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 September 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 September 30, 2004 there were  1,381,188  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,
                   September 30, 2004 and December 31, 2003                    1

                   Consolidated Condensed Statements of
                   Income, Three and Nine months Ended
                   September 30, 2004 and 2003                                 2

                   Consolidated Condensed Statements of
                   Cash Flows, Nine months Ended
                   September 30, 2004 and 2003                                 3

                   Notes to Consolidated Condensed
                   Financial Statements                                      4-5


         Item 2.   Management's Discussion and Analysis
                   Of Financial Condition and Results of
                   Operations                                               6-16

         Item 3.   Quantitative and Qualitative Disclosures About
                   Market Risk                                                17

         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                            18

         Item 4.   Submission of Matters to a Vote of Security Holders        18

         Item 5.   Other Information                                          18

         Item 6.   Exhibits                                                   18


Signatures                                                                    19

                                       2
<PAGE>

                  IOWA FIRST BANCSHARES CORP. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (In Thousands)
                                   (Unaudited)
<TABLE>
                                                          September 30,  December 31,
                                                              2004          2003
                                                          ---------------------------
<S>                                                       <C>            <C>
               ASSETS
Cash and due from banks ................................   $  15,376      $  12,988
Interest-bearing deposits at financial institutions ....       8,413          6,948
Federal funds sold .....................................      22,907         31,414
Investment securities available for sale ...............      31,204         37,157
Loans, net of allowance for loan losses September 30,
  2004, $3,370; December 31, 2003, $3,180 ..............     275,326        266,925
Bank premises and equipment, net .......................       6,951          6,764
Accrued interest receivable ............................       2,310          2,231
Life insurance contracts ...............................       4,378          4,254
Restricted investment securities .......................       2,688          3,028
Other assets ...........................................         751            705
                                                           ------------------------
        TOTAL ASSETS ...................................   $ 370,304      $ 372,414
                                                           ========================

LIABILITIES AND STOCKHOLDERS' EQUITY
   LIABILITIES
Noninterest bearing deposits ...........................   $  50,025      $  47,549
Interest bearing deposits ..............................     233,198        230,027
                                                           ------------------------
        TOTAL DEPOSITS .................................     283,223        277,576
Note payable ...........................................       2,100          2,700
Securities sold under agreements to repurchase .........       6,865          4,912
Federal Home Loan Bank advances ........................      42,958         52,071
Treasury tax and loan open note ........................          82            556
Junior subordinated debentures .........................       4,125          4,125
Dividends payable ......................................         335            343
Other liabilities ......................................       1,845          1,723
                                                           ------------------------
        TOTAL LIABILITIES ..............................     341,533        344,006
                                                           ------------------------

Redeemable common stock held by employee stock
ownership plan with 401(k) provisions (KSOP) ...........       3,171          2,971
                                                           ------------------------

STOCKHOLDERS' EQUITY
Common stock ...........................................         200            200
Additional paid-in capital .............................       4,251          4,251
Retained earnings ......................................      37,839         36,071
Accumulated other comprehensive income .................         494            788
Less net cost of common shares acquired for the treasury     (14,013)       (12,902)
Less maximum cash obligation related to KSOP shares ....      (3,171)        (2,971)
                                                           ------------------------
        TOTAL STOCKHOLDERS' EQUITY .....................      25,600         25,437
                                                           ------------------------

        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....   $ 370,304      $ 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  Nine months Ended
                                                    September 30,       September 30,
                                                  ------------------  -----------------
                                                    2004      2003      2004      2003
                                                  -------------------------------------
<S>                                               <C>       <C>       <C>       <C>
INTEREST AND DIVIDEND INCOME:
  Loans, including fees:
    Taxable ...................................   $ 4,127   $ 4,267   $12,260   $13,184
    Nontaxable ................................        59        33       154        92
  Investment securities available for sale:
    Taxable ...................................       141       236       517       739
    Nontaxable ................................       163       180       500       556
  Federal funds sold ..........................        63        91       220       349
  Restricted investment securities ............        18        28        45        89
  Other .......................................        60        34       158        85
                                                  -------------------------------------
        Total interest and dividend income ....     4,631     4,869    13,854    15,094
                                                  -------------------------------------
INTEREST EXPENSE:
  Deposits ....................................       963     1,128     2,898     3,614
  Note payable ................................        24        27        69       127
  Other borrowed funds ........................       580       798     1,876     2,604
  Junior subordinated debentures ..............       106       106       319       319
                                                  -------------------------------------
        Total interest expense ................     1,673     2,059     5,162     6,664
                                                  -------------------------------------

        Net interest income ...................     2,958     2,810     8,692     8,430
Provision for loan losses .....................       120        65       380       525
                                                  -------------------------------------
        Net interest income after provision for
        loan losses ...........................     2,838     2,745     8,312     7,905
                                                  -------------------------------------
Other income:
  Trust department ............................        95        98       282       288
  Service fees ................................       535       467     1,449     1,230
  Investment securities gains, net ............        12        --        45        22
  Gains on loans sold .........................        23       180       137       325
  Corporate owned life insurance income .......        43        53       132       161
  Other .......................................        87        40       286       224
                                                  -------------------------------------
        Total other income ....................       795       838     2,331     2,250
                                                  -------------------------------------
Operating expenses:
  Salaries and employee benefits ..............     1,325     1,260     3,875     3,744
  Occupancy expenses, net .....................       195       180       569       522
  Equipment expenses ..........................       155       136       475       468
  Office supplies, printing, and postage ......        79        86       237       278
  Computer costs ..............................       126       131       386       396
  Advertising and business promotion ..........        41        45       121       124
  Other operating expenses ....................       318       364       952     1,050
                                                  -------------------------------------
        Total operating expenses ..............     2,239     2,202     6,615     6,582
                                                  -------------------------------------
        Income before income taxes ............     1,394     1,381     4,028     3,573
Income taxes ..................................       424       441     1,247     1,072
                                                  -------------------------------------
Net income ....................................   $   970   $   940   $ 2,781   $ 2,501
                                                  =====================================

Net income per common share, basic and diluted    $   .70   $   .66   $  1.99   $  1.76
                                                  =====================================

Dividends declared per common share ...........   $   .24   $   .24   $   .73   $   .71
                                                  =====================================

Comprehensive income ..........................   $ 1,188   $   641   $ 2,487   $ 2,278
                                                  =====================================
</TABLE>
See notes to Consolidated Condensed Financial Statements.

                                       4
<PAGE>

                  Iowa First Bancshares Corp. and Subsidiaries
                 Consolidated Condensed Statements of Cash Flows
              For The Nine months Ended September 30, 2004 and 2003
                                 (In Thousands)
                                   (Unaudited)
<TABLE>
                                                                          2004        2003
                                                                        --------------------
<S>                                                                     <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..........................................................   $  2,781    $  2,501
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Proceeds from loans sold ..........................................      7,649      22,980
  Loans underwritten ................................................     (7,512)    (22,714)
  Gains on loans sold ...............................................       (137)       (325)
  Provision for loan losses .........................................        380         525
  Investment securities gains, net ..................................        (45)        (22)
  Depreciation ......................................................        427         384
  Amortization of premiums and accretion of discounts
    on investment securities available for sale, net ................        153         130
  Net (increase) decrease in accrued interest receivable ............        (79)        245
  Net decrease in other assets ......................................         44         304
  Net increase in other liabilities .................................        297         305
                                                                        --------------------
        Net cash provided by operating activities ...................      3,958       4,313
                                                                        --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Net increase in interest-bearing deposits at financial institutions     (1,465)     (4,680)
  Net (increase) decrease in federal funds sold .....................      8,507     (11,240)
  Proceeds from sales of available for sale securities ..............      2,548         516
  Proceeds from maturities, calls and paydowns of available for sale      14,276       6,483
    securities
  Purchases of available for sale securities ........................    (11,448)     (6,458)
  Net (increase) decrease in loans ..................................     (8,871)     10,849
  Purchases of bank premises and equipment ..........................       (614)     (1,745)
  Purchases of life insurance contracts .............................         --        (100)
  Increase in cash value of life insurance contracts ................       (124)       (151)
  Proceeds from sales of restricted investment securities ...........        340         704
                                                                        --------------------
        Net cash  provided by (used in) investing activities ........      3,149      (5,822)
                                                                        --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in noninterest-bearing deposits ......................      2,476         743
  Net increase in interest-bearing deposits .........................      3,171      11,399
  Net increase (decrease) in securities sold under agreements to ....      1,953        (874)
    repurchase
  Repayment of note payable .........................................       (600)     (3,922)
  Proceeds from note payable ........................................         --       3,322
  Net decrease in treasury tax and loan open note ...................       (474)       (403)
  Advances from Federal Home Loan Bank ..............................         --       9,550
  Payments of advances from Federal Home Loan Bank ..................     (9,113)    (17,866)
  Cash dividends paid ...............................................     (1,021)     (1,003)
  Purchases of common stock for the treasury ........................     (1,111)       (235)
                                                                        --------------------
        Net cash provided by (used in) financing activities .........     (4,719)        711
                                                                        --------------------

        Net increase (decrease) in cash and due from banks ..........      2,388        (798)
Beginning cash and due from banks ...................................     12,988      17,283
                                                                        --------------------
Ending cash and due from banks ......................................   $ 15,376    $ 16,485
                                                                        =====================

Supplemental Disclosures of Cash Flow Information, cash payments for:
  Interest ..........................................................   $  5,116    $  6,668
  Income taxes ......................................................      1,156         983
Supplemental Schedule of Noncash Investing and Financing Activities:
  Change in accumulated other comprehensive income, unrealized
    gains (losses) on investment securities available for sale, net .       (294)       (223)
  (Increase) in maximum cash obligations related to KSOP shares .....       (200)        (94)
  Transfers of loans to other real estate owned .....................         90         123
</TABLE>

See Notes to Consolidated Condenced 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 nine months ended September 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 nine months ended  September 30,
2004 were 1,384,640 and 1,399,040, respectively. The average number of shares of
common stock  outstanding for the three and nine months ended September 30, 2003
were  1,417,345  and  1,421,258,   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.

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.

                                       6
<PAGE>

Financial instruments whose contract amounts represent credit risk:

                                                 September 30,      December 31,
                                                      2004               2003
                                                 -------------------------------

Commitments to extend credit .............        $60,342,000        $43,843,000
Standby letters of credit ................          2,139,000          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.  The increase of nearly
$16.5  million  in  commitments  to extend  credit  from  December  31,  2003 to
September  30, 2004,  is primarily  attributable  to a small number of borrowers
who, like the other borrowers included in the commitments to extend credit, meet
the standards of creditworthiness established by management.

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 September 30,
2004 and December 31, 2003 no amounts have been recorded as liabilities  for the
Banks' potential obligations under these guarantees.

The  Company  also  executes  contracts  for the sale of  mortgage  loans in the
secondary market. None of these contracts were executed as of September 30, 2004
and December 31, 2003,  respectively.  These amounts, if any, representing loans
held for sale, are included in loans at the respective balance sheet dates.

Results of Operations:

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

The Company  recorded net income of $970,000 for the quarter ended September 30,
2004,  compared with net income of $940,000 for the quarter ended  September 30,
2003,  an increase  of $30,000 or 3.2%.  This  increase in net income  primarily
resulted  from  higher net  interest  income  during  the third  quarter of 2004
compared to the third quarter of 2003.

Basic and  diluted  earnings  per share  were  $.70 for the three  months  ended
September  30,  2004,  $.04 or 6.1%  more  than the  same  period  in 2003.  The
Company's  annualized return on average assets for the third quarter of 2004 was
1.05% compared to .98% during the third quarter of the prior year. The Company's
annualized  return on average  equity for the three months ended  September  30,
2004 and September 30, 2003 was 15.1% and 14.9%, respectively.

                                       7
<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>
                                                               Three Months Ended             Three Months Ended
                                                               September 30, 2004             September 30, 2003
                                                        -------------------------------------------------------------
                                                                               Average                        Average
                                                        Balance     Interest     Rate     Balance   Interest    Rate
                                                        -------------------------------------------------------------
<S>                                                     <C>         <C>        <C>       <C>        <C>       <C>
Assets
Taxable loans, net ..................................   $271,686    $  4,127     6.08%   $263,024   $  4,267    6.49%
Taxable investment securities available for sale ....     18,111         141     3.11      21,582        236    4.37
Nontaxable investment securities and loans ..........     19,425         336     6.93      18,556        323    6.96
Federal funds sold ..................................     18,451          63     1.37      40,833         91    0.89
Restricted investment securities ....................      2,751          18     2.62       3,313         28    3.38
Interest-bearing deposits at financial
  institutions ......................................      8,614          60     2.79       6,318         34    2.15
                                                        --------------------             -------------------
        Total interest-earning assets ...............    339,038       4,745     5.60     353,626      4,979    5.63
                                                                    --------                       ---------
Cash and due from banks .............................     14,757                           14,322
Bank premises and equipment, net ....................      6,811                            6,641
Life insurance contracts ............................      4,360                            4,151
Other assets ........................................      2,827                            3,478
                                                        --------                         --------
        Total .......................................   $367,793                         $382,218
                                                        ========                         ========
Liabilities
Deposits:
  Interest-bearing demand ...........................   $121,063    $    206     0.68%   $121,652   $    199    0.65%
  Time ..............................................    107,736         757     2.79     113,914        929    3.23
Note payable ........................................      2,724          24     3.41       3,293         27    3.25
Other borrowings ....................................     51,799         580     4.44      63,998        798    4.95
Junior subordinated debentures ......................      4,125         106    10.32       4,125        106   10.32
                                                        --------------------             -------------------
        Total interest-bearing liabilities ..........    287,447       1,673     2.31     306,982      2,059    2.66
                                                                    --------                        --------
Noninterest-bearing deposits ........................     49,417                           45,289
Other liabilities ...................................      2,389                            2,007
                                                        --------                         --------
        Total liabilities ...........................    339,253                          354,278
Redeemable common stock held by KSOP ................      3,057                            2,868
Stockholders' Equity ................................     25,483                           25,072
                                                        --------                         --------
        Total .......................................   $367,793                         $382,218
                                                        ========                         ========
Net interest earnings ...............................               $  3,072                        $  2,920
                                                                    ========                        ========

Net Interest Margin (net interest earnings divided
by total interest-earning assets) ...................                            3.59%                          3.30%
                                                                                ======                         ======
</TABLE>
Nonaccruing loans are included in the average balance.  Loan fees are not
material.

The net interest  margin  increased  to 3.59%  during the third  quarter of 2004
compared  to 3.30%  during  the third  quarter  of 2003.  The  return on average
interest-earning assets decreased a modest 3 basis points (from 5.63% in 2003 to
5.60%  in  2004)  and  interest  paid on  average  interest-bearing  liabilities
decreased 35 basis points (from 2.66% in 2003 to 2.31% in 2004).

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%. In a reversal of  accommodative  monetary  policy,  the
Federal Reserve Bank started to raise short-term interest rates during the third
quarter  2004.  Consequently,  the prime lending rate was raised 25 basis points
three times during the third quarter of 2004 and stood at 4.75% at September 30,
2004.  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 three 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 third
quarter of 2004, versus the third quarter of 2003,  declining  approximately the
same amount as the rates paid on  interest-bearing  liabilities (41 basis points
compared to 35 basis points, respectively). 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.

                                       8
<PAGE>

Rates  received  on  taxable  investment  securities  available  for  sale  have
decreased  during the third  quarter of 2004,  compared to the third  quarter of
2003,  at a  significantly  faster pace than the rates paid on  interest-bearing
liabilities  (decreases of 126 basis points and 35 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 like-term  treasury
securities.

Rates  received  during the quarter ended  September 30, 2004,  versus the third
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 3 basis points and 35 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  increased 48
basis points during the third  quarter of 2004,  compared to the same quarter of
2003.  This increase is primarily  attributable  to the monetary policy shift of
the Federal Reserve Bank which has caused overnight federal funds rates to rise.
For the quarter ended  September 30, 2004,  average  federal funds sold to total
average  assets had been  reduced to 5.0% from 10.7%  during the same quarter in
2003.  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  64 basis points
during the third  quarter of 2004  versus  the same  quarter of 2003,  while the
average  balance  increased  approximately  $2,300,000.  This asset category was
emphasized  as it yielded 142 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
September 30, 2004.

During  this  period  of  low  market   interest   rates,   the  rates  paid  on
interest-bearing  demand  deposits  rose 3 basis  points  and the  rates on time
deposits were reduced 44 basis points when  comparing the third quarters of 2004
and 2003.

The rate paid on the note payable  outstanding  increased 16 basis points during
the third  quarter of 2004  compared to the same  quarter of 2003.  This was the
result of three increases  during the quarter in the prime lending rate to which
the note payable rate is tied.

The  usage of  wholesale  funding  sources  (primarily  Federal  Home  Loan Bank
advances),  while  mitigating  intermediate  and  long-term  interest rate risk,
tended to  represent a  relatively  higher cost of funds than  deposits and note
payable for the Company.  The Company's  average rate paid for such Federal Home
Loan Bank advances and other funds was reduced by 51 basis points when comparing
the third 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 $12 million during the third quarter of 2004 compared to
the third quarter of 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 3.59% during the three months ended September 30,
2004, compared to 3.30% for the same period last year.

Provisions  for loan losses were $120,000 and $65,000 for the three months ended
September 30, 2004 and September 30, 2003,  respectively.  Net loan  charge-offs
for the  quarter  ended  September  30,  2004  totaled  $24,000  compared to net
charge-offs of $37,000 for the same quarter in 2003.

                                       9
<PAGE>

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  $1,853,000  at  September  30,  2004,  a decrease of
$270,000 or 12.7% from  December  31, 2003.  There was a total of $77,000  other
real estate owned at September  30, 2004  compared to none at December 31, 2003.
Loans past due 90 days or more and still accruing  totaled  $138,000,  which was
$77,000 or 35.8% less than at year-end  2003.  The  allowance  for possible loan
losses of $3,370,000 at September 30, 2004,  represented 1.2% of gross loans and
163% 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,  gains  (or  losses)  from the sale of  investment
securities in the available for sale category and loans,  as well as income from
corporate owned life insurance. Total other income for the third quarter of 2004
was $795,000; $43,000 or 5.1% less than the third 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 $68,000 or 14.6%.  Due to a
significant  reduction  in loan  refinancings,  gains  on  loans  sold  declined
$157,000 or 87.2%.  Income on corporate owned life insurance declined $10,000 or
18.9% due to lower overall market  interest rates  impacting the rates earned on
the insurance policies owned.  Finally,  miscellaneous other income rose $47,000
or 117.5%.  The majority of this  increase in the third quarter of 2004 compared
to the same quarter in 2003 resulted from non-recurring revenue.

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  September  30, 2004,  salaries and employee  benefits  expense  increased
$65,000  or  5.2%  due to  normal  raises,  incentives  and the  rising  cost of
benefits.  Occupancy  and  equipment  expenses  increased  $34,000  or  10.8% as
depreciation  and maintenance  costs have risen.  All other  operating  expenses
decreased $62,000 or 9.9% due in large measure to management's  focus on control
of these expenses.  Total operating  expenses increased a very slight $37,000 or
1.7% during the third quarter of 2004 versus the same quarter last year.

Income  tax  expense  for the  quarter  ended  September  30,  2004 of  $424,000
represented  30.4% of income before taxes. For the comparable  quarter last year
income tax expense was 31.9% 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 59.7% and 60.4% for the three  months  ended  September  30,  2004 and 2003,
respectively.  The primary reasons for this  improvement in the efficiency ratio
are discussed previously in this report.

Results of Operations:

Nine months ended  September 30, 2004 compared with nine months ended  September
30, 2003

The  Company  recorded  net  income  of  $2,781,000  for the nine  months  ended
September  30,  2004,  compared  with net  income  of  $2,501,000  for the three
quarters  ended  September  30,  2003,  an increase  of $280,000 or 11.2%.  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 three  quarters of 2004  compared to the
same period during 2003.

Basic and  diluted  earnings  per share  were  $1.99 for the nine  months  ended
September  30,  2004,  $.23 or 13.1%  more  than the same  period  in 2003.  The
Company's  annualized  return on average  assets for the first three quarters of
2004 and 2003 was .99% and .86%,  respectively.  The Company's annualized return
on average equity for the nine months ended September 30, 2004 and September 30,
2003 was 14.6% and 13.4%, 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>
                                                           Nine months Ended             Nine months Ended
                                                           September 30, 2004            September 30, 2003
                                                  -------------------------------   -----------------------------
                                                                          Average                         Average
                                                   Balance     Interest     Rate    Balance    Interest     Rate
                                                   --------------------------------------------------------------
<S>                                                <C>         <C>        <C>       <C>        <C>        <C>
Assets
Taxable loans, net .............................   $267,378    $ 12,260     6.11%   $267,332   $ 13,184     6.58%
Taxable investment securities available for sale     19,262         517     3.58      21,605        739     4.56
Nontaxable investment securities and loans .....     19,154         991     6.90      18,685        982     7.01
Federal funds sold .............................     29,787         220     0.98      45,059        349     1.03
Restricted investment securities ...............      2,883          45     2.08       3,740         89     3.17
Interest-bearing deposits at financial
  institutions .................................      8,218         158     2.56       5,106         85     2.22
                                                   --------------------             -------------------
        Total interest-earning assets ..........    346,682      14,191     5.46     361,527     15,428     5.69
                                                               --------                        --------
Cash and due from banks ........................     14,739                           14,127
Bank premises and equipment, net ...............      6,766                            6,302
Life insurance contracts .......................      4,321                            4,054
Other assets ...................................      2,921                            3,705
                                                   --------                         --------
        Total ..................................   $375,429                         $389,715
                                                   ========                         ========
Liabilities
Deposits:
  Interest-bearing demand ......................   $127,155    $    575     0.60%   $124,788   $    741     0.79%
  Time .........................................    108,928       2,323     2.85     115,075      2,873     3.34
Note payable ...................................      2,728          69     3.31       3,298        127     5.08
Other borrowings ...............................     54,372       1,876     4.61      68,525      2,604     5.08
Junior subordinated debentures .................      4,125         319    10.32       4,125        319    10.32
                                                   --------------------             -------------------
        Total interest-bearing liabilities .....    297,308       5,162     2.32     315,811      6,664     2.82
                                                               --------                        --------
Noninterest-bearing deposits ...................     47,440                           44,250
Other liabilities ..............................      2,128                            1,984
                                                   --------                         --------
        Total liabilities ......................    346,876                          362,045
Redeemable common stock held by KSOP ...........      3,074                            2,767
Stockholders' Equity ...........................     25,479                           24,903
                                                   --------                         --------
        Total ..................................   $375,429                         $389,715
                                                   ========                         ========
Net interest earnings ..........................               $  9,029                        $  8,764
                                                               ========                        ========
Net Interest Margin (net interest earnings
  divided by total interest-earning assets) ....                            3.48%                           3.23%
                                                                           ======                          ======
</TABLE>
Nonaccruing loans are included in the average balance. Loan fees are not
material.

The net interest  margin  increased to 3.48% during the first three  quarters of
2004  compared to 3.23% during the first three  quarters of 2003.  The return on
average interest-earning assets decreased 23 basis points (from 5.69% in 2003 to
5.46%  in  2004)  and  interest  paid on  average  interest-bearing  liabilities
decreased 50 basis points (from 2.82% in 2003 to 2.32% in 2004).

Rates  received  during the first three  quarters of 2004,  compared to the same
quarters in 2003,  on taxable loans  decreased  slightly less than rates paid on
interest-bearing  liabilities (decreases of 47 basis points and 50 basis points,
respectively).

Rates  received on taxable  investment  securities  available for sale decreased
during the first nine months of 2004,  compared to the same period in 2003, at a
faster pace than the rates paid on interest-bearing liabilities (decreases of 98
basis  points  and 50  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 nine months  comparable  to the  interest  return  earned on five year
treasury securities.

                                       11
<PAGE>

Rates received  during the first three quarters of 2004,  versus the first three
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 11 basis points and 50 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 a
modest 5 basis points during the first nine months of 2004, compared to the same
period in 2003. For the first three quarters of 2004, average federal funds sold
to total  average  assets  were  reduced to 7.9%  compared to 11.6% for the same
period in 2003. 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  34 basis points
during the first nine months of 2004 versus the first nine months of 2003, while
the  average  balance  increased  over  $3,100,000.   This  asset  category  was
emphasized  as it yielded 158 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 nine  months  ended
September 30, 2004.

During  this  period  of  low  market   interest   rates,   the  rates  paid  on
interest-bearing  demand and time  deposits  were reduced 19 basis points and 49
basis points, respectively,  when comparing the first three quarters of 2004 and
2003.

The rate paid on the note payable  outstanding  declined 177 basis points during
the first nine 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  during the entire first
three quarters of 2004 compared to only a portion of the same period last year.

The  usage of  wholesale  funding  sources  (primarily  Federal  Home  Loan Bank
advances),  while  mitigating  intermediate  and  long-term  interest rate risk,
tended to  represent a  relatively  higher cost of funds than  deposits and note
payable for the Company.  The Company's  average rate paid for such Federal Home
Loan Bank advances and other funds was reduced by 47 basis points when comparing
the first three 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 $14 million during the first three 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 3.48% during the nine months ended September 30,
2004, compared to 3.23% for the same period last year.

Provisions for loan losses were $380,000 for the nine months ended September 30,
2004,  compared to $525,000 for the nine months ended  September  30, 2003.  Net
loan  charge-offs  for the three  quarters  ended  September  30,  2004  totaled
$190,000  compared to net charge-offs of $446,000 for the same quarters in 2003.
The loan losses in 2003 were primarily attributable to two agricultural loans at
our Fairfield subsidiary bank.

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,  gains  (or  losses)  from the sale of  investment
securities in the available for sale category and loans,  as well as income from
corporate owned life insurance.  Total other income for the first nine months of
2004 was  $2,331,000;  $81,000 or 3.6% more than the first nine  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 $219,000 or
17.8%. Due to a significant reduction in loan refinancings,  gains on loans sold
declined  $188,000 or 57.8%.  Income on corporate owned life insurance  declined
$29,000 or 18.0% due to lower overall market  interest rates impacting the rates
earned on the insurance policies owned. Finally, miscellaneous other income rose
$62,000 or 27.7%. The majority of this increase in the first nine months of 2004
compared to the same period in 2003 resulted from non-recurring revenue.

                                       12
<PAGE>

Operating  expenses include all the costs incurred to operate the Company except
for interest  expense,  the loan loss provision and income taxes.  For the three
quarters  ended  September  30, 2004,  salaries and  employee  benefits  expense
increased $131,000 or 3.5% due to normal raises,  incentives and the rising cost
of benefits.  Occupancy  and  equipment  expenses  increased  $54,000 or 5.5% as
depreciation  and maintenance  costs have risen.  All other  operating  expenses
decreased $152,000 or 8.2% due in large measure to managements' focus on control
of these expenses 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  increased a very slight
$33,000 or 0.5% during the first three quarters of 2004 versus the same quarters
last year.

Income tax expense for the first nine months of 2004 was 31.0% of income  before
tax. For the comparable  period last year income tax expense was 30.0% 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 60.0%  and 61.6% for the nine  months  ended  September  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 September 30, 2004 totaled  $370,304,000,  a decrease of
$2,110,000 or 0.6% from December 31, 2003. As of September 30, 2004, the Company
had  $22,907,000  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
$8,413,000  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  $5,953,000 or 16.0% during the
first nine months of 2004 to total  $31,204,000 at September 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 three  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 $2,548,000 and resulted in net gains recognized of
$45,000.

Net loans totaled  $275,326,000 at September 30, 2004, an increase of $8,401,000
or 3.1% 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  three  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.

Total  deposits  at  September  30,  2004,  were  $283,223,000,  an  increase of
$5,647,000  or 2.0% from the  balance at  December  31,  2003.  Certificates  of
deposit  represented  on average for the nine months ended  September  30, 2004,
approximately 38% of total deposits. Interest-bearing demand deposits, comprised
of savings,  money market and NOW accounts,  represented  another 45% of average
deposits.  The  final  17%  of  average  deposits  were  in  noninterest-bearing
accounts. Securities sold under agreements to repurchase increased $1,953,000 to
$6,865,000,  and advances  borrowed  from the Federal Home Loan Bank declined by
$9,113,000 from year-end 2003, totaling $42,958,000 at quarter end.

The note payable balance of $2,100,000 at September 30, 2004, was $600,000 lower
than  December 31,  2003,  as the Company made the  scheduled  annual  principal
payment  of  $600,000  at the end of the third  quarter  of 2004.  This note was
refinanced  during the third 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%.

                                       13
<PAGE>

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 September  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.

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
September 30, 2004, were $283,223,000 or 76.5% of total liabilities and equity.

Federal funds sold overnight  totaled  $22,907,000 or 6.2% of September 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  $31,204,000  at
quarter-end  included net unrealized gains of $788,000.  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  increased  $354,000 (1.4%) and $163,000 (0.6%) during the
three and nine months ended September 30, 2004,  respectively.  The year-to-date
increase included net income of $2,781,000,  decrease of $294,000 in accumulated
other  comprehensive  income,  $1,012,000 of dividends declared to shareholders,
$1,112,000  of treasury  share  purchases  and $200,000  increase in the maximum
obligation related to KSOP shares.

                                       14
<PAGE>

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  September  30,  2004  with the
requirements to be considered  adequately  capitalized is presented  below.

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

Total capital to risk-weighted assets ...........   12.9%           8.00%
Tier 1 capital to risk-weighted assets ..........   11.7%           4.00%
Tier 1 capital to average assets ................    8.7%           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.

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,  6,591 shares were  purchased by the Company
during the third  quarter of 2004 and 36,372  shares were  purchased  during the
first three  quarters of 2004. See Part II, Item 2 of this Form 10-Q for further
detail regarding purchases of equity securities for the treasury.

                                       15
<PAGE>

"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.

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.

                                       16
<PAGE>

                            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  September  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>
July 1 - July 31, 2004  ............     1,775        $31.00         1,775          28,397

August 1 - August 31, 2004 .........     4,816        $32.25         4,816          23,581

September 1 - September 30, 2004 ...        --           N/A           N/A          23,581
<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.

Item 6. Exhibits

        (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

                                       17
<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)



November 15, 2004                                /s/ D. Scott Ingstad
-----------------                                -------------------------------
Date                                             D. Scott Ingstad, Chairman of
                                                 the Board, President and CEO




November 15, 2004                                /s/ Kim K. Bartling
-----------------                                -------------------------------
Date                                             Kim K. Bartling, Executive Vice
                                                 President, Chief Operating
                                                 Officer & Treasurer

                                       18