UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                    FORM 10-Q

X  QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
   ACT OF 1934.

   For the quarterly period ended June 30, 2004
                                  -------------

                                       OR

__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
   ACT OF 1934.

   For the transition period from ___________________ to _______________________

                         Commission file number 2-89283
                         ------------------------------


                           IOWA FIRST BANCSHARES CORP.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


        STATE  OF  IOWA                                           42-1211285
--------------------------------------------------------------------------------
 (State or other jurisdiction                                 (IRS Employer of
incorporation or organization)                               Identification No.)

                             300 East Second Street
                             Muscatine, Iowa 52761
                    ----------------------------------------
                    (Address of principal executive offices)

                                  563-263-4221
                        -------------------------------
                        (Registrant's telephone number)

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 such  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 [ ]

Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [ X ]

At June 30, 2004 there were 1,387,779  shares of the  registrant's  common stock
outstanding.


                                       1
<PAGE>

                  IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q

                                                                        PAGE NO.

PART 1   Financial Information

         Item 1.   Financial Statements

                   Consolidated Condensed Balance Sheets,
                   June 30, 2004 and December 31, 2003                         3

                   Consolidated Condensed Statements of
                   Income, Three and Six Months Ended
                   June 30, 2004 and 2003                                      4

                   Consolidated Condensed Statements of
                   Cash Flows, Six Months Ended
                   June 30, 2004 and 2003                                      5

                   Notes to Consolidated Condensed
                   Financial Statements                                      6-7


         Item 2.   Management's Discussion and Analysis
                   Of Financial Condition and Results of
                   Operations                                               8-16

         Item 3.   Quantitative and Qualitative Disclosures About
                   Market Risk                                                16

         Item 4.   Controls and Procedures                                    17

PART II   Other Information

         Item 1.   Legal Proceedings                                          17

         Item 2.   Changes in Securities, Use of Proceeds and Issuer
                   Purchases of Equity Securities                             17

         Item 3.   Defaults Upon Senior Securities                            17

         Item 4.   Submission of Matters to a Vote of Security Holders        17

         Item 5.   Other Information                                          17

         Item 6.   Exhibits and Reports on Form 8-K                           18

Signatures                                                                    19


                                       2
<PAGE>

                  IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES

                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (In Thousands)
                                   (Unaudited)
<TABLE>

                                                            June 30,   December 31,
                                                              2004        2003
                                                           ----------------------
<S>                                                        <C>         <C>
               ASSETS

Cash and due from banks ................................   $  11,949    $  12,988
Interest-bearing deposits at financial institutions ....       8,276        6,948
Federal funds sold .....................................      24,445       31,414
Investment securities available for sale ...............      34,025       37,157
Loans, net of allowance for loan losses June 30, 2004,
  $3,274; December 31, 2003, $3,180 ....................     280,472      266,925
Bank premises and equipment, net .......................       6,789        6,764
Accrued interest receivable ............................       2,151        2,231
Life insurance contracts ...............................       4,338        4,254
Restricted investment securities .......................       2,800        3,028
Other assets ...........................................         697          705
                                                           ----------------------
        TOTAL ASSETS ...................................   $ 375,942    $ 372,414
                                                           ======================

LIABILITIES AND STOCKHOLDERS' EQUITY
            LIABILITIES

Noninterest bearing deposits ...........................   $  46,054    $  47,549
Interest bearing deposits ..............................     238,957      230,027
                                                           ----------------------
        TOTAL DEPOSITS .................................     285,011      277,576
Note payable ...........................................       2,800        2,700
Securities sold under agreements to
  repurchase ...........................................       7,134        4,912
Federal Home Loan Bank advances ........................      46,749       52,071
Treasury tax and loan open note ........................          93          556
Junior subordinated debentures .........................       4,125        4,125
Dividends payable ......................................         337          343
Other liabilities ......................................       1,565        1,723
                                                           ----------------------
        TOTAL LIABILITIES ..............................     347,814      344,006
                                                           ----------------------
Redeemable common stock held by employee stock
  ownership plan with 401(k) provisions (KSOP) .........       2,882        2,971
                                                           ----------------------

STOCKHOLDERS' EQUITY

Common stock ...........................................         200          200
Additional paid-in capital .............................       4,251        4,251
Retained earnings ......................................      37,204       36,071
Accumulated other comprehensive income .................         276          788
Less net cost of common shares acquired for the treasury     (13,803)     (12,902)
Less maximum cash obligation related to KSOP shares ....      (2,882)      (2,971)
                                                           ----------------------
        TOTAL STOCKHOLDERS' EQUITY .....................      25,246       25,437
                                                           ----------------------

        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....   $ 375,942    $ 372,414
                                                           ======================
</TABLE>

See notes to Consolidated Condensed Financial Statements.

                                       3
<PAGE>

                  Iowa First Bancshares Corp. and Subsidiaries

                   Consolidated Condensed Statements of Income
                      (In Thousands, Except Per Share Data)
                                   (Unaudited)
<TABLE>

                                                           Three Months Ended    Six Months Ended
                                                                 June 30,            June 30,
                                                           --------------------------------------
                                                             2004       2003      2004      2003
                                                           --------------------------------------
<S>                                                        <C>        <C>       <C>       <C>
INTEREST AND DIVIDEND INCOME:
  Loans, including fees:
    Taxable .............................................   $ 4,060   $ 4,435   $ 8,133   $ 8,917
    Nontaxable ..........................................        52        25        95        59
  Investment securities available for sale:

    Taxable .............................................       175       247       376       503
    Nontaxable ..........................................       166       183       337       376
  Federal funds sold ....................................        75       141       157       258
  Restricted investment securities ......................        16        30        27        61
  Other .................................................        56        29        98        51
                                                            -------------------------------------
        Total interest and dividend income ..............     4,600     5,090     9,223    10,225
                                                            -------------------------------------
INTEREST EXPENSE:
  Deposits ..............................................       957     1,229     1,935     2,486
  Note payable ..........................................        22        39        45       100
  Other borrowed funds ..................................       627       876     1,296     1,806
  Junior subordinated debentures ........................       107       107       213       213
                                                            -------------------------------------
        Total interest expense ..........................     1,713     2,251     3,489     4,605
                                                            -------------------------------------

        Net interest income .............................     2,887     2,839     5,734     5,620
Provision for loan losses ...............................        90        90       260       460
                                                            -------------------------------------
        Net interest income after provision for
        loan losses .....................................     2,797     2,749     5,474     5,160
                                                            -------------------------------------
Other income:
  Trust department ......................................        95        95       187       190
  Service fees ..........................................       485       415       914       763
  Investment securities gains, net ......................        --        12        33        22
  Gains on loans sold ...................................        94       111       114       179
  Corporate owned life insurance income .................        43        54        89       108
  Other .................................................       127        78       199       150
                                                            -------------------------------------
        Total other income ..............................       844       765     1,536     1,412
                                                            -------------------------------------
Operating expenses:
  Salaries and employee benefits ........................     1,275     1,218     2,550     2,484
  Occupancy expenses, net ...............................       183       164       374       342
  Equipment expenses ....................................       165       179       320       332
  Office supplies, printing, and postage ................        73        85       158       192
  Computer costs ........................................       131       135       260       265
  Advertising and business promotion ....................        45        49        80        79
  Other operating expenses ..............................       333       350       634       686
                                                            -------------------------------------
        Total operating expenses ........................     2,205     2,180     4,376     4,380
                                                            -------------------------------------
        Income before income taxes ......................   $ 1,436   $ 1,334   $ 2,634   $ 2,192
Income taxes ............................................       448       390       823       631
                                                            -------------------------------------
        Net income ......................................   $   988   $   944   $ 1,811   $ 1,561
                                                            =====================================
Net income per common share, basic and diluted ..........   $  0.71   $  0.67   $  1.29   $  1.10
                                                            =====================================
Dividends declared per common share .....................   $  0.24   $  0.24   $  0.49   $  0.47
                                                            =====================================

Comprehensive income ....................................   $   472   $ 1,015   $ 1,299   $ 1,637
                                                            =====================================
</TABLE>

See notes to Consolidated Condensed Financial Statements


                                       4
<PAGE>

                  Iowa First Bancshares Corp. and Subsidiaries

                 Consolidated Condensed Statements of Cash Flows
                 For The Six Months Ended June 30, 2004 and 2003
                                 (In Thousands)
                                   (Unaudited)
<TABLE>

                                                                           2004       2003
                                                                        --------------------
<S>                                                                     <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..........................................................   $  1,811    $  1,561
Adjustments to reconcile net income to net cash
provided by operating activities:
  Proceeds from loans sold ..........................................      6,219       9,800
  Loans underwritten ................................................     (6,254)    (10,268)
  Gains on loans sold ...............................................       (114)       (145)
  Provision for loan losses .........................................        260         460
  Investment securities gains, net ..................................        (33)        (22)
  Depreciation ......................................................        284         259
  Amortization of premiums and accretion of discounts
    on investment securities available for sale, net ................        114          95
  Net decrease in accrued interest receivable .......................         80         492
  Net decrease in other assets ......................................        102          27
  Net increase in other liabilities .................................        147          44
                                                                        --------------------
        Net cash provided by operating activities ...................   $  2,616    $  2,303
                                                                        --------------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Net increase in interest-bearing deposits at financial institutions   $ (1,328)   $ (4,850)
  Net (increase) decrease in federal funds sold .....................      6,969     (16,435)
  Proceeds from sales of available for sale securities ..............      1,151         516
  Proceeds from maturities, calls and paydowns of available for sale      12,037       4,251
  Purchases of available for sale securities ........................    (10,954)     (4,037)
  Net (increase) decrease in loans ..................................    (13,752)      2,692
  Purchases of bank premises and equipment ..........................       (309)     (1,615)
  Increase in cash value of life insurance contracts ................        (84)       (100)
  Proceeds from sales of restricted investment securities ...........        228          --
                                                                        --------------------
        Net cash (used in) investing activities .....................   $ (6,042)   $(19,578)
                                                                        --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase (decrease) in noninterest-bearing deposits ...........   $ (1,495)   $    853
  Net increase in interest-bearing deposits .........................      8,930      20,102
  Net increase (decrease) in securities sold under
    agreements to repurchase ........................................      2,222      (1,588)
  Net increase in line of credit ....................................        100          --
  Repayment of note payable .........................................         --      (3,324)
  Proceeds from note payable ........................................         --       3,324
  Net decrease in treasury tax and loan open note ...................       (463)        (88)
  Advances from Federal Home Loan Bank ..............................         --       9,550
  Payments of advances from Federal Home Loan Bank ..................     (5,322)    (14,407)
  Cash dividends paid ...............................................       (684)       (670)
  Purchases of common stock for the treasury ........................       (901)       (107)
                                                                        --------------------
        Net cash provided by financing activities ...................   $  2,387    $ 13,645
                                                                        --------------------
   Net decrease in cash and due from banks ..........................     (1,039)     (3,630)
   Beginning cash and due from banks ................................   $ 12,988    $ 17,283
                                                                        --------------------
   Ending cash and due from banks ...................................   $ 11,949    $ 13,653
                                                                        ====================

Supplemental Disclosures of Cash Flow Information, cash payments for:
  Interest ..........................................................   $  3,535    $  4,676
  Income taxes ......................................................        689         697
Supplemental Schedule of Noncash Investing and Financing Activities:
  Change in accumulated other comprehensive income, unrealized
    gains (losses) on investment securities available for sale, net .       (512)         76
  (Increase) in maximum cash obligations related to KSOP shares .....         89          --
   Transfers of loans to other real estate owned ....................         25         140
</TABLE>

See notes to Consolidated Condensed Financial Statements.

                                       5
<PAGE>

                  IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



Note 1.  Nature of Business and Significant Accounting Policies

Nature of business:

Iowa  First   Bancshares  Corp.  (the  "Company")  is  a  bank  holding  company
headquartered in Muscatine,  Iowa. The Company owns the outstanding stock of two
national banks, First National Bank of Muscatine  (Muscatine) and First National
Bank in Fairfield  (Fairfield).  First National Bank of Muscatine has a total of
five  locations in  Muscatine,  Iowa.  First  National Bank in Fairfield has two
locations in  Fairfield,  Iowa.  Each bank is engaged in the general  commercial
banking   business  and  provides  full  service   banking  to  individuals  and
businesses, including checking, savings, money market and time deposit accounts,
commercial loans,  consumer loans,  real estate loans, safe deposit  facilities,
transmitting of funds,  trust services,  and such other banking  services as are
usual and customary for commercial  banks.  Some of these other services include
sweep  accounts,  lock-box  deposits,  debit  cards,  credit-related  insurance,
internet  banking,  automated teller machines,  telephone banking and investment
services  through  a  third-party   arrangement.   The  Company  also  owns  the
outstanding  stock of Iowa First Capital Trust I, which was capitalized in March
2001  for the  purpose  of  issuing  Company  Obligated  Mandatorily  Redeemable
Preferred Securities.

Basis of Presentation:

The consolidated  financial  statements  include the accounts of the Company and
all  wholly-owned  subsidiaries,  except Iowa First Capital Trust I, which under
current  accounting rules, no longer meets the criteria for  consolidation.  The
consolidated   financial   statements  are  unaudited  and  should  be  read  in
conjunction with the  consolidated  financial  statements  contained in the 2003
Annual Report on Form 10-K.  The  consolidated  financial  statements  have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America and conform to predominant practices within the banking
industry.  Management  of  the  Company  has  made a  number  of  estimates  and
assumptions  relating  to the  reporting  of  assets  and  liabilities  and  the
disclosure  of contingent  assets and  liabilities  to prepare the  consolidated
financial statements.  In the opinion of management,  all adjustments and normal
recurring accruals  considered  necessary for a fair presentation of the results
of  operations  for the interim  periods  presented  herein have been  included.
Operating  results  for the three and six  months  ended  June 30,  2004 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2004.

Reclassifications:

Certain amounts in the prior year financial  statements have been  reclassified,
with no effect on net income or stockholders' equity, to conform to current year
presentations.

Note 2.  Capital Stock and Earnings Per Share

Common shares and preferred stock  authorized total 6,000,000 shares and 500,000
shares,  respectively.  Basic  earnings  per share is arrived at by dividing net
income by the weighted average number of shares of common stock  outstanding for
the respective period.  Diluted earnings per share is arrived at by dividing net
income  by the  weighted  average  number  of  common  stock  and  common  stock
equivalents  outstanding for the respective period. The average number of shares
of common  stock  outstanding  for the three and six months  ended June 30, 2004
were  1,398,886 and  1,406,240,  respectively.  The average  number of shares of
common stock  outstanding  for the three and six months ended June 30, 2003 were
1,418,983 and 1,423,214, respectively. There were no common stock equivalents in
2004 or 2003.

Note 3.   Commitments and Contingencies

The Banks are parties to financial instruments with  off-balance-sheet risk made
in the normal course of business to meet the financing needs of their customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  These instruments  involve, to varying degrees,  elements of
credit and interest rate risk in excess of the amount  recognized in the balance
sheets.


                                       6
<PAGE>

The Banks' 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  is  represented  by  the   contractual   amounts  of  those
instruments.  The Banks use the same credit  policies in making  commitments and
conditional obligations as they do for on-balance-sheet instruments.

Financial instruments whose contract                June 30,        December 31,
amounts represent credit risk:                       2004               2003
--------------------------------------------------------------------------------

Commitments to extend credit .............        $45,390,000       $43,843,000
Standby letters of credit ................          1,956,000         2,336,000

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon  and some of the  commitments  will be sold to other
financial  intermediaries  if drawn upon,  the total  commitment  amounts do not
necessarily  represent  future  cash  requirements.   The  Banks  evaluate  each
customer's creditworthiness on a case-by-case basis.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily  issued to support  public and  private  borrowing  arrangements  and,
generally,  have terms of one year, or less. The credit risk involved in issuing
letters of credit is  essentially  the same as that  involved in extending  loan
facilities to customers.  The Banks hold collateral,  which may include accounts
receivable,  inventory,  property,  equipment, and income-producing  properties,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance  with the terms of the agreement with the third party,
the Banks would be required to fund the commitment. The maximum potential amount
of future  payments  the Banks could be required to make is  represented  by the
contractual  amount shown in the summary above. If the commitment is funded, the
Banks would be entitled to seek recovery from the customer. At June 30, 2004 and
December 31, 2003 no amounts have been  recorded as  liabilities  for the Banks'
potential obligations under these guarantees.

The Company has also executed  contracts  for the sale of mortgage  loans in the
secondary  market in the  amount  of  $80,000  and none as of June 30,  2004 and
December 31, 2003,  respectively.  These  amounts,  representing  loans held for
sale, are included in loans at the respective balance sheet dates.

                                       7
<PAGE>

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

Results of Operations:

Quarter ended June 30, 2004 compared with quarter ended June 30, 2003:

The Company recorded net income of $988,000 for the quarter ended June 30, 2004,
compared  with net income of $944,000 for the quarter  ended June 30,  2003,  an
increase of $44,000 or 4.7%.  This  increase in net income  resulted from higher
net interest income,  higher noninterest  income,  identical  provision for loan
losses,  and controlled  noninterest  expenses during the second quarter of 2004
compared to the second quarter of 2003.

Basic and diluted  earnings  per share were $.71 for the three months ended June
30,  2004,  $.04 or 6.0%  more  than the same  period  in  2003.  The  Company's
annualized  return on average  assets  for the second  quarter of 2004 was 1.04%
compared to .95%  during the second  quarter of the prior  year.  The  Company's
annualized return on average equity for the three months ended June 30, 2004 and
June 30, 2003 was 15.7% and 15.2%, respectively.

The  distribution of average assets,  liabilities and  stockholders'  equity and
interest rates, as well as interest  differential was as follows (dollar amounts
in  thousands  and  income and rates on fully  taxable  equivalent  basis  using
statutory tax rates in effect for the year presented):
<TABLE>
                                                               Three Months Ended              Three Months Ended
                                                                  June 30, 2004                   June 30, 2003
                                                        -------------------------------   ------------------------------
                                                                                Average                          Average
                                                        Balance    Interest      Rate     Balance   Interest       Rate
                                                        -----------------------------------------------------------------
<S>                                                     <C>        <C>          <C>       <C>       <C>         <C>
Assets
Taxable loans, net ..................................   $268,798    $  4,060     6.04%    $270,395   $  4,435      6.56%
Taxable investment securities available for sale ....     19,648         175     3.56%      21,903        247      4.51%
Nontaxable investment securities and loans ..........     19,186         330     6.89%      18,131        315      6.95%
Federal funds sold ..................................     33,716          75     0.89%      51,271        141      1.10%
Restricted investment securities ....................      2,897          16     2.21%       3,957         30      3.03%
Interest-bearing deposits at financial
  institutions ......................................      8,499          56     2.64%       5,166         29      2.25%
                                                        --------------------              -------------------
        Total interest-earning assets ...............    352,744       4,712     5.34%     370,823      5,197      5.61%
                                                                    --------                         --------
Cash and due from banks .............................     15,205                            13,845
Bank premises and equipment, net ....................      6,748                             6,498
Life insurance contracts ............................      4,322                             4,031
Other assets ........................................      2,744                             3,498
                                                        --------                          --------
        Total .......................................   $381,763                          $398,695
                                                        ========                          ========
Liabilities
Deposits:

  Interest-bearing demand ...........................   $134,395    $    192     0.57%   $134,976   $    274       0.81%
  Time ..............................................    109,023         765     2.82%    114,833        955       3.34%
Note payable ........................................      2,716          22     3.18%      3,300         39       4.73%
Other borrowings ....................................     54,259         627     4.64%     68,977        876       5.10%
Junior subordinated debentures ......................      4,125         107    10.20%      4,125        107      10.20%
                                                        --------------------             --------
        Total interest-bearing liabilities ..........    304,518       1,713     2.26%    326,211      2,251       2.77%
                                                                    --------                         -------
Noninterest-bearing deposits ........................     46,997                           42,811
Other liabilities ...................................      1,922                            2,020
                                                        --------                         --------
        Total liabilities ...........................    353,437                          371,042
Redeemable common stock held by KSOP ................      3,072                            2,717
Stockholders' Equity ................................     25,254                           24,936
                                                        --------                         --------
        Total .......................................   $381,763                         $398,695
                                                        ========                         ========
Net interest earnings ...............................               $  2,999                         $  2,946
                                                                    ========                         ========

Net Interest Margin (net interest earnings divided by
  total interest-earning assets) ....................                            3.41%                             3.18%
                                                                                ======                            ======
</TABLE>

Nonaccruing  loans  are  included  in the  average  balance.  Loan  fees are not
material.

The net interest  margin  increased  to 3.41% during the second  quarter of 2004
compared  to 3.18%  during  the second  quarter  of 2003.  The return on average
interest-earning  assets  decreased 27 basis points (from 5.61% in 2003 to 5.34%
in 2004) and interest paid on average interest-bearing  liabilities decreased 51
basis points (from 2.77% in 2003 to 2.26% in 2004).

                                       8
<PAGE>

The Federal  Reserve  Bank Board and Chairman  Greenspan  during all of 2003 and
through June 30,  2004,  continued to manage  short-term  interest  rates at, or
near,  lows not seen in decades.  The prime lending rate began 2003 at 4.25% and
ended the year at 4.00%,  the same rate in effect as of June 30, 2004. This rate
was increased to 4.25% in early July, 2004,  signaling a reversal of the Federal
Reserve Bank's accommodative monetary policy. During this period of historically
low interest rates,  the Company has emphasized the utilization of interest rate
floors on  selected  commercial  and  agricultural  loans.  During the first two
quarters  of 2004 and the entire  year of 2003 most,  if not all,  of such loans
subject to  interest  rate  floors were  actually  paying the floor rate.  This,
coupled  with a change in the mix of the loan  portfolio,  resulted in the rates
received on taxable loans during the second  quarter of 2004,  versus the second
quarter of 2003, declining the same amount as the rates paid on interest-bearing
liabilities  (51 basis points).  As market  interest  rates rise,  rates paid on
interest-bearing  liabilities may, for a time, increase more than rates received
on taxable loans. This outcome is possible due to the loans which are subject to
floor rate pricing lagging market interest rate increases until such time as the
floor rate has been  exceeded.  The  extent of this  impact  will  depend on the
amount and timing of future market interest rate hikes.

Rates  received  on  taxable  investment  securities  available  for  sale  have
decreased  during the second quarter of 2004,  compared to the second quarter of
2003,  at a faster  pace than the  rates  paid on  interest-bearing  liabilities
(decreases  of 95 basis  points  and 51  basis  points,  respectively).  This is
largely  due to  maturities  and early  calls of taxable  investment  securities
coupled with  reinvestment at appreciably  lower interest rates. This portfolio,
however,  with an average maturity of less than four years, had an interest rate
return during the quarter similar to that of five year treasury securities.

Rates received during the quarter ended June 30, 2004, versus the second quarter
of 2003,  on  nontaxable  investment  securities  available  for sale and  loans
decreased  at a much  slower  pace  than  the  rates  paid  on  interest-bearing
liabilities  (decreases  of 6 basis points and 51 basis  points,  respectively).
This was due largely to a longer  average  duration  for  nontaxable  investment
securities   available  for  sale  and  loans  than  the  average  duration  for
interest-bearing  liabilities.  Most  of the  nontaxable  investment  securities
available for sale were  purchased  when market  interest rates were higher than
rates  currently  available.  In the current  interest  rate  environment,  when
taxable and nontaxable  investment  securities  mature or are sold,  called,  or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.

The rate received on overnight  federal  funds sold to other banks  decreased 21
basis points during the second quarter of 2004,  compared to the same quarter of
2003.  Given the Company's  relatively  large balance held in federal funds sold
(8.8% of quarterly  average  assets),  this caused downward  pressure on the net
interest  income.  As of June 30, 2004, total federal funds sold to total assets
had been reduced to 6.5%.  These  federal  funds sold can be used to fund future
loan  demand,  deposit  or  other  liability  outflows,   investment  securities
purchases, or various other purposes as identified by management.

The  rate  earned  on  interest-bearing   deposits  at  financial   institutions
(primarily  FDIC  insured  certificates  of deposit)  increased  39 basis points
during the second  quarter of 2004  versus the same  quarter of 2003,  while the
average balance increased over $3,300,000. This asset category was emphasized as
it yielded 175 basis points over federal funds sold with little,  if any, credit
risk.   The  average   duration  of   interest-bearing   deposits  at  financial
institutions was less than two years during the quarter ended June 30, 2004.

During  this  period  of  low  market   interest   rates,   the  rates  paid  on
interest-bearing  demand and time  deposits  were reduced 24 basis points and 52
basis points, respectively, when comparing the second quarters of 2004 and 2003.

The rate paid on the note payable  outstanding  declined a substantial 155 basis
points  during the second  quarter of 2004 compared to the same quarter of 2003.
This was the result of refinancing this debt with a different lender at far more
favorable terms.  The impact at this refinancing was reflected the entire second
quarter of 2004, compared to only a portion of 2003.

The  usage of  wholesale  funding  sources  (primarily  Federal  Home  Loan Bank
advances),  while  mitigating  intermediate  and  long-term  interest rate risk,
tended to increase overall interest expense. The Company's average rate paid for
such  Federal  Home Loan Bank  advances  and other funds was reduced by 46 basis
points  when  comparing  the second  quarters of 2004 and 2003.  Management  has
noticeably  reduced  reliance on wholesale  funding  sources as evidenced by the
average balance in this category  declining nearly $15 million during the second
quarter of 2004 compared to the second quarter of 2003.

                                       9
<PAGE>

Intense  competition  for all  types of loans  and  deposits  tends to limit the
Company's  ability  to  control  pricing  and  other  terms  when  dealing  with
customers.  Despite  these  limitations,  the Company  was able to increase  the
overall net  interest  margin to 3.41%  during the three  months  ended June 30,
2004, compared to 3.18% for the same period last year.

Provisions for loan losses were $90,000 for the three months ended June 30, 2004
and June 30,  2003.  Net loan  charge-offs  for the quarter  ended June 30, 2004
totaled only $26,000 compared to net charge-offs of $54,000 for the same quarter
in 2003.

The allowance  for possible  loan losses is  maintained at the level  considered
adequate  by  management  of the Banks to  provide  for  probable  losses in the
existing loan  portfolio.  The  allowance is increased by provisions  charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the  allowance  balance  the  Banks  make  continuous  evaluations  of the  loan
portfolio and related  off-balance sheet commitments,  consider current economic
conditions,  the  composition  of  the  loan  portfolio,  historical  loan  loss
experience, review of specific problem loans, the estimated net realizable value
or the fair value of the underlying collateral,  and other factors. There can be
no assurance that loan losses will not exceed the estimated  amounts or that the
company will not be required to make  additional  provisions  for loan losses in
the  future.  Asset  quality  is a constant  priority  for the  Company  and its
subsidiary  banks.  Should  the  economic  climate  deteriorate,  borrowers  may
experience  difficulty,  and  the  level  of  non-performing,  charge-offs,  and
delinquencies could rise thus requiring further increases in the provision.

Nonaccrual loans totaled  $1,962,000 at June 30, 2004, a decrease of $161,000 or
7.6% from  December 31,  2003.  There was no other real estate owned at June 30,
2004 or December  31,  2003.  Loans past due 90 days or more and still  accruing
totaled  $203,000,  which was  $12,000 or 5.6% less than at year-end  2003.  The
allowance for possible  loan losses of $3,274,000 at June 30, 2004,  represented
1.2% of gross loans and 151% of total nonaccrual loans, other real estate owned,
and loans past due 90 days or more and still accruing.

Other income results from the charges and fees collected by the Company from its
customers  for  various  services  performed,  gross trust  department  revenue,
miscellaneous  other  income and gains (or losses)  from the sale of  investment
securities in the available for sale category and loans.  Total other income for
the second  quarter of 2004 was $844,000;  $79,000 or 10.3% more than the second
quarter  of 2003.  Service  fees,  particularly  on deposit  accounts,  were the
largest  single  area of growth  in the other  income  category,  exhibiting  an
increase  of  $70,000  or  16.9%.  Due  to  a  significant   reduction  in  loan
refinancings,   gains  on  loans  sold  declined  $42,000  or  37.8%.   Finally,
miscellaneous  other income rose $49,000 or 62.8%.  The majority of this $49,000
increase  in the second  quarter of 2004  compared  to the same  quarter in 2003
resulted from a non-recurring revenue source.

Operating  expenses include all the costs incurred to operate the Company except
for interest expense,  the loan loss provision and income taxes. For the quarter
ended June 30, 2004, salaries and employee benefits expense increased $57,000 or
4.7% due to normal raises, incentives and the rising cost of benefits. Occupancy
and equipment  expenses  increased  very  modestly by $5,000 or 1.5%.  All other
operating  expenses  decreased  $37,000 or 6.0% due  largely to lower  costs for
supplies,  printing and postage, as well as loan related expenses and insurance.
Total  operating  expenses  increased a very  slight  $25,000 or 1.1% during the
second quarter of 2004 versus the same quarter last year.

Income tax expense for the quarter  ended June 30, 2004 of $448,000  represented
31.2% of income before taxes.  For the  comparable  quarter last year income tax
expense was 29.2% of income before tax.

The efficiency ratio,  defined as noninterest  expense,  excluding the provision
for loan losses,  as a percent of net interest income plus  noninterest  income,
was  59.0%  and  60.5%  for the  three  months  ended  June 30,  2004 and  2003,
respectively.  The primary reasons for this  improvement in the efficiency ratio
are discussed previously in this report.

Results of Operations:

Six months ended June 30, 2004 compared with six months ended June 30, 2003

The Company  recorded net income of $1,811,000 for the six months ended June 30,
2004, compared with net income of $1,561,000 for the two quarters ended June 30,
2003,  an increase of $250,000 or 16.0%.  This  increase in net income  resulted
from higher net interest income,  higher noninterest income, lower provision for
loan losses,  and tightly controlled  noninterest  expenses during the first two
quarters of 2004 compared to the same period during 2003.

Basic and diluted  earnings  per share were $1.29 for the six months  ended June
30,  2004,  $.19 or 17.3%  more  than the same  period  in 2003.  The  Company's
annualized  return on average assets for the first two quarters of 2004 was .96%
compared to .80%  during the same  quarters  of the prior  year.  The  Company's
annualized  return on average  equity for the six months ended June 30, 2004 and
June 30, 2003 was 14.4% and 12.7%, respectively.

                                       10
<PAGE>

The  distribution of average assets,  liabilities and  stockholders'  equity and
interest rates, as well as interest  differential was as follows (dollar amounts
in  thousands  and  income and rates on fully  taxable  equivalent  basis  using
statutory tax rates in effect for the year presented):

<TABLE>

                                                           Six Months Ended               Six Months Ended
                                                            June 30, 2004                   June 30, 2003
                                                   -----------------------------------------------------------------
                                                                          Average                            Average
                                                   Balance     Interest     Rate     Balance   Interest        Rate
                                                   -----------------------------------------------------------------
<S>                                                <C>         <C>        <C>       <C>        <C>           <C>
Assets

Taxable loans, net .............................   $265,200    $  8,133     6.13%    $269,522   $  8,917       6.62%
Taxable investment securities available for sale     19,844         376     3.79%      21,616        503       4.65%
Nontaxable investment securities and loans .....     19,017         655     6.89%      18,750        659       7.03%
Federal funds sold .............................     35,517         157     0.89%      47,207        258       1.09%
Restricted investment securities ...............      2,949          27     1.83%       3,957         61       3.08%
Interest-bearing deposits at financial
  institutions .................................      8,019          98     2.44%       4,490         51       2.27%
                                                   --------------------              -------------------
     Total interest-earning assets .............    350,546       9,446     5.39%     365,542     10,449       5.72%
                                                               --------                         --------
Cash and due from banks ........................     14,730                                       14,027
Bank premises and equipment, net ...............      6,747                                        6,129
Life insurance contracts .......................      4,301                                        4,005
Other assets ...................................      2,705                                        3,744
                                                   --------                                     --------
     Total .....................................   $379,029                                     $393,447
                                                   ========                                     ========
Liabilities
Deposits:

  Interest-bearing demand ......................   $130,235    $    369     0.57%    $126,382   $    542       0.86%
  Time .........................................    109,531       1,566     2.88%     115,666      1,944       3.39%
Note payable ...................................      2,738          45     3.26%       3,300        100       6.06%
Other borrowings ...............................     55,673       1,296     4.70%      70,825      1,806       5.14%
Junior subordinated debentures .................      4,125         213    10.26%       4,125        213      10.26%
                                                   --------------------              -------------------
     Total interest-bearing liabilities ........    302,302       3,489     2.33%     320,298      4,605       2.90%
                                                               --------                         --------
Noninterest-bearing deposits ...................     46,440                            43,720
Other liabilities ..............................      1,809                             1,896
                                                   --------                          --------
     Total liabilities .........................    350,551                           365,914
Redeemable common stock held by KSOP ...........      3,038                             2,717
Stockholders' Equity ...........................     25,440                            24,816
                                                   --------                          --------
     Total .....................................   $379,029                          $393,447
                                                   ========                          ========

Net interest earnings ..........................               $  5,957                         $  5,844
                                                               ========                         ========

Net Interest Margin (net interest earnings

divided by total interest-earning assets) ......                            3.40%                              3.20%
                                                                           ======                             ======
</TABLE>

Nonaccruing  loans  are  included  in the  average  balance.  Loan  fees are not
material.

                                       11
<PAGE>

The net interest margin increased to 3.40% during the first two quarters of 2004
compared to 3.20% during the first two  quarters of 2003.  The return on average
interest-earning  assets  decreased 33 basis points (from 5.72% in 2003 to 5.39%
in 2004) and interest paid on average interest-bearing  liabilities decreased 57
basis points (from 2.90% in 2003 to 2.33% in 2004).

Rates  received  during the first two  quarters  of 2004,  compared  to the same
quarters  in  2003,  on  taxable  loans   decreased  less  than  rates  paid  on
interest-bearing  liabilities (decreases of 49 basis points and 57 basis points,
respectively).

Rates  received  on  taxable  investment  securities  available  for  sale  have
decreased  during the first six months of 2004,  compared  to the same period in
2003,  at a faster  pace than the  rates  paid on  interest-bearing  liabilities
(decreases  of 86 basis  points  and 57  basis  points,  respectively).  This is
largely  due to  maturities  and early  calls of taxable  investment  securities
coupled with  reinvestment at appreciably  lower interest rates. This portfolio,
however,  with an average maturity of less than four years, had an interest rate
return  during the first six months in excess of the interest  return  earned on
five year treasury securities.

Rates  received  during  the first two  quarters  of 2004,  versus the first two
quarters of 2003, on  nontaxable  investment  securities  available for sale and
loans  decreased  at a much slower pace than the rates paid on  interest-bearing
liabilities  (decreases of 14 basis points and 57 basis  points,  respectively).
This was due largely to a longer  average  duration  for  nontaxable  investment
securities   available  for  sale  and  loans  than  the  average  duration  for
interest-bearing  liabilities.  Most  of the  nontaxable  investment  securities
available for sale were  purchased  when market  interest rates were higher than
rates  currently  available.  In the current  interest  rate  environment,  when
taxable and nontaxable  investment  securities  mature or are sold,  called,  or
otherwise paid down, the reinvestment rate available is nearly always lower than
the yield of the liquidating security.

The rate received on overnight  federal  funds sold to other banks  decreased 20
basis points during the first six months of 2004, compared to the same period in
2003.  Given the Company's  relatively  large balance held in federal funds sold
(9.4% of year-to-date average assets),  this caused downward pressure on the net
interest  income.  As of June 30, 2004, total federal funds sold to total assets
had been reduced to 6.5%.  These  federal  funds sold can be used to fund future
loan  demand,  deposit  or  other  liability  outflows,   investment  securities
purchases, or various other purposes as identified by management.

The  rate  earned  on  interest-bearing   deposits  at  financial   institutions
(primarily  FDIC  insured  certificates  of deposit)  increased  17 basis points
during the first six months of 2004  versus the first six months of 2003,  while
the  average  balance  increased  over  $3,500,000.   This  asset  category  was
emphasized  as it yielded 155 basis points over federal  funds sold with little,
if any,  credit  risk.  The  average  duration of  interest-bearing  deposits at
financial  institutions was less than two years during the six months ended June
30, 2004.

During  this  period  of  low  market   interest   rates,   the  rates  paid  on
interest-bearing  demand and time  deposits  were reduced 29 basis points and 51
basis points,  respectively,  when  comparing the first two quarters of 2004 and
2003.

The rate paid on the note payable  outstanding  declined a remarkable  280 basis
points  during the first six months of 2004 compared to the same period in 2003.
This was the result of refinancing this debt with a different lender at far more
favorable  terms. The impact of this refinancing was reflected the entire second
quarter of 2004 compared to only a portion of 2003.

The  usage of  wholesale  funding  sources  (primarily  Federal  Home  Loan Bank
advances),  while  mitigating  intermediate  and  long-term  interest rate risk,
tended to increase overall interest expense. The Company's average rate paid for
such  Federal  Home Loan Bank  advances  and other funds was reduced by 44 basis
points when  comparing the first two quarters of 2004 and 2003.  Management  has
noticeably  reduced  reliance on wholesale  funding  sources as evidenced by the
average balance in this category declining over $15 million during the first two
quarters of 2004 compared with 2003.

Intense  competition  for all  types of loans  and  deposits  tends to limit the
Company's  ability  to  control  pricing  and  other  terms  when  dealing  with
customers.  Despite  these  limitations,  the Company  was able to increase  the
overall net interest  margin to 3.40% during the six months ended June 30, 2004,
compared to 3.20% for the same period last year.

Provisions for loan losses were $260,000 for the six months ended June 30, 2004,
compared  to  $460,000  for the  six  months  ended  June  30,  2003.  Net  loan
charge-offs for the two quarters ended June 30, 2004 totaled  $166,000  compared
to net charge-offs of $409,000 for the same quarters in 2003. The loan losses in
2003 were  primarily  attributable  to two  agricultural  loans at our Fairfield
subsidiary bank.

                                       12
<PAGE>

Other income results from the charges and fees collected by the Company from its
customers  for  various  services  performed,  gross trust  department  revenue,
miscellaneous  other  income and gains (or losses)  from the sale of  investment
securities in the available for sale category and loans.  Total other income for
the first  six  months of 2004 was  $1,536,000;  $124,000  or 8.8% more than the
first six months of 2003. Service fees,  particularly on deposit accounts,  were
the largest  single area of growth in the other income  category,  exhibiting an
increase  of  $151,000  or  19.8%.  Due  to  a  significant  reduction  in  loan
refinancings,   gains  on  loans  sold  declined  $65,000  or  36.3%.   Finally,
miscellaneous  other income rose $49,000 or 32.7%.  The majority of this $49,000
increase  in the first six months of 2004  compared  to the same  period in 2003
resulted from a non-recurring revenue source.

Operating  expenses include all the costs incurred to operate the Company except
for interest  expense,  the loan loss  provision and income  taxes.  For the two
quarters ended June 30, 2004,  salaries and employee  benefits expense increased
$66,000  or  2.7%  due to  normal  raises,  incentives  and the  rising  cost of
benefits.  Occupancy and equipment expenses increased $20,000 or 3.0%. All other
operating  expenses  decreased  $102,000  or 8.3% due largely to lower costs for
supplies,  printing,  postage,  loan  related  expenses,  insurance,  and  final
settlement of a non-recurring  liability at an amount approximately $20,000 more
advantageous to the Company than  previously  anticipated and accrued for. Total
operating  expenses  decreased  a slight  $4,000  or 0.1%  during  the first two
quarters of 2004 versus the same quarters last year.

Income tax expense  for the first six months of 2004 was 31.3% of income  before
tax. For the comparable  period last year income tax expense was 28.8% of income
before tax.

The efficiency ratio,  defined as noninterest  expense,  excluding the provision
for loan losses,  as a percent of net interest income plus  noninterest  income,
was  60.2%  and  62.3%  for the  six  months  ended  June  30,  2004  and  2003,
respectively.  The primary reasons for this  improvement in the efficiency ratio
are discussed previously in this report.

Discussion and Analysis of Financial Condition

The  Company's  assets at June 30,  2004  totaled  $375,942,000,  an increase of
$3,528,000 or 1.0% from December 31, 2003. As of June 30, 2004,  the Company had
$24,445,000  of federal funds sold compared to $31,414,000 at December 31, 2003.
Additionally,  interest-bearing  deposits at financial  institutions  (primarily
fully FDIC  insured  certificates  of deposit) as well as some  interest-bearing
demand  accounts  at various  banking  institutions  totaled  $8,276,000  versus
$6,948,000  at December 31, 2003.  This  increase  was  primarily  the result of
higher yields  available on such  certificates of deposit than could be obtained
in the federal  funds and treasury  securities  markets.  Federal funds sold and
other liquid assets have been higher the past several  quarters than the Company
would  historically  consider  normal.  These liquid  assets may be used to fund
future loan growth, deposit or other liability outflows, purchases of investment
securities  available for sale when interest  rates again rise, or various other
purposes as identified by management.

Total  available  for sale  securities  decreased  $3,132,000 or 8.4% during the
first  six  months  of 2004 to total  $34,025,000  at June 30,  2004.  The Banks
emphasize  purchase of securities with maturities of five years and less as such
purchases  typically offer reasonable yields with limited credit risk as well as
limited  interest  rate risk.  Additionally,  selected  securities  with  longer
maturities  are  owned in order  to  enhance  overall  portfolio  yield  without
significantly  increasing  risk.  In the low  interest  rate  environment  which
continued  during  the first two  quarters  of 2004,  the  banks  limited  their
purchases of  securities  to less than the total of  securities  that were sold,
matured,  called,  or paid down.  Furthermore,  most of the securities that were
purchased had relatively short maturities or likely early call dates. Securities
sold thus far in 2004 totaled $1,151,000 and resulted in net gains recognized of
$33,000.

Net loans  totaled  $280,472,000  at June 30, 2004, an  encouraging  increase of
$13,547,000 or 5.1% from December 31, 2003.  Competition for high-quality  loans
remains  intense in all loan  categories.  Refinancing of home loans  continued,
albeit at a  substantially  slower  pace than  during the first two  quarters of
2003.  The  Company  sells  many  of  these  loans  in  the  secondary   market.
Consequently,  the loans which are sold,  as well as the loans  remaining in the
Company's  portfolio  but  refinanced  at lower  rates,  combine to put downward
pressure on loan yields and the volume of home loans on the balance sheet.

                                       13
<PAGE>

Total deposits at June 30, 2004, were $285,011,000, an increase of $7,435,000 or
2.7% from the balance at December 31, 2003.  Certificates of deposit represented
on average for the six months  ended June 30, 2004,  approximately  38% of total
deposits.  Interest-bearing demand deposits,  comprised of savings, money market
and NOW accounts,  represented another 46% of average deposits. The final 16% of
average  deposits were in  noninterest-bearing  accounts.  Securities sold under
agreements  to  repurchase  increased  $2,222,000  to  $7,134,000,  and advances
borrowed from the Federal Home Loan Bank  declined by  $5,322,000  from year-end
2003, totaling $46,749,000 at quarter end.

The note payable  balance of  $2,800,000 at June 30, 2004,  was $100,000  higher
than the December  31, 2003,  balance due to  short-term  borrowing  for holding
company cash flow  management  purposes.  Repayment of this $100,000  short-term
borrowing  is  anticipated  during the 3rd quarter of 2004.  The next  scheduled
annual  principal  payment of $600,000 is due at the end of the third quarter of
2004.  This note was  refinanced  during  the second  quarter  of 2003.  The new
variable rate revolving five-year term note is priced at Prime less one percent,
with a floor of 3.25% and a ceiling of 5.25%,  considerably lower than the prior
fixed rate of over 7.35%.

Interest Rate Sensitivity

The Company  manages its balance  sheet to minimize the impact of interest  rate
movements on its earnings.  The term "rate sensitive" refers to those assets and
liabilities  which are  "sensitive" to  fluctuations  in rates and yields.  When
interest  rates move,  earnings may be affected in many ways.  Interest rates on
assets and liabilities  may change at different  times or by different  amounts.
Maintaining a proper  balance  between rate  sensitive  earning  assets and rate
sensitive   liabilities  is  the  principal  function  of  asset  and  liability
management of a banking organization.

A positive  repricing gap for a given period exists when total  interest-earning
assets exceed total interest-bearing  liabilities and a negative gap exists when
total  interest-bearing  liabilities are in excess of  interest-earning  assets.
Generally a positive  repricing gap will result in increased net interest income
in a rising rate environment and decreased net interest income in a falling rate
environment.  A negative  repricing gap tends to produce  increased net interest
income in a falling rate  environment  and  decreased  net interest  income in a
rising rate environment.  At June 30, 2004, rate sensitive  liabilities exceeded
rate sensitive assets within a one year maturity range and, thus, the Company is
theoretically  positioned to benefit from a decline in interest rates within the
next year.

The Company's  repricing gap position is useful for measuring  general  relative
risk  levels.  However,  even with  perfectly  matched  repricing  of assets and
liabilities,  interest rate risk cannot be avoided entirely.  Interest rate risk
remains in the form of prepayment risk of assets and liabilities, timing lags in
adjusting  certain assets and  liabilities  that have varying  sensitivities  to
market interest rates, and basis risk. Basis risk refers to the possibility that
the repricing  behavior of variable-rate  assets could differ from the repricing
characteristics  of  liabilities  which  reprice in the same time  period.  Even
though  these  assets are  match-funded,  the spread  between  asset  yields and
funding costs could change.  Because the repricing gap position does not capture
these risks,  Management  utilizes simulation modeling to measure and manage the
rate sensitivity exposure of earnings. The Company's simulation model provides a
projection  of the  effect on net  interest  income  of  various  interest  rate
scenarios and balance sheet strategies.

Liquidity

For  banks,  liquidity  represents  ability  to meet both loan  commitments  and
deposit withdrawals.  Factors which influence the need for liquidity are varied,
but include general economic  conditions,  asset/liability mix, bank reputation,
future  FDIC  funding  needs,  changes  in  regulatory  environment,  and credit
standing.  Assets which provide liquidity consist principally of loans, cash and
due from banks, interest-bearing deposits at financial institutions,  investment
securities,  and short-term  investments  such as federal  funds.  Maturities of
securities  held for  investment  purposes and loan payments  provide a constant
flow of funds available for cash needs. Additionally, liquidity can be gained by
the sale of loans or securities  prior to maturity if such assets had previously
been designated as available for sale. Interest rates, relative to the rate paid
by the  security or loan sold,  along with the maturity of the security or loan,
are the major determinates of the price which can be realized upon sale.

                                       14
<PAGE>

The  stability  of the  Company's  funding,  and  thus  its  ability  to  manage
liquidity,  is greatly enhanced by its consumer deposit base.  Consumer deposits
tend to be small in size,  diversified  across a large base of individuals,  and
are  government  insured to the extent  permitted by law. Total deposits at June
30, 2004, were $285,011,000 or 75.8% of total liabilities and equity.

Federal funds sold overnight  totaled  24,445,000 or 6.5% of June 30, 2004 total
assets.  These  federal  funds sold may be used to fund loans as well as deposit
withdrawals, or for other purposes as defined by management.

Securities  available  for  sale  with  a fair  value  totaling  $34,025,000  at
quarter-end  included net unrealized gains of $440,000.  These securities may be
sold in whole or in part to increase  liquid  assets,  reposition the investment
portfolio, or for other purposes as defined by management.

Capital

Stockholders'  equity  decreased  $47,000 (0.2%) and $191,000  (0.8%) during the
three  and six  months  ended  June 30,  2004,  respectively.  The  year-to-date
decrease included net income of $1,811,000,  decrease of $512,000 in accumulated
other  comprehensive  income,  $678,000 of dividends  declared to  shareholders,
$901,000  of  treasury  share  purchases  and  $89,000  decrease  in the maximum
obligation related to KSOP shares.

Federal regulatory agencies have adopted various capital standards for financial
institutions,  including risk-based capital standards. The primary objectives of
the  risk-based  capital  framework  are to  provide  a  consistent  system  for
comparing capital  positions of financial  institutions and to take into account
the  different   inherent  risks  among  financial   institutions'   assets  and
off-balance-sheet items.

Risk-based  capital  standards have been  supplemented  with  requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.

A comparison of the Company's  capital as of June 30, 2004 with the requirements
to be considered adequately capitalized is presented below.

                                                                  For Capital
                                                   Actual      Adequacy Purposes
                                                   -----------------------------

Total capital to risk-weighted assets ........      12.7%            8.00%
Tier 1 capital to risk-weighted assets .......      11.5%            4.00%
Tier 1 capital to average assets .............       8.2%            4.00%

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America,  which  require the  measurement  of financial  position and  operating
results  in terms of  historical  dollars  without  considering  changes  in the
relative  purchasing  power of money  over time due to  inflation.  Unlike  most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature.

As a result,  interest  rates  have a more  significant  impact  on a  financial
institution's  performance  than the  effects  of general  levels of  inflation.
Interest  rates do not  necessarily  move in the same  direction  or in the same
magnitude  as the price of goods and  services.  In the  current  interest  rate
environment,  liquidity and the maturity  structure of the Company's  assets and
liabilities are critical to the maintenance of acceptable performance levels.

Trends, Events or Uncertainties

Officers  and  Directors of the Company and its  subsidiaries  have had, and may
have in the future,  banking  transactions in the ordinary course of business of
the Company's subsidiaries.  All such transactions are on substantially the same
terms, including interest rates on loans and collateral,  as those prevailing at
the time for comparable  transactions  with others,  involve no more than normal
risk of collectibility, and present no other unfavorable features.

In the normal  course of  business,  the Banks are  involved  in  various  legal
proceedings.  In the current opinion of management, any liability resulting from
such  proceedings  would not have a material  effect on the Company's  financial
statements.

                                       15
<PAGE>

The Company began construction during the second quarter of 2004 of a new branch
facility on the west side of  Muscatine,  Iowa.  This branch is  scheduled to be
completed  before year-end 2004. The branch is anticipated to offer a wide array
of  banking  services  and is located  in a section  of  Muscatine  in which the
Company  has no  current  banking  facilities.  The total  cost of this  branch,
including  the  underlying  real  estate and  equipment,  is  anticipated  to be
approximately $900,000.

The Company has in the past purchased, and is authorized under an existing stock
repurchase plan to buy in the future, shares of its outstanding common stock for
the treasury as they become  available.  Pursuant to the stock  repurchase  plan
approved by the Board of Directors,  18,138 shares were purchased by the Company
during the second  quarter of 2004 and 29,781 shares were  purchased  during the
first two  quarters  of 2004.  See Part II, Item 2 of this Form 10-Q for further
detail regarding purchases of equity securities for the treasury.

Current Accounting Developments

The Financial  Accounting  Standard  Board has issued  Interpretation  (FIN)46R,
Consolidation of Variable  Interest  Entities,  an  Interpretation of Accounting
Research  Bulletin No. 51 which,  for the Company,  was  effective  for the year
ended  December  31,  2003.  FIN  46R   establishes   accounting   guidance  for
consolidation of variable  interest  entities (VIE) that function to support the
activities of the primary  beneficiary.  The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected  losses,  receives a
majority  of the  VIE's  expected  residual  returns,  or both,  as a result  of
ownership,  controlling  interest,  contractual  relationship  or other business
relationship  with a VIE.  Prior to the  implementation  of FIN 46R,  VIE's were
generally  consolidated  by an enterprise  when the enterprise had a controlling
financial  interest  through  ownership of a majority of voting  interest in the
entity.

Under the  provisions  of FIN 46R,  Iowa  First  Capital  Trust I, a 100%  owned
subsidiary of the Company,  no longer meets the criteria for consolidation.  FIN
46 was adopted on a  prospective  basis on December 31, 2003.  As a result,  the
June 30, 2004 and December 31, 2003 balance sheets include  $4,125,000 of junior
subordinated  debentures which, in prior periods,  was classified in the balance
sheet as  $4,000,000  of  Company  Obligated  Mandatorily  Redeemable  Preferred
Securities,  after a consolidation  elimination of $125,000.  Additionally,  the
June 30, 2004 and 2003 income statements include $213,000 of interest expense on
junior  subordinated  debentures  which,  for prior  periods,  was classified as
$207,000  of  interest  expense  on  Company  Obligated  Mandatorily  Redeemable
Preferred Securities, after a consolidation elimination of $6,000.

On May 6,  2004 the  Board of  Governors  of the  Federal  Reserve  System  (the
"Board")  issued a Notice of Proposed  Rulemaking  in which it proposed to allow
the continued  inclusion of trust preferred  securities in the tier 1 capital of
bank holding company's  cumulative  perpetual  preferred stock,  trust preferred
securities  and other  minority  interests to 25% of the company's  core capital
elements,  net of goodwill.  Current regulations do not require the deduction of
goodwill.  The proposal also provides that amounts of qualifying trust preferred
securities  and  certain  minority  interests  in excess of the 25% limit may be
included in tier 2 capital,  but would be limited,  together  with  subordinated
debt and limited-life  preferred  stock, to 50% of tier 1 capital.  The proposal
provides for a three-year  transition  period for bank holding companies to meet
these quantitative  limitations.  Implementation of the proposal, in its present
form, is not expected to have a material  impact on the  consolidated  financial
statements.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

With the exception of the historical  information  contained in this report, the
matters described herein contain certain forward-looking statements with respect
to the Company's financial condition,  results of operations and business. These
forward-looking  statements are subject to certain risks and uncertainties,  not
all of which can be  predicted  or  anticipated.  Factors  that may cause actual
results to differ  materially  from those  contemplated  by the  forward-looking
statements herein include market conditions as well as conditions  affecting the
banking industry  generally and factors having a specific impact on the Company,
including but not limited to  fluctuations in interest rates and in the economy;
the  impact  of laws and  regulations  applicable  to the  Company  and  changes
therein; the impact of accounting  pronouncements  applicable to the Company and
changes  therein;  competitive  conditions  in the  markets in which the Company
operates,  including  competition  from banking and  non-banking  companies with
substantially   greater   resources;   the  Company's  ability  to  control  the
composition of its loan portfolio without adversely  affecting  interest income;
the Company's dependence on third party suppliers;  and the Company's ability to
respond to changes in technology. Readers of this Form 10-Q should therefore not
place undue reliance on forward-looking statements.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in the quantitative and qualitative  market risks
since the prior year-end.  Such risks were described in the Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2003.

                                       16
<PAGE>

Item 4.  Disclosure Controls and Procedures

As of the end of the period  covered by this  report,  the Company  conducted an
evaluation,  under the supervision and with the  participation  of the principal
executive  officer  (Chairman  of the Board,  President  and CEO) and  principal
financial  officer   (Executive  Vice  President,   Chief  Operating  Officer  &
Treasurer),  of the Company's  disclosure controls and procedures (as defined in
Rules  13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation,  the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information  required to be disclosed by
the  Company  in  reports  that it files or submits  under the  Exchange  Act is
recorded,  processed,  summarized and reported within the time periods specified
in Securities and Exchange  Commission  rules and forms.  There was no change in
the Company's  internal  control over financial  reporting  during the Company's
most recently  completed  fiscal  quarter that has  materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

                            Part II OTHER INFORMATION

Item 1.   Legal Proceedings

The Company has no legal proceedings which are deemed material.

Item 2. Changes in  Securities,  Use of Proceeds and Issuer  Purchases of Equity
        Securities

During the quarter ended June 30, 2004, the Company purchased its own
common stock, detailed as follows:

<TABLE>

                                                           Total
                                                          Number of       Maximum
                                                           Shares         Number of
                                                          Purchased      Shares That
                            Total                         As Part of     May Yet Be
                           Number of       Average        Publicly       Purchased
                            Shares        Price Paid      Announced      Under The
Period                     Purchased      Per Share        Plan (1)       Plan (1)
------------------------------------------------------------------------------------
<S>                        <C>            <C>             <C>            <C>
April 1 - April 30, 2004     5,200          $30.70          5,200          33,110
May 1 - May 31, 2004         5,500          $31.20          5,500          27,610
June 1 - June 30, 2004       7,438          $31.00          7,438          30,172
<FN>

(1)  In May 2002, the Company's board of directors  approved a stock  repurchase
     plan of up to 75,000 shares, or approximately  5.2% of the then outstanding
     shares.  The Company's board of directors in June 2004 increased this stock
     repurchase plan by authorizing the purchase of an additional 10,000 shares.
     This  stock  repurchase  plan  has no  stated  expiration  date  and is the
     Company's  only current,  publicly-announced  stock  repurchase  plan.  The
     Company anticipates future purchases under this stock repurchase plan.

</FN>
</TABLE>

The above table is required for any equity  securities of the Company which have
been registered by the Company pursuant to section 12 of the Securities Exchange
Act of 1934.  The Company has only filed a  registration  statement with the SEC
under the Securities Act of 1933 and, therefore,  its equity securities are only
registered  under section 15(d) of the Exchange Act. Thus, while the above table
is  not  required,  it  has  been  provided  in  the  interest  of  high-quality
disclosure.

Item 3.  Defaults Upon Senior Securities

There have been no defaults upon senior securities by the Company.

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

There were no matters submitted to a vote of security holders during the current
quarter.

Item 5.  Other Information

There has been no new information not previously  disclosed requiring disclosure
under this item.

                                       17
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K.

(a)      Exhibits

         Exhibit 31.1 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)

         Exhibit 31.2 - Certification pursuant to Rule 13a-15(e) and 15d-15(e)

         Exhibit 32.1 - Certification pursuant to Section 906 of the
                        Sarbanes-Oxley Act of 2002

         Exhibit 32.2 - Certification pursuant to Section 906 of the
                        Sarbanes-Oxley Act of 2002

(b)      Reports on Form 8-K.

         A Form 8-K was filed on April 22, 2004  consisting  of a press  release
         discussing financial results of the Company for the quarter ended March
         31, 2004 as well as the shareholder dividend payable in April 2004.

         A Form 8-K was filed on July 22,  2004  consisting  of a press  release
         discussing  financial  results of the  Company  for the quarter and six
         months ended June 30, 2004 as well as the shareholder  dividend payable
         in July 2004.

                                       18
<PAGE>

                  IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES

                                   SIGNATURES

Pursuant  to the  requirements  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.

                             IOWA FIRST BANCSHARES CORP.

                                 (Registrant)



August 13, 2004                                  /s/ D. Scott Ingstad
---------------                                  -------------------------------
Date                                             D. Scott Ingstad, Chairman of
                                                 the Board, President and CEO

August 13, 2004                                  /s/ Kim K. Bartling
---------------                                  -------------------------------
Date                                             Kim K. Bartling, Executive Vice
                                                 President, Chief Operating
                                                 Officer & Treasurer


                                       19