and into Franklin’s wholly-owned subsidiary, Farmers and Merchants Trust Company of Chambersburg (“F&M Trust”), (the “Bank Merger”) with F&M Trust being the surviving bank in the Bank Merger. Under the terms of the Merger Agreement, shareholders of the Corporation will have the right to elect to receive, for each share of the Corporation’s common stock they own: (1) 1.864 shares of validly issued, fully paid and nonassessable shares of Franklin’s common stock, or (2) $ 48.00 in cash. Each shareholder of the Corporation will be entitled to elect all cash, all Franklin common stock or a mix of cash and Franklin common stock for their shares of the Corporation’s common stock. Shareholder elections, however, will be subject to allocation procedures designed to ensure that the aggregate number of shares of Franklin common stock to be issued and the aggregate amount of cash to be paid shall not exceed 492,790 shares and $ 10,964,577 in cash. Consummation of the Merger is subject to

29

Note 20. Subsequent Events (Continued)

certain customary terms and conditions, including, but not limited to, receipt of various regulatory approvals and approval by the Corporation’s shareholders.

On January 24, 2006, the Corporation filed the Merger Agreement on a Form 8-K with the Securities and Exchange Commission. Franklin will file a Registration Statement on Form S-4 with the Securities and Exchange Commission addressing the proposed Merger and issuance of Franklin Common Stock in the Merger, which may be subsequently amended and which includes the Corporation’s proxy statement to be used for its annual meeting of shareholders to consider and vote on adoption of the Merger Agreement.

Under the Merger Agreement, the Corporation agreed to take all reasonable efforts to close the Breezewood branch office, located at 200 South Breezewood Road, Breezewood, Pennsylvania  15536 as soon as practicable after the date of the Merger Agreement in accordance with all applicable regulatory requirements.

Notices of the closing of the branch office were sent to customers on February 24, 2006. The anticipated closing date is June 3, 2006.

30

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA

	2005			2004			2003			2002			2001
Income Statement (000 omitted)
Interest income	$	7,124		$	7,555		$	8,365		$	9,449		$	10,105
Interest expense	2,900			2,891			3,175			4,271			5,432
Provision for loan losses	317			261			1,265			255			15
Net interest income after provision for loan losses	3,907			4,403			3,925			4,923			4,658
Securities gains (losses)	0			(1,265		)	86			1			57
Other operating income	613			609			751			640			582
Other operating expense	5,167			4,219			4,005			3,774			3,450
Income (loss before income taxes (benefit)	(647		)	(472		)	757			1,790			1,847
Applicable income tax (benefit)	(359		)	(7		)	(10		)	335			415
Net income (loss)	$	(288	)	$	(465	)	$	767		$	1,455		$	1,432
Per share amounts based on weighted averages shares outstanding	492,790			492,799			492,810			492,772			492,747
Income (loss) before income taxes (benefit)	$	(1.31	)	$	(0.96	)	$	1.54		$	3.63		$	3.75
Income taxes (benefit)	(0.73		)	(0.01		)	(0.02		)	0.68			0.84
Net Income (loss)	(0.58		)	(0.94		)	1.56			2.95			2.91
Cash dividend paid	0.00			1.05			1.05			1.02			0.95
Book value	30.24			31.49			32.68			33.80			30.88
Year-End Balance Sheet (000 omitted)
Total assets	$	139,131		$	141,757		$	147,569		$	162,492		$	150,828
Loans	79,780			94,470			103,288			108,267			104,501
Reserve for loan losses	(1,354		)	(1,821		)	(1,889		)	(1,031		)	(845		)
Net loans	78,426			92,649			101,389			107,236			103,656
Total investment securities	34,792			20,192			31,081			39,447			31,899
Deposits-noninterest bearing	18,365			16,524			13,927			16,156			13,486
Deposits-interest bearing	89,121			93,097			97,200			96,870			103,552
Total deposits	107,486			109,621			111,127			113,025			117,038
Liabilities for borrowed money	15,000			15,000			18,825			31,250			17,325
Total stockholders’ equity	14,902			15,518			16,104			16,658			15,217
Ratios
Average equity/average assets	10.73		%	11.23		%	11.05		%	10.19		%	10.17		%
Return on average equity	(1.94		)%	(2.85		)%	4.52		%	9.18		%	9.76		%
Return on average assets	(0.21		)%	(0.32		)%	0.50		%	0.94		%	0.99		%

31

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
 SUMMARY OF QUARTERLY FINANCIAL DATA

The unaudited quarterly results of operations for the years ended December 31, 2005 and 2004 are as follows:

	2005 Quarter Ended												2004 Quarter Ended
(000 omitted  except per share)	Mar. 31			June 30			Sept. 30			Dec. 31			Mar. 31		June 30			Sept. 30			Dec. 31
Interest income(1)	$	1,783		$	1,779		$	1,793		1,769			$	1,915	$	1,877		$	1,879		$	1,884
Interest expense	696			711			735			758			734		730			717			710
Net interest income	1,087			1,068			1,058			1,011			1,181		1,147			1,162			1,174
Provision for loan losses	70			17			80			150			0		261			0			0
Net interest income after provision for loan losses	1,017			1,051			978			861			1,181		886			1,162			1,174
Securities gains (losses)	0			0			0			0			4		6			0			(1,275		)
Other income	181			154			150			128			159		163			134			153
Other expenses	1,144			1,375			1,300			1,348			1,014		(1,089			1,004			1,112
Operating income before income taxes	54			(170		)	(172		)	(359		)	330		(34		)	292			(1,060		)
Applicable income taxes	(17		)	(95		)	(73		)	(174		)	48		(7		)	((13		)	(35		)
Net income	$	71		$	(75	)	$	(99	)	(185		)	$	282	$	(27	)	$	305		$	(1,025	)
Net income applicable to common stock
Per share data:
Net income	$	0.14		$	(0.15	)	$	(0.20	)	$	(0.37)		$	0.57	$	(0.05	)	$	0.62		$	(2.08	)

32

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

(000 omitted)	2005									2004									2003
	Average									Average									Average
ASSETS	Balance			Interest			Rate			Balance			Interest			Rate			Balance			Interest			Rate
Investment securities:
Taxable interest income	$	22,972		$		924		4.0	%	$	25,479		$		981		3.9	%	$	32,341		$		1,377		4.3	%
Nontaxable interest income	5,394			207				3.8	%	5,395			207				3.8	%	1,657			75				4.5	%
Total investment securities	28,366			1,131				4.0	%	30,874			1,189				3.9	%	33,998			1,452				4.3	%
Loans (net of unearned discounts)	87,210			5,739				6.6	%	99,808			6,351				6.4	%	107,140			6,913				6.5	%
Other short-term investments	8,224			254				3.1	%	1,129			15				1.3	%	0			0				0.0	%
Total interest earning assets	123,800			7,124				5.8	%	131,811			7,554				5.7	%	141,138			8,365				5.9	%
Allowance for loan losses	(1,877		)							(1,700		)							(1,159		)
Cash and due from banks	3,892									4,122									3,748
Bank premises and equipment	3,564									3,694									3,869
Other assets	9,315									7,363									6,025
Total assets	$	138,694								$	145,290								$	153,621
LIABILITIES AND STOCHOLDERS’ EQUITY
Interest bearing demand deposits	13,050			55				0.4	%	13,202			71				0.5	%	11,925			76				0.6	%
Savings deposits	21,932			150				0.7	%	24,188			169				0.7	%	22,579			198				0.9	%
Time deposits	55,452			1,794				3.2	%	58,816			1,732				2.9	%	61,069			1,858				3.0	%
Borrowings	15,002			901				6.0	%	16,202			918				5.7	%	25,290			1,043				4.1	%
Total interest bearing liabilities	105,436			2,900				2.8	%	112,408			2,891				2.6	%	120,863			3,175				2.6	%
Demand deposits	16,686									15,081									14,966
Other liabilities	1,690									1,573									821
Total liabilities	123,812									129,062									136,650
Stockholders’ equity	14,882									16,329									16,971
Total liabiliites and stockholders’ equity	$	138,694								$	145,391								$	153,621
Net interest income/net yield on average earning assets				$	4,224			3.4	%				$	4,664			3.5	%				$	5,190			3.7	%

33

FULTON BANCSHARES CORPORATION AND SUBSIDIARIES
CHANGES IN NET INTEREST INCOME

	2005 Versus 2004												2004 Versus 2003
	Increase (Decrease)												Increase (Decrease)
	Due to Change in												Due to Change in
	Average				Average				Total Increase				Average				Average				Total Increase
(000) omitted)	Volume				Rate				(Decrease)				Volume				Rate				(Decrease)
Interest Income
Loans (net of unearned discounts)		$	(802	)		$	190			$	(612	)		$	(469	)		$	(95	)		$	(563	)
Taxable investment securities		(96		)		39				(57		)		(273		)		(123		)		(396		)
Nontaxable investment securities		0				0				0				145				(13		)		132
Other short-term investment		199				40				239				15				0				15
Total interest income		(699		)		269				(430		)		(581		)		(230		)		(811		)
Interest Expense
Interest bearing demand		(1		)		(15		)		(16		)		8				(12		)		(5		)
Savings deposits		(19		)		0				(19		)		13				(43		)		(29		)
Time deposits		(95		)		157				62				(67		)		(58		)		(126		)
Borrowings		(68		)		51				(17		)		(444		)		319				(125		)
Total interest expense		(183		)		193				10				(498		)		218				(284		)
Net interest income										$	(440	)										$	(527	)

34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the significant changes in the financial condition and results of operations of Fulton Bancshares Corporation (the “Corporation”) and its wholly owned subsidiaries, The Fulton County National Bank and Trust Company (the “Bank”) and Fulton County Community Development Corporation (“FCCDC”). The consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. This discussion should be read in conjunction with the financial tables, consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report. Current performance does not guarantee, assure or may not be indicative of similar performance in the future.

We have made forward-looking statements in this document and in documents that we incorporated by reference that are subject to risk and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation, the Bank, and FCCDC. When we used words such as “believes”, “expects”, “anticipates” or other similar expressions, we are making forward-looking statements.

Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documentation that we incorporate by reference, could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in our forward-looking statements contained or incorporated by reference in this document. These factors include the following:

·Operating, legal and regulatory risks;

·Economic, political and competitive forces affecting our banking business; and

·The risk that our analysis of these risks and forces could be incorrect and/or the strategies developed to address them could be unsuccessful.

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that the Corporation files periodically with the Securities and Exchange Commission.

SUBSEQUENT EVENTS:

On January 23, 2006, the Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Franklin Financial Services Corporation (“Franklin”) pursuant to which the Corporation will merge with and into Franklin (the “Merger”) with Franklin being the surviving corporation in the Merger. In connection with the Merger, the Corporation will also cause its wholly-owned subsidiary, the Bank, to merge with and into Franklin’s wholly-owned subsidiary, Farmers and Merchants Trust Company of Chambersburg (“F&M Trust”), (the “Bank Merger”) with F&M Trust being the surviving bank in the Bank Merger. Under the terms of the Merger Agreement,  shareholders of the Corporation will have the right to elect to receive, for each share of the Corporation’s common stock they own:  (1) 1.864 shares of validly issued, fully paid and nonassesable shares of Franklin’s common stock, or (2) $48.00 in cash. Each shareholder of the Corporation will be entitled to elect all cash, all Franklin common stock or a mix of cash and Franklin common stock for their shares of the Corporation’s common stock. Shareholder elections, however, will be subject to allocation procedures designed to ensure that the aggregate number of shares of Franklin common stock to be issued and the aggregate amount of cash to be paid shall not exceed 492,790 shares and $10,964,577 in cash. Consummation of the Merger is subject to certain customary terms and conditions, including but not limited to, receipt of various regulatory approvals and approval by the Corporation’s shareholders.

35

On January 24, 2006, the Corporation filed the Merger Agreement on the Form 8-K with the Securities and Exchange Commission. Franklin will file a Registration Statement on Form S-4 with the Securities and Exchange Commission addressing the proposed Merger and issuance of Franklin common stock in the Merger, which may be subsequently amended and which includes the Corporation’s proxy statement to be used for its annual meeting of shareholders to consider and vote on adoption of the Merger Agreement.

The Board of Directors and Management of Fulton Bancshares Corporation believe this merger is in the best interests of our shareholders, customers, employees and the communities served by the Corporation.

Under the Merger Agreement, the Corporation agreed to take all reasonable efforts to close the Breezewood branch office, located at 200 South Breezewood Road, Breezewood, Pennsylvania  15536 as soon as practicable after the date of the Merger Agreement in accordance with all applicable regulatory requirements. Notices of the closure were sent to customers on February 24, 2006. The anticipated closing date is June 3, 2006.

RESULTS OF OPERATIONS

Net Income (Loss)

The net loss for 2005 was ($288,000), compared to a net loss of ($465,000) for 2004, representing an increase of $177,000 or 38% to the bottom line. The net loss on an average per share basis (fully diluted) for 2005 was ($.58), an increase of $.36 from the loss of ($.94) realized during 2004. The net loss before applicable income tax (benefit) was ($648,000) in 2005, a reduction of $176,000 from the net loss before applicable income tax (benefit) of ($472,000) in 2004. The tax benefit for 2005 was ($359,000), compared to ($7,000) in 2004. The greater tax benefit resulted from a change in the cause of the net loss from operations which provided larger tax deductions. In 2005, the loss was generated from lower net interest income, higher provision for loan losses, and greatly increased operating expenses caused by the need to comply with the Consent Order from the OCC and MOU from the Reserve Bank. The loss in 2004 resulted primarily from the sale of investment securities at a loss of ($1,265,000).

The net loss was ( $465,000) for 2004 compared to net income $767,000 for 2003, representing a decrease of $1,232,000, or (161%). Net income on an average share basis (fully diluted) for 2004 was ($.94), a decrease of $2.50 from the $1.56 per share realized during 2003.

Net Interest Income

Total interest income for 2005 was $7,124,000, compared with $7,554,000 in 2004, a decrease of $431,000 or 5.7%. Total average earnings assets declined $8 million, or 6.1%, from 2004 to 2005. This drop and a change in the mix from higher yielding loans to lower yielding investment securities were the cause of the decrease in total interest income. Loans continued to decline in 2005 as a result of customers refinancing with other institutions and a reduction in new loan originations due to the lack of a senior lender on staff. The average yield on loans and investment securities remained fairly consistent from 2004 to 2005, while short-term investment rates increased with the changes in short-term yields in the market. Though prime rate increased throughout 2005, the average balance of nonaccrual loans as a percentage of total loans also increased, offsetting the potential interest income improvement for loans.

Total interest income for 2004 was $7,554,000 compared with $8,365,000 earned during 2003, a decrease of $811,000, or 10%. A decrease in average volume of loans and investments in 2004 reduced interest income by $581,000 while a decrease in average rates on earning assets reduced interest income an additional $230,000. Loans decreased as a result of customers refinancing to other institutions due to rate, due to workouts of nonperforming loans, and due to the departure of the senior lender in 2004. The lower

36

rates earned on loans was a result of local and national market forces. The average balance in investment securities decreased due to the decline in deposits (which fund investments and other assets) and lower use of borrowings to fund investments in 2004. The rates on investments decreased due to national market forces and a change in the mix of investment types.

Average earning assets decreased 7% in 2004 and decreased 1% in 2003. Loans, the highest yielding earning assets, decreased on average by 7% in 2004. Average investments decreased 9% in 2004. The Corporation sold its entire position in FNMA/FHLMC preferred stocks during the fourth quarter of 2004 due to concerns about protracted market value impairment in an environment of rising rates and due to regulatory concerns about the Bank’s concentration in this investment type. Due to the timing of the sales, the majority of the proceeds were in cash at year-end. Subsequent reinvestments were in shorter duration agency mortgage-backed securities. The preferred stock sale resulted in a loss of $1.3 million and was a material cause of the Corporation’s net loss before taxes. The loss on sale of the preferred stock is considered a capital loss by applicable tax code and a current tax benefit was not available. The 2003 decrease in investments was a result of a decrease in deposit funding and an increase in the average loans outstanding.

Total interest expense for 2005 was $2,900,000, a modest increase of $9,000, or 0.3%, from $2,891,000 in 2004. The average balance of interest bearing liabilities in 2005 declined $6,972,000 or 6.2%, and the cost of interest bearing liabilities increased from 2.6% to 2.8%. The primary cause of the increase in rates was the need to be more competitive on time deposit rates in an attempt to retain customers. Market competition for rates on certificates of deposit and other time deposits increased significantly throughout 2005. The Corporation did not use short-term borrowings during 2005.

Total interest expense was $2,891,000 for 2004, a decrease of $284,000, or 9%, from the $3,175,000 for 2003. The decrease resulted from less use of borrowings for funding in 2004 and lower balances and rates on time and savings products. Lower funding sources were required in 2004 due to lower loan production.

Average interest-bearing liabilities decreased 7% in 2004. Average borrowings decreased 36% in 2004 as there was less use of overnight borrowing to fund longer duration assets because of the interest rate risk involved. Average time deposits decreased 4% as a conservative rate posture was maintained in light of the lack of loan production. Core deposits increased as a result of improving economic conditions, varying levels of local government funds, and customers temporarily deploying funds while waiting for time deposit rates to increase.

Net interest income is the difference between total interest income and total interest expense. Interest income is generated through earning assets, which include loans, deposits with other banks, and investments. Interest income is dependent on many factors including the volume of earning assets; level of interest rates; changes in interest rates; and volumes of nonperforming loans. The cost of funds varies with the volume of funds necessary to support earning assets; rates paid to maintain deposits; rates paid on borrowed funds; and level of interest-free deposits.

Net interest income for 2005 totaled $4,224,000, a decline of $440,000, or 9.4%, from 2004. Net interest income for 2004 totaled $4,664,000, down $526,000, or 10% from 2003. Liquidity and interest rate risk are monitored on a regular basis through ALCO modeling. Management strives to stabilize net interest margin while competitively pricing loans and deposits and by structuring the maturities of interest-earning assets and liabilities to maintain a desired net interest margin and liquidity.

Other Income and Expenses

Other income represents service charges on deposit accounts, commissions on loan insurance, fees for official checks and other services, safe deposit box rentals, fees for trust services, securities gains (losses),

37

gains(losses) on sales of loans and other real estate owned, and earnings on cash surrender value of directors and officers life insurance.

The Corporation sold no investment securities in 2005, resulting in zero loss or gain. In 2004 the liquidation of the Corporation’s investment in preferred stock resulted in a loss of $1.3 million and was a material cause of the Corporation’s net loss before taxes. In addition, the loss on sale of the preferred stock is considered a capital loss by applicable tax code and a current tax benefit was not available on the loss.

Other income increased slightly, by $4,000, to $613,000 in 2005, compared to $609,000 before the loss on sales of investments securities in 2004. Besides the loss on sales of investment securities in 2004, other income decreased $141,000, or 19% in 2004 compared to 2003. Service charges on deposits decreased $6,000, or 3.3%, in 2005 and $ 45,000, or 21%, in 2004 due to the closings of accounts that were providing fee income. Other service charges and fees increased $24,000, or 15.6% in 2005. Other service charges and fees decreased $ 66,000, or 30%, in 2004 due to lower mortgage fee income, printed check upcharges and settlement services income. Trust services and revenue from the sales of financial products decreased in both 2005 and 2004 due to the bank outsourcing these services which typically have high direct cost and compliance and legal risks. The Corporation sold no loans in 2005, resulting in zero gains or losses. The Corporation had gains on sales of student loans of $11,000 in 2004 as it exited direct origination and administration in favor of a referral process that entails no direct costs. Earnings on bank-owned life insurance decreased $18,172, or 7.5% in 2005 and $15,000, or 6%, in 2004 due to decreases in crediting rates. Gain on the sale of OREO properties was $19,000 in 2005 versus $5,000 in 2004. No additional OREO properties were acquired during 2005. The Corporation sold real estate and fixtures at its Warfordsburg branch office location during 2005, resulting in a gain of $9,000.

Noninterest expenses are classified into six main categories:  salaries and employee benefits; occupancy and furniture and equipment expenses that include depreciation, maintenance, utilities, taxes, insurance and rents; professional and other fees; data processing expenses; FDIC insurance premiums; and other operating expenses that include all other expenses incurred in normal operations.

Salaries and benefits increased $285,000, or 16.9%, during 2005 as a result of the hiring of contract individuals to fill roles vacated by senior executives during the year and to compensate the added staff required for compliance with the Consent Order and MOU. Salaries and benefits for 2004 decreased by $25,000 or 2% compared 2003. New hires, merit pay increases and a significant increase in health insurance costs (up 21%) were offset by the eliminated salary and deferred benefit reversals attributable to the departure of certain senior officers and by a lower elective contribution to the 401 K plan. Net occupancy and furniture and equipment expenses increased $31,000 in 2005 due to charges for network maintenance and enhancements to the ATMs required to bring them into compliance with new security requirements. Net occupancy and furniture and equipment expenses decreased $27,000, or 3%, due to lower maintenance, utilities, and depreciation expense in 2004. Professional and other loan-related expenses increased $492,000, or 137.2% in 2005 and $174,000 or 94% in 2004 as the Corporation incurred material expenses to work problem credits, handle legal costs associated with the departure of the CEO , and comply with the Consent Order and MOU.

Data processing expenses increased $22,000 in 2005 and $29,000 in 2004, primarily due to the implementation of Internet Banking in 2004. FDIC premium expense increased $161,000, or 492.5%, in 2005 and $15,000, or 87%, in 2004 due to a higher risk rating assigned by regulators. Other operating expenses declined $43,000 or 4.1% in 2005 due to expense savings programs implemented in all areas except those required for compliance with regulatory orders. Other operating expenses increased $47,000 or 5% for 2004 due to supply costs to establish customer identification files required by regulations, increased director oversight costs and higher shares tax.

38

Income Taxes

Applicable income taxes changed between 2005, 2004, and 2003 because of changes in pretax accounting income and taxable income. The effective tax (benefit) rate for 2005 was (55.5%) compared to (1.5%) and (1.3%) for 2005, 2004 and 2003, respectively. The more favorable effective income tax benefit for 2005 reflected the loss resulting from tax deductible increases in expenses without a corresponding change in the mix of tax-free loans and investments. The loss on sale of the preferred stock which occurred in 2004 is considered a capital loss under the IRS tax code. Because the Corporation did not have material capital gains in the past nor can capital gains be predicted in the future, the 2004 capital loss does not produce a current tax benefit. The tax rate in 2004 and 2003 was reduced by the dividends received deduction for FNMA/FHLMC preferred stock and is reduced in all years by tax-exempt interest on obligations of state and political subdivisions (carried as both loans and investments). See Note 9 to the Financial Statements for more information on the components of federal income tax expense.

The following table presents a summary of significant earnings and capital ratios:

	2005			2004			2003
Average assets	$	138,694		$	145,391		$	153,621
Net income (loss)	(288		)	(465		)	767
Average equity	14,882			16,329			16,971
Cash dividends paid	0			517			517
Return on average assets	(0.21		%)	(0.32		%)	(0.20		%)
Return on average equity	(1.94		%)	(2.85		%)	(4.52		%)
Dividend payout ratio	0.00		%	211.18		%	67.41		%
Equity to asset ratio	10.73		%	11.23		%	11.05		%
Loan to deposit ratio	72.96		%	84.52		%	91.24		%

FINANCIAL CONDITION

Total assets at December 31, 2005 were $139,131,000, a 1.8% decrease from December 31, 2004. The balance sheet mix changed significantly in 2005. Loans decreased $14,690,000, or 18.4%, and investment securities increased $15,807,000 or 83.3%, from year-end 2004 to year-end 2005. Total deposits declined only 1.9% from December 31, 2004 to December 31, 2005. The Corporation sold its entire position in FNMA/FHLMC preferred stocks during the fourth quarter of 2004 due to concerns about protracted market value impairment in an expected return to a rising rates environment and due to regulatory concerns about the Bank’s concentration in this investment type. Due to the timing of the sales, the majority of the proceeds were in cash at year-end. Subsequent reinvestments were made to shorter duration agency mortgage-backed securities.

39

The following table shows the maturities of investment securities at book value as of December 31, 2005, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% federal income tax rate.

					After 1			After 5
					year but			years
	Within 1				within 5			but within				After 10
(000 omitted)	year				years			10 years				years				Total
Bonds:
U.S. Government agencies
Book value		$	5,749		$	8,189			$	0			$	0		$	13,938
Yield		3.65		%	4.12		%		0.00		%		0.00		%	3.93		%
State and municipal
Book value		300			4,414				680				0			5,394
Yield		8.52		%	6.95		%		6.10		%		0.00		%	6.93		%
Mortgage-backed
Book value		0			10,229				5,526				112			15,867
Yield		0.00		%	4.35		%		4.55		%		4.70		%	4.42		%
Total book value		$	6,049		$	22,832			$	6,206			$	112		$	35,199
Yield		3.89		%	4.77		%		4.72		%		4.70		%	4.61		%
Equity securities:
Total equity securities																$	59
Yield																2.70		%
Total Investment securities
Total Yield																$	35,258
																4.61		%

Loans

Gross loans receivable at December 31, 2005 totaled $79,780,000, compared to $94,470,000 a decrease of $14,690,000 or 18.4%. This decrease, which occurred across all significant loan categories, was the result of the absence of a senior commercial lender during the year, increased regulatory scrutiny, loans paid off in troubled loan workout efforts, and mortgage refinancing to mass market lenders.

Gross loans receivable at December 31, 2004 decreased $8,819,000 or 9% from December 31, 2003. Mortgage and personal loan refinancing to other lenders was responsible for much of the decrease.

The following table presents the loan portfolio at the end of each of the last five years:

(000 omitted)	2005		2004		2003		2002		2001
Commercial, financial and agricultural	$	13,175	$	15,531	$	18,623	$	15,171	$	17,418
Real estate—Construction	0		0		0		0		0
Real estate—Mortgage	64,315		75,861		80,398		82,098		78,796
Installment and other personal loans (net of unearned discount)	2,290		3,078		4,268		10,998		8,287
Total loans	$	79,780	$	94,470	$	103,289	$	108,267	$	104,501

40

Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages and installments) at December 31, 2005:

(000 omitted)	Under One Year		One to Five Years		Over Five Years		Total
Commercial, financial and agricultural	$	7,767	$	4,865	$	543	$	13,175
Real estate—Construction	0		0		0		0
Total	$	7,767	$	4,865	$	543	$	13,175

The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December 31, 2005:

(000 omitted)	Fixed Rate Loans		Variable Rate Loans
Due within one year	$	5,479	$	36,083
Due after one but within five years	15,096		15,164
Due after five years	7,958		0
Total	$	28,533	$	51,247

Allowance for Loan Losses and Related Provision

The provision for loan losses was $317,000 in 2005 compared to 261,000 in 2004 and $1,265,000 in 2003. The provision expense in each year was based on management’s evaluation of the adequacy of the allowance for loan losses and represents amounts deemed necessary to maintain the allowance at the appropriate level based on the quality of the loan portfolio and economic conditions. Actual charge-offs (net of recoveries) were $784,000 in 2005, $339,000 in 2004;and $396,000 in 2003. The allowance for loan losses was deemed to adequately reflect the risk inherent in the loan portfolio at December 31, 2005.

The following table is a summary of loan loss experience for the past five years.

	Years Ended December 31
(000 omitted)	2005			2004			2003			2002			2001
Average total loans outstanding (net of unearned income)	$	87,210		$	99,808		$	107,140		$	105,219		$	105,028
Allowance for loan losses, beginning of period	$	1,821		$	1,900		$	1,031		$	845		$	847
Additions to provision for loan losses charged to operations	317			261			1,265			255			15
Loans charged off during the year
Real estate	0			2			25			0			0
Commercial and agricultural	755			343			363			3			20
Installment	39			19			23			73			14
Total charge-off’s	794			364			411			76			34
Recoveries of loans previously charged off:
Real estate	7			3			6			0			0
Commercial and agricultural	0			7			0			1			2
Installment	3			14			9			6			15
Total recoveries	10			24			15			7			17
Net loans charged off	784			339			396			69			17
Allowance for loan losses	$	1,354		$	1,821		$	1,900		$	1,031		$	845
Ratio of net loans charged off to average loans outstanding	.90		%	.34		%	.37		%	.06		%	.02		%

41

The provision is based on an evaluation of the adequacy of the allowance for possible loan losses. The evaluation includes, but is not limited to, review of net loan losses for the year, the present and prospective financial condition of the borrowers and evaluation of current and projected economic conditions.

The following table sets forth the outstanding balances of those loans on a nonaccrual status and those on accrual status which are contractually past due as to principal or interest payments for 30 days or more at December 31:

(000 omitted)	2005		2004		2003		2002		2001
Nonaccrual loans	$	1,594	$	1,729	$	4,159	$	1,596	$	289
Accrual loans:
Restructured	$	0	$	0	$	0	$	0	$	0
30 through 89 days past due	1,644		3,778		3,362		3,692		4,121
90 days or more past due	330		48		0		70		922
Total accrual loans	$	1,974	$	3,826	$	3,326	$	3,762	$	5,043

Foregone revenue on nonaccrual loans was as follows (in thousands):

	2005		2004		2003
Interest income that would have been accrued at original loan rates	$	180	$	260	$	147
Amount recognized as interest income	124		178		3
Foregone revenue	$	56	$	82	$	144

42

At December 31, 2005, the total recorded investment in impaired loans, all of which had allowances determined in accordance with SFAS No. 114, amounted to approximately $2,457,000. The average recorded investment in impaired loans amounted to approximately $ 2,157,000 for the year ended December 31, 2005. The allowance for loan losses related to impaired loans amounted to approximately $ 176,896 at December 31, 2005. Interest income on impaired loans of $ 59,289 was recognized for cash payments received in 2005. The Bank has no commitments at December 31, 2005 to loan additional funds to borrowers whose loans have been modified.

There were no restructured loans for any of the time periods set forth above.

The Corporation utilizes a systematic review of its loan portfolio on a quarterly basis in order to determine the adequacy of the allowance for loan losses. The allowance for loan losses consists of a component for individual loan impairment primarily based on the loan’s collateral fair value and other observable data. A watch list of loans is identified for evaluation based on regulatory examinations and internal and external loan grading and reviews. Loans other than those determined to be impaired are grouped into pools of loans with similar credit risk characteristics. These loans are evaluated as groups with allocations made to the allowance based on historical loss experience adjusted for current trends in delinquencies, trends in underwriting and oversight, concentrations of credit and general economic conditions within the Corporation’s trading area. The 2005 provision for loan losses increased versus 2004 due primarily to the charge-off of a large commercial relationship. The 2004 provision was lower than 2003 based on fewer additions to the watch list in 2004 than in 2003, a decrease in the loan portfolio and lower net charge-offs.

The provision expense increased significantly from 2003 through 2005 compared to prior years for two reasons. First, nonaccrual loans and net charge-offs remain at levels much higher than prior years. The increase in non-accrual loans and charge-offs resulted from actions taken as required by the Bank’s primary regulator in response to examinations conducted in 2003 and 2004. Secondly, the examinations increased the amount of the classified loans which increased the Bank’s risk-based allowance on such loans. These loans were tested for impairment and additional provisions were made as necessary. The examinations adversely classified loans primarily because of structural weaknesses and lack of adequate financial analysis in underwriting new loans and renewing existing loans. The examinations also cited weaknesses in credit risk practices, changes in lending philosophy and unreliable historical loss trends as cause for requiring higher allowances. Throughout 2005, management has been working diligently with outside consultants to improve underwriting practices and shore up structural weaknesses and financial analysis for all loans in the portfolio. In addition, the methodology for the analysis for loan losses has been enhanced to correspond more closely with OCC standards for evaluating deficiencies and estimating probable losses.

	Years Ended December 31
	2005			2004			2003			2002
Nonaccrual loans as a percentage of total loans	2.00		%	1.83		%	4.03		%	1.47		%
Net charge-offs to average total loans	0.90		%	0.34		%	0.37		%	0.06		%
Provision for loan losses	$	317,000		$	261,000		$	1,265,000		$	255,000

The Corporation has identified loans dependent on the agribusiness economic sector as a concentration of credit. At December 31, 2005, agribusiness loans comprised 43% of criticized and 13% of classified assets.

43

The following is an allocation by loan categories of the allowance for loan losses at December 31 for the last five years. In retrospect the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current conditions. Accordingly, the entire allowance is available to absorb losses in any category.

	2005						2004
(000 omitted)	Allowance Amount			Percentage of Loans to Total Loans			Allowance Amount			Percentage of Loans to Total Loans
Commercial, financial and agricultural		$	1,129		16.5	%		$	1,565		16.4	%
Real estate—Construction		0			0.0			0			0.0
Real estate—Mortgage		193			80.6			240			80.3
Installment		32			2.9			16			3.3
Total		$	1,354		100.00	%		$	1,821		100.00	%

	2003						2002
(000 omitted)	Allowance Amount			Percentage of Loans to Total Loans			Allowance Amount			Percentage of Loans to Total Loans
Commercial, financial and agricultural		$	1,507		18.0	%		$	561		14.0	%
Real estate—Construction		0			0.0			0			0.0
Real estate—Mortgage		351			77.8			333			75.8
Installment		42			4.2			137			10.2
Total		$	1,900		100.00	%		$	1 031		100.00	%

	2001
(000 omitted)	Allowance Amount			Percentage of Loans to Total Loans
Commercial, financial and agricultural		$	141		12.7	%
Real estate—Construction		0			0.0
Real estate—Mortgage		637			77.8
Installment		67			9.5
Total		$	845		100.00	%

Deposits

Total deposits decreased 3.4% to $107,486,000 at December 31, 2005, compared to $ 109,621,000 at December 31, 2004. Noninterest bearing demand deposits increased 11.1% year-end to year-end and average balances were up $1,605,000 for 2005 and $ 115,000 for 2004. Interest bearing deposits decreased 4.3% due to competitive market pressures and a conservative rate posture. Noninterest bearing demand deposits increased 19% from December 31, 2003 to December 31, 2004, while average demand deposit balances remained similar. Interest bearing deposits decreased 4%. The average amounts of deposits are summarized below:

	Years Ended December 31
(000 omitted)	2005		2004		2003
Demand deposits	$	16,686	$	15,081	$	14,966
Interest bearing demand deposits	13,050		13,202		11,925
Savings deposits	21,932		24,188		22,579
Time deposits	55,452		58,816		61,069
Total deposits	$	107,120	$	111,287	$	110,593

44

The following is a breakdown of maturities of time deposits of $ 100,000 or more as of December 31, 2005:

Maturity	(000 omitted)
Certificates of Deposit
Three months or less		$	5,578
Over three months through six months		434
Over six months through twelve months		808
Over twelve months		7,175
		$	13,995

Stockholders’ Equity

Stockholders’ equity was $ 14,902,000 at December 31, 2005, compared with $15,518,000 at December 31, 2004, a decrease of $616,000 or 4%. The December 31, 2004 balance was down 4% compared to December 31, 2003. The decrease in 2005 was a result of the net loss of $288,000 and a reduction of $328,000 in accumulated other comprehensive income. The decrease in 2004 was a result of the net loss of $465,000 and dividends paid of $ 517,000, partially offset by an increase of $ 398,000 in accumulated other comprehensive income. Total stockholders’ equity represented 10.7% of total assets at the end of 2005 and 10.9% at the end of 2004. No cash dividends were paid in 2005. Cash dividends of $ 1.05 per share were paid in both 2004 and 2003. On July 20, 2000, the Board of Directors announced the approval of a plan to purchase up to 2% of its shares of outstanding common stock. As of December 31, 2004, the company had repurchased 2,210 shares, representing 0.45% of its shares of outstanding common stock. The repurchase plan has been suspended as of April 11, 2005. No shares have been repurchased since June 28, 2004.

Dividends from the Bank to the Corporation are the predominant source for the Corporation to pay dividends. National banks must obtain regulatory approval before declaring dividends that exceed its current net profits and prior two years’ retained net profits. Because of the net losses and pursuant to the Consent Order with the OCC and the MOU with the Reserve Bank, dividends have been suspended in upcoming periods until further notice.

CRITICAL ACCOUNTING POLICIES

Bank policy related to the allowance for loan losses is considered to be a critical accounting policy because the allowance for loan losses represents a particularly sensitive accounting estimate. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance is an amount 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 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.

LIQUIDITY

Liquidity and interest rate sensitivity are related to, but distinctly different from, one another.

45

Liquidity involves the Bank’s ability to meet cash withdrawal needs of customers and their credit needs in the form of loans. Liquidity is provided by certain balances held at correspondent banks. Adequate liquidity to meet credit demands and/or adverse deposit flows is also made available from sales or maturities of short-term assets. Additional sources of funds to meet credit needs are provided by access to the marketplace to obtain interest-bearing deposits and other borrowings, including special programs available through Federal Home Loan Bank. At both December 31, 2005 and 2004, the Bank had borrowings of $ 15,000,000 from the Federal Home Loan Bank. At December 31, 2005, the Bank had total borrowing capacity available of $ 54.6 million.

On March 29, 2005, the Corporation was notified by Federal Home Loan Bank that it was required to identify and deliver specific assets as collateral equal to outstanding borrowings, plus accrued interest and any penalties for early payment. The amount required to cover the $15 million borrowing at December 31, 2005 was approximately $ 16.1 million at December 31, 2005.

Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest bearing assets and liabilities. It is the objective of management to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin and manage changes in the market value of equity. The following table approximately reflects the matching of assets and liabilities maturing within one year and thereafter, which management feels is adequate to meet customer cash and credit needs while maintaining a desired interest rate spread.

(000 omitted)	Due 0-30 Days			Due 31-90 Days		Due 90-180 Days			Due 181-360 Days			Due After 1 Year		Total
Rate Sensitive Assets
Investment securities	$	645		$	590	$	2,675		$	3,705		$	27,643	$	35,258
Real estate, commercial and
installment loans	16,902			5,201		9,725			9,737			38,215		79,780
	17,547			5,791		12,400			13,442			65,858		115,038
Rate Sensitive Liabilities
Short-term borrowings	0			0		0			0			0		0
Long-term borrowings	0			0		0			0			15,000		15,000
Certificates of deposit over $100,000	3,474			2,104		434			808			7,175		13,995
Other certificates of deposit	10,999			2,115		2,921			5,965			19,689		41,689
Money market deposit accounts	81			161		243			488			4,059		5,032
Other interest bearing deposits	232			462		695			1,392			25,624		28,405
	14,786			4,842		4,293			8,653			71,547		104,121
Cumulative GAP—12/31/05	$	2,761		$	3,710	$	11,817		$	16,606		$	10,917	$	10,917
Cumulative GAP—12/31/04	$	(8,142	)	$	2,704	$	(2,246	)	$	(17,431	)	$	5,357	$	5,357

During 2005, the Corporation engaged an outside firm to assist with ALCO reporting and simulation analysis. The results of the two years are not necessarily comparable in that the assumptions used during 2005 were evaluated in much more detail and used data derived directly from the core banking systems in the 2005 analysis of maturities. In monitoring and evaluating liquidity, management generally does not consider regular savings or interest-bearing checking accounts to be particularly rate sensitive based on past experience in various interest rate cycles.

46

CONTRACTUAL OBLIGATIONS

Contractual obligations of the Company as of December 31, 2005 are as follows:

	Payments due by period
(000 omitted)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
FHLB borrowings	$	15,000	$	0	$	0	$	15,000		$	0
Operating lease obligations	333		73		146		114			0
Total	$15,333		$	73	$	146	$15,114			$	0

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. Those off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These commitments totaled $ 10,195,000 at December 31, 2005. This consisted of $ 3,522,000 in home equity lines of credit, $ 21,000 in standby letters of credit and $ 6,652,000 in other unused commitments (primarily commercial and agricultural lines of credit). Because these instruments have fixed maturity dates, and because many of them will expire without being drawn, they do not generally present any significant liquidity risk to the Corporation.

Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Regulatory Matters and Contingencies

Dividends paid by Fulton Bancshares Corporation are generally provided from the Fulton County National Bank and Trust Company’s upstreamed 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.

Under capital adequacy guidelines, the Corporation is required to maintain minimum capital ratios. In general, 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%. 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.

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: 14% Tier I capital to risk weighted assets and 10% Tier I capital to adjusted total assets. In furtherance of the Order, dividends have been suspended until further regulatory approval.

47

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

					Actual
	Industry Requirements		Consent Order Requirements		2005		2004
Leverage (total adjusted capital/total average assets)	4.0	%	10.0	%	10.9	%	10.8	%
Tier 1 (Tier 1 core capital/risk weighted assets)	4.0	%	14.0	%	18.1	%	17.1	%
Total capital (total capital plus allowance for loan losses/risk weighted assets)	8.0	%	N/A		19.4	%	18.4	%

As of December 31, 2005, 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 as shown above.

Under the Order, the Bank must obtain OCC approval before any executive officers or directors can be added to the Bank’s management. During 2005, the OCC approved George W. Millward as Interim CEO and Debra A. Goodling as Interim CFO. Stanley J. Kerlin was also approved as an additional Board member.

Similar restrictions have been placed on the holding company, Fulton Bancshares Corporation, by the Federal Reserve Bank. By letter dated March 15, 2005 the The Corporation was deemed to be in ““troubled”“ condition, as that term is defined in 12Regulation Y, 12 C.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 the final form in February, 2005. The OCC, the Bank’s 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.

On May 9, 2005 the Board of Directors of the Corporation signed a Memorandum of Understanding (“MOU”) dated May 9, 2005 issued by Federal Reserve Bank (“Reserve Bank”). The principle elements of the MOU are as follows:  The Corporation may not issue dividends nor incur debt not in the ordinary course of business without approval of the Reserve Bank, the Corporation may not repurchase its own stock without approval of the Reserve Bank, the Corporation must appoint a compliance committee and conduct an assessment of the external audit firm’s ability to audit an organization, such as the Corporation, which is subject to the Sarbanes Oxley Act and the Corporation is required to ensure that its wholly owned subsidiary, The Fulton County National Bank & Trust Company, complies with the supervisory actions imposed by the Office of the Comptroller of the Currency.

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, 2005.

As discussed previously in the Managements’ Discussion, compliance with the Order has required reallocation and increases in internal resources and the engagement of various vendors and consultants.

48

The future 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 has taken numerous actions required by the Order to remediate the identified weaknesses. It formed a Board Compliance Committee that directs and monitors the completion of the specific requirements of Order.  A monthly report is filed with the OCC updating the Bank’s progress in meeting the requirements of the Consent Order.

On March 4, 2005, the Bank terminated its President. The Boards of Directors of Fulton Bancshares Corporation and The Fulton County National Bank and Trust Company entered into a Settlement Agreement and General Release with its former President which became effective on June 15, 2005. The terms of the Settlement Agreement are summarized as follows.

The former President’s termination on March 4, 2005 from employment as an officer or employee of the Bank remained in effect. The former President resigned as a member of the Boards of Directors and any other officer or employment position he held with the Corporation and the Bank, effective June 15, 2005. The former President acknowledged his March 4, 2005 separation from employment by the Corporation and the Bank and agreed that he will not challenge the legal validity of that separation. The former President agreed not to seek employment with the Corporation or the Bank.

The principal balances of a loan to the former President and two other loans in the aggregate approximate amount of $185,000 were paid to the Bank in full with interest and other charges as required by the applicable loan documents. In addition, the former President assigned Pittsburgh Steelers ticket licensing rights for six seats to the Bank.

The Bank agreed to no longer take the position under the Salary Continuation Agreement known generically as a Supplemental Employee Retirement Plan dated September 1, 1995 and subsequently amended (together, “SERP”) that the former President’s termination was for cause, thereby allowing the former President to apply to the OCC and the Federal Deposit Insurance Corporation (“FDIC”) for permission to obtain such part of his SERP as the regulators or the courts determine that the Bank must pay. If the SERP payments are not approved by the OCC and FDIC, and such regulatory disapproval is upheld by any subsequent judicial review, then the Bank agreed to pay the former President only one year of severance pay at his final annual salary, if authorized by the regulators to do so. The former President agreed to not challenge the legal validity of the Bank’s payment under the SERP of the amount determined by the regulators or a final valid court order. The Bank agreed to not file a civil action requesting the return by the former President of monies paid to him under the Bank’s 401(k) plan or the SERP. The liability for the SERP as of the date of termination is accounted for in total on the Corporation’s financial statements.

The Directors as individuals and shareholders released the former President from liability related to his employment with the Corporation and the Bank. The former President released the Corporation, Bank, and Directors from any liability related to termination of his employment with the Corporation and the Bank.

49

Market Risk Management

The Bank has risk management policies to monitor and limit exposure to market risk, and simulates rate changes up and down 200 basis points to measure the impact of changing mix, interest rate movements, rates, and yield curves on net interest income and the market value of equity. Management continuously monitors liquidity and interest rate risk through its Asset-Liability Committee, and reprices products in order to maintain a desired balance sheet mix and net interest margins. Management expects to continue to direct its marketing efforts toward attracting more low cost retail deposits while competitively pricing its time deposits in order to maintain favorable interest spreads, while minimizing structural interest rate risk.

The following table sets forth the projected maturities and average rates for all rate sensitive assets and liabilities based on the following assumptions. All fixed and variable rate loans were based on original maturities since the bank has not experienced, and does not expect, a significant rewriting of loans. Investments are based on maturity date except certain long-term agencies, which are classified by call date. The bank has historically experienced very little deposit runoff. Based on this experience, it was estimated that average runoff of noninterest bearing checking, interest bearing checking, and other savings would be 10%. It was estimated that average runoff of time deposits would be 25% and these deposits are classified by original maturity date.

	Principal/Notional Amount Maturing In
(In thousands)	2006			2007			2008			2009			2010			Thereafter				Total			Fair Value
Rate sensitive assets
Fixed rate loans	$	5,479		$	4,738		$	4,123		$	2,903		$	3,332			$	7,958		$	28,533		$	28,771
Average Yield	7.56		%	7.61		%	7.67		%	7.27		%	6.93		%		7.35		%	7.43		%
Variable rate loans	36,759			9,105			5,115			527			414				0			51,920			51,897
Average Yield	6.94		%	6.05		%	6.61		%	6.25		%	6.73		%					6.74		%
Fixed rate investment securities	6,013			8,338			4,463			2,419			1,797				9,747			32,777			32,288
Average Yield	3.68		%	3.81		%	4.12		%	4.88		%	4.50		%		4.07		%	4.02		%
Variable rate investment securities	1,602			824																2,426			2,426
Average Yield	4.28		%	4.09		%														4.21		%
Rate sensitive liabilities
Noninterest-bearing checking	1,836			1,836			1,836			1,836			1,836				9,185			18,365			18,365
Interest-bearing checking accounts	1,269			1,274			1,279			1,285			1,290				6,531			12,928			12,928
Average Yield	0.44		%	0.44		%	0.42		%	0.42		%	0.42		%		0.44		%	0.43		%
Savings accounts	2,485			2,509			2,534			2,559			2,585				7,837			20,509			20,509
Average Yield	0.43		%	1.12		%	1.09		%	1.08		%	1.10		%		0.60		%	0.91		%
Time deposits	29,311			11,954			9,713			3,808			853				45			55,684			54,969
Average Yield	3.40		%	4.00		%	3.49		%	3.70		%	3.95		%		2.16		%	3.57		%
Variable rate borrowings													15,000							15,000			15,702
Average Yield													5.93		%					5.93		%

Future Impact of Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (Revised 2004) (SFAS No. 123R) “Share-Based Payment”, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. SFAS No. 123R

50

replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123R requires all share-based payments to employees to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable vesting period. SFAS No. l23R also amends SFAS No. 95 “Statement of Cash Flows” requiring the benefits of tax deductions in excess of recognized compensation cost be reported as financing instead of operating cash flows. The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), which expresses the SEC’s views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. Additionally, SAB No. 107 provides guidance related to share-based payment transactions for public companies. The Corporation will be required to apply SFAS No. 123R as of the annual reporting period that begins after September 15, 2005. The Corporation does not anticipate that this statement will have a material effect on its financial statements.

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, (“SFAS No. 154”) “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3”. The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement”. The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not anticipate this statement will have a material effect on its financial statements.

In November 2005, FASB Staff Position (FSP) 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. The FSP applies to investments in debt and equity securities and cost-method investments. The application guidance within the FSP includes items to consider in determining whether an investment is impaired, in evaluating if an impairment is other than temporary and recognizing impairment losses equal to the difference between the investment’s cost and its fair value when an impairment is determined. The FSP is required for all reporting periods beginning after December 15, 2005. Earlier application is permitted. The Corporation does not anticipate the statement will have a material effect on its financial statements.

Stock Market Analysis and Dividends

The Corporation’s common stock is traded inactively in the over-the-counter market. As of December 31, 2005 the number of shareholders of record was 562.

	Market Price		Cash Dividend			Market Price		Cash Dividend
	2005					2004
First Quarter	$	43.50		$	0	$	49.17		$	.23
Second Quarter	36.50			0		43.41			.23
Third Quarter	36.40			0		41.66			.27
Fourth Quarter	36.85			0		41.00			.32

51

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

1.  Fulton County National Bank and Trust, Pennsylvania; a national bank organized February 24, 1887 under the Pennsylvania Banking Code.

It converted to a national banking association on September 5, 1933.

2.  Fulton County Community Development Corporation, which was formed on June 7, 1996 under the Pennsylvania Business Corporation Law of 1988, as amended.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Fulton Bancshares Corporation

We consent to the incorporation by reference in previously filed registration statements (Form SB-2 No. 33-85626) of Fulton Bancshares Corporation of our report dated February 16, 2006 appearing in the 2005 Annual Report to Shareholders incorporated by reference in this Form 10-K of Fulton Bancshares Corporation for the year ended December 31, 2005.

/S/ SMITH ELLIOTT KEARNS & COMPANY, LLC

Chambersburg, PA

March 13, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, George W. Millward, Interim Principal Executive Officer, certify, that:

1.I have reviewed this annual report on Form 10-K of Fulton Bancshares Corporation;

2.                              
60;                          Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.                                       0;                  Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.                                                  0;       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) intentionally omitted;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based upon such evaluation; and

( d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other cert ifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 13. 2006	By:	/s/ George W. Millward
			Interim Principal Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I,  Debra A. Goodling, Interim Chief Financial Officer, certify that:

1.I have reviewed this annual report on Form 10-K of Fulton Bancshares Corporation;

2.Based on my knowledge, the annual report does not conta in any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statement, and other financial information included in this annual report, fairly present, in all material respects, the financial condition, results of operations and cash fl ows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)intentionally omitted;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based upon such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)      ;                            any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 13, 2006	By:	/s/ Debra A. Goodling
			Interim Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of FULTON BANCSHARES CORPORATION (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, George W. Millward, Interim Principal Executive Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Dated: March 13, 2006	By:  /s/ George W. Millward
	Interim Principal Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO

SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of FULTON BANCSHARES CORPORATION (the “Company”) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Debra A. Goodling, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

	By: /s/ Debra A. Goodling
	Interim Chief Financial Officer
Dated: March 13, 2006