UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**Form 10-K**
Annual Report Pursuant to Section 13 or 15(d) of			the Securities Exchange Act of 1934For the fiscal year ended December 31, 2007Commission File No. 000-50047
Calvin B. Taylor Bankshares, Inc. (Exact name of registrant as specified in its Charter)

Maryland(State of incorporation or organization)

52-1948274(I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (410)641-1700
Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, par value $1.00 per share

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act.Yes ____ No [ X ]

Indicate by check mark if the registrant is not required tofile reports pursuant to Section 13 or Section 15(d) of the Act.Yes ____ No [ X ]

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes [ X ] No ____

Indicate by check mark if disclosure of delinquent filers inresponse to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of the registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X]

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See the definitions of "large accelerated filer,""accelerated filer" and "smaller reporting company" in Rule 12b-2 of theExchange Act.    Large accelerated filer ____                                                                                     Accelerated filer [ X ]     Non- accelerated filer ____ (Do not check if a smallerreporting company)     Smaller reporting company ____

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Act). Yes ____ No [ X ] 

The aggregate market value of the Common Stock, all of whichhas voting rights, held by non-affiliates of the registrant on December 31,2007, was $100,040,633. This calculation is based upon the last price known tothe registrant at which its Common Stock was sold as of the last business day ofthe registrant’s most recently completed second fiscal quarter. As of June 30,2007, the last known sale price was $38.50 per share. There is not an activetrading market for the Common Stock and it is not possible to identify preciselythe market value of the Common Stock.  On February 29, 2008, 3,096,072 shares of the registrant's common stock wereissued and outstanding.
**DOCUMENTS INCORPORATED BY REFERENCEThe Company's Proxy Statement for Annual Meeting ofStockholders to be held on May 14, 2008, is incorporated by reference in thisForm 10-K in Part III, Item 10, Item 11, Item 12, Item 13, and Item 14.                                                                                       - 1 -

*This Reportcontains statements which constitute forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and the Securities ExchangeAct of 1934. These statements appear in a number of places in this Report andinclude all statements regarding the intent, belief or current expectations ofthe Company, its directors, or its officers with respect to, among other things:(i) the Company's financing plans; (ii) trends affecting the Company's financialcondition or results of operations; (iii) the Company's growth strategy andoperating strategy; and (iv) the declaration and payment of dividends. Investorsare cautioned that any such forward-looking statements are not guarantees offuture performance and involve risks and uncertainties, and that actual resultsmay differ materially from those projected in the forward-looking statements asa result of various factors discussed herein and those factors discussed indetail in the Company's filings with the Securities and Exchange Commission.***PART I****Item 1. Business
General   **Calvin B. Taylor Bankshares, Inc. (Company) was incorporatedas a Maryland corporation on October 31, 1995. The Company owns all of the stockof Calvin B. Taylor Banking Company of Berlin, Maryland (Bank). The Bank, whichcommenced operation in 1890, is a commercial bank incorporated under the laws ofthe State of Maryland on December 17, 1907, with a main office located inBerlin, Maryland. **Location and Service Area   The Company, through the Bank, is engaged in a generalcommercial and retail banking business serving individuals, small- tomedium-sized businesses, professional organizations, and governmental units. TheBank operates nine branches located throughout Worcester County, Maryland andone branch located in Sussex County, Delaware. The Bank draws most of itscustomer deposits and conducts most of its lending transactions within thecommunities in which these branches are located.    Much of the Bank’s service area is located along the shoresof the Atlantic Ocean and has grown as both a resort and a retirement community.The principal components of the economy are tourism and agriculture. Berlin hasa strong component of health-care related businesses. The tourist businesses ofOcean City, Maryland and Bethany, Delaware and the health-care facilities inBerlin, Maryland (including Berlin Nursing Home and Atlantic General Hospital)are among the largest employers in the counties.
**Banking Products and Services   The Bank offers a full range of deposit services includingchecking, NOW, Money Market, and savings accounts, and time deposits includingcertificates of deposit. The transaction, savings, and certificate of depositaccounts are tailored to the Bank’s principal market areas at rates competitiveto those offered in the area. The Bank also offers Individual RetirementsAccounts (IRA), Health Savings Accounts, and Education Savings Accounts. Alldeposits are insured by the Federal Deposit Insurance Corporation (FDIC) up tothe maximum amount allowed by law (generally, $100,000 per depositor, except for$250,000 for per depositor for certain retirement accounts, subject toaggregation rules). The Bank solicits these accounts from individuals,businesses, associations and organizations, and governmental authorities. TheBank offers individual customers up to $50 million in FDIC insured depositsthrough the Certificate of Deposit Account Registry Services®.   The Bank also offers a full range of short- to medium-termcommercial and personal loans. Commercial loans include both secured andunsecured loans for working capital (including inventory and receivables),business expansion (including acquisition of real estate and improvements), andpurchase of equipment and machinery. Consumer loans include secured andunsecured loans for financing automobiles, home improvements, education, andpersonal investments. The Bank originates commercial and residential mortgageloans and real estate construction and acquisition loans. These lendingactivities are subject to a variety of lending limits imposed by state andfederal law. The Bank lends to directors and officers of the Company and theBank under terms comparable to those offered to other borrowers entering intosimilar loan transactions. The Board of Directors approves all loans to officersand directors and reviews these loans every six months.   Other bank services include cash management services, 24-hourATM’s, debit cards, safe deposit boxes, travelers’ checks, direct deposit ofpayroll and social security funds, and automatic drafts for various accounts.The Bank offers bank-by-phone and Internet banking services, includingelectronic bill-payment, to both commercial and retail customers. Early in 2008,the Bank began offering a remote capture service that enables commercialcustomers to electronically capture check images and make on-line deposits. TheBank also offers non-deposit products including retail repurchase agreements anddiscount brokerage services through a correspondent bank. 

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**Competition   The Company and the Bank face strong competition in all areasof operations. The competition comes from entities operating in WorcesterCounty, Maryland and Sussex County, Delaware and neighboring counties andincludes branches of some of the largest banks in Maryland, Delaware, andVirginia. Its most direct competition for deposits historically has come fromother commercial banks, savings banks, savings and loan associations, and creditunions operating in its service areas. The Bank also competes for deposits withmoney market mutual funds and corporate and government securities. The Bankcompetes for loans with the same banking entities, as well as mortgage bankingcompanies and other institutional lenders. The competition for loans varies fromtime to time depending on certain factors. These factors include, among others,the general availability of lendable funds and credit, general and localeconomic conditions, current interest rate levels, conditions in the mortgagemarket, and other factors which are not readily predictable.   The Bank employs traditional marketing media including localnewspapers and radio, to attract new customers. Bank officers, directors, andemployees are active in numerous community organizations and participate incommunity-based events. These activities and referrals by satisfied customersresult in new business. 
**Employees   As of December 31, 2007, the Bank employed 92 full-timeequivalent employees. The Company's operations are conducted through the Bank.Consequently, the Company does not have separate employees. None of theemployees of the Bank are represented by any collective bargaining unit. TheBank considers its relations with its employees to be good.
**SUPERVISION AND REGULATION**
    The Company and the Bank are subject to state and federalbanking laws and regulations which impose specific requirements or restrictionson, and provide for general regulatory oversight with respect to, virtually allaspects of operations. These laws and regulations are generally intended toprotect depositors, not stockholders. The following is a summary of certainstatutes, rules, and regulations affecting the Company and the Bank. To theextent that the following summary describes statutory or regulatory provisions,it is qualified in its entirety by reference to the particular statutory andregulatory provisions.    Proposed legislative changes and the policies of variousregulatory authorities may affect the operations of the Company and the Bank andthose effects may be material. The Company is unable to predict the nature orthe extent of the effect on its business and earnings that fiscal or monetarypolicies, economic controls, or new federal or state legislation may have in thefuture.
**The CompanyBank Holding Company Act of 1956    The Company is a bank holding company within the meaning ofthe federal Bank Holding Company Act of 1956 ( BHCA). Under the BHCA, theCompany is subject to periodic examination by the Federal Reserve and isrequired to file periodic reports of its operations and such additionalinformation as the Federal Reserve may require. The Company's and the Bank’sactivities are limited to banking, managing or controlling banks, furnishingservices to or performing services for its Subsidiary, or engaging in any otheractivity that the Federal Reserve determines to be so closely related to bankingor managing and controlling banks as to be a proper incident thereto.*    Investments, Control, and Activities.* With certainlimited exceptions, the BHCA requires a bank holding company to obtain the priorapproval of the Federal Reserve before (i) acquiring substantially all theassets of any bank, (ii) acquiring direct or indirect ownership or control ofany voting shares of any bank if after such acquisition it would own or controlmore than 5% of the voting shares of such bank (unless it already owns orcontrols the majority of such shares), or (iii) merging or consolidating withanother bank holding company.    In addition, and subject to certain exceptions, the BHCA andthe Change in Bank Control Act, together with regulations thereunder, requireFederal Reserve approval (or, depending on the circumstances, no notice ofdisapproval) prior to any person or company acquiring "control" of a bankholding company, such as the Company. Control is conclusively presumed to existif an individual or company acquires 25% or more of any class of votingsecurities of the bank holding company. Because the Company's Common Stock isregistered under the Securities Exchange Act of 1934, under Federal Reserveregulations, control will be rebuttably presumed to exist if a person acquiresat least 10% of the outstanding shares of any class of voting securities of theCompany. The regulations provide a procedure for challenge of the rebuttablecontrol presumption.    Under the BHCA, the Company is generally prohibited fromengaging in, or acquiring direct or indirect control of more than 5% of thevoting shares of any company engaged in non-banking activities, unless theFederal Reserve, by order or regulation, has found those activities to be soclosely related to banking or managing or controlling banks as to be a properincident thereto. 
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*    Source of Strength; Cross-Guarantee.* Under FederalReserve policy, the Company is expected to act as a source of financial strengthto the Bank and to commit resources to support the Bank in circumstances inwhich the Company might not otherwise do so. The Federal Reserve may require abank holding company to terminate an activity or relinquish control of a nonbanksubsidiary if the Federal Reserve determines that such activity or control posesserious risk to the financial soundness or stability of a subsidiary bank.Further, federal bank regulatory authorities have discretion to require a bankholding company to divest itself of any bank or nonbank subsidiary if the agencydetermines that divestiture may aid the depository institution's financialcondition. The Bank may be required to indemnify, or cross-guarantee, the FDICagainst losses it incurs with respect to any other bank controlled by theCompany, which in effect makes the Company's equity investments in healthy banksubsidiaries available to the FDIC to assist any failing or failed banksubsidiary of the Company.

Gramm-Leach-Bliley Act   In November 1999, the Gramm-Leach-Bliley Act was signed intolaw. Among other things, the Act repeals the restriction, contained in theGlass-Steagall Act, on banks affiliating with securities firms. The Act permitsbank holding companies to engage in a statutorily provided list of financialactivities, including insurance and securities underwriting and agencyactivities, merchant banking, and insurance company portfolio investmentactivities. The Act also authorizes activities that are "complementary" tofinancial activities. The Act is intended to grant certain powers to communitybanks that larger institutions have accumulated on an ad hoc basis. The Act mayhave the result of increasing competition that the Company and the Bank facefrom larger institutions and other types of companies. It is not possible topredict the full effect that the Act will have on the Company and the Bank. 
Securities Exchange Act of 1934   The Company’s common stock is registered with the Securitiesand Exchange Commission (SEC) under Section 12(g) of the Securities Exchange Actof 1934 (the Act). The Company is, therefore, subject to periodic and ad hocinformation reporting, proxy solicitation rules, restrictions on insidertrading, and other requirements of the Act. 

Sarbanes-Oxley Act   The Sarbanes-Oxley Act (SOX) of 2002 imposed additionaldisclosure requirements in the Company’s reports filed with the SEC. SOX definesnew standards of independence for insiders, provides guidance for certain Boardcommittees including the composition of those committees, and establishescorporate governance requirements.
**The Bank*    General.* The Bank operates as a state nonmemberbanking association incorporated under the laws of the State of Maryland. It issubject to examination by the FDIC and the state department of bankingregulation for each state in which it has a branch. The States and the FDICregulate or monitor all areas of the Bank’s operations, including securitydevices and procedures, adequacy of capitalization and loss reserves, loans,investments, borrowings, deposits, mergers, issuances of securities, payment ofdividends, interest rates payable on deposits, interest rates or fees on loans,establishment or closure of branches, corporate reorganizations, maintenance ofbooks and records, and adequacy of staff training to carry on safe lending anddeposit gathering practices. The FDIC requires the Bank to maintain certaincapital ratios and imposes limitations on the Bank’s aggregate investment inreal estate, bank premises, and furniture and fixtures. The Bank is required bythe FDIC to prepare quarterly reports on the Bank’s financial condition.    Under provisions of the Federal Deposit Insurance CorporationImprovement Act of 1991 (FDICIA), all insured institutions must undergo periodicon-site examination by the appropriate banking agency. The cost of examinationsof insured depository institutions and any affiliates may be assessed by theagency against each institution or affiliate, as it deems necessary orappropriate. Insured institutions are required to submit annual reports to theFDIC and the appropriate agency (and state supervisor when applicable). FDICIAalso directs the FDIC to develop with other appropriate agencies a method forinsured depository institutions to provide supplemental disclosure of theestimated fair market value of assets and liabilities, to the extent feasibleand practicable, in any balance sheet, financial statement, report of condition,or other report of any insured depository institution. FDICIA also requires thefederal banking regulatory agencies to prescribe, by regulation, standards forall insured depository institutions and depository institution holding companiesrelating, among other things, to: (i) internal controls, information systems,and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)interest rate risk exposure; and (v) asset quality.

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Transactions With Affiliates and Insiders   The Bank is subject to Section 23A of the Federal ReserveAct, which places limits on the amount of loans or extensions of credit to, orinvestment in, or certain other transactions with, affiliates and on the amountof advances to third parties collateralized by the securities or obligations ofaffiliates. The aggregate of all covered transactions is limited in amount, asto any one affiliate, to 10% of the Bank’s capital and surplus and, as to allaffiliates combined, to 20% of the Bank’s capital and surplus. In addition, eachcovered transaction must meet specific collateral requirements. The Bank is alsosubject to Section 23B of the Federal Reserve Act which, among other things,prohibits an institution from engaging in certain transactions with certainaffiliates unless the transactions are on terms substantially the same, or atleast as favorable to such institution or its subsidiaries, as those prevailingat the time for comparable transactions with nonaffiliated companies. The Bankis subject to certain restrictions on extensions of credit to executiveofficers, directors, certain principal stockholders, and their relatedinterests. Such extensions of credit (i) must be made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with third parties, and (ii) must not involve morethan the normal risk of repayment or present other unfavorable features.

Community Reinvestment Act   The Community Reinvestment Act requires that the Bank shallbe evaluated by its primary federal regulator with respect to its record inmeeting the credit needs of its local community, including low and moderateincome neighborhoods, consistent with safe and sound operations. These factorsare also considered in evaluating mergers, acquisitions, and applications toopen a branch or facility. The Bank received a satisfactory rating in its mostrecent evaluation.
**
USA Patriot Act    In response to the terrorist attacks on September 11, 2001,Congress passed the Patriot Act. The Patriot Act requires that Banks prepare andretain additional records designed to assist the government in an effort tocombat terrorism. The Act includes anti-money laundering and financialtransparency provisions, and guidelines for verifying customer identificationduring account opening. The Act promotes cooperation between law enforcement,financial institutions, and financial regulators in identifying persons involvedin illegal acts such as money laundering and terrorism.

Other Regulations   Interest and certain other charges collected or contractedfor by the Bank are subject to state and federal laws concerning interest rates.The Bank’s loan operations are also subject to certain federal laws applicableto credit transactions, such as the federal Truth-In-Lending Act governingdisclosures of credit terms to consumer borrowers, the Home Mortgage DisclosureAct of 1975 requiring financial institutions to provide information to enablethe public and public officials to determine whether a financial institution isfulfilling its obligation to help meet the housing needs of the community itserves, the Equal Credit Opportunity Act prohibiting discrimination on the basisof race, creed, or other prohibited bases in extending credit, the Fair CreditReporting Act of 1978 governing the use and provision of information to creditreporting agencies, the Fair Debt Collection Act governing the manner in whichconsumer debts may be collected by collection agencies, and the rules andregulations of the various federal agencies charged with the responsibility ofimplementing such federal laws. The deposit operations of the Bank are subjectto the Truth in Savings Act which governs disclosures of rate and feeinformation to consumer deposit customers, the Right to Financial Privacy Actwhich imposes a duty to maintain confidentiality of customers’ financial recordsand prescribes procedures for complying with administrative subpoenas offinancial records, and the Electronic Fund Transfers Act as implemented by theFederal Reserve Board’s Regulation E which governs automatic deposits to andwithdrawals from deposit accounts and customers' rights and liabilities arisingfrom the use of automated teller machines and other electronic banking services.

Deposit Insurance    The FDIC establishes rates for the payment of premiums byfederally insured banks and thrifts for deposit insurance. The Deposit InsuranceFund is maintained for commercial banks and thrifts, with insurance premiumsfrom the industry used to offset losses from insurance payouts when banks andthrifts fail. Since 1993, insured depository institutions like the Bank havepaid for deposit insurance under a risk-based premium system. The FederalDeposit Insurance Reform Act of 2005 creates a revised deposit insuranceassessment rate structure, effective January 1, 2007. Under this system,assessment rates are based on Risk Categories as determined by a combination ofCAMELS component ratings and financial ratios. Banks in Risk Category I, thelowest risk profile, will be assessed at a rate of 5 to 7 basis points. AOne-time Assessment Credit for banks that were in existence on December 31,1996, will be applied to offset assessments dollar-for-dollar until full benefitof the credit is received. In addition to the amount paid for deposit insurance,banks are assessed an additional amount to service the interest on the bondobligations of the Financial Corporation (FICO). Any increase in depositinsurance premiums for the Bank will increase the Bank’s operating expenses, andthere can be no assurance that such costs can be passed on to the Bank’scustomers. 

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**Dividends   The principal source of the Company's cash revenues comesfrom dividends received from the Bank. The amount of dividends that may be paidby the Bank to the Company depends on the Bank's earnings and capital positionand is limited by federal and state laws, regulations, and policies. The FederalReserve has stated that bank holding companies should refrain from or limitdividend increases or reduce or eliminate dividends under circumstances in whichthe bank holding company fails to meet minimum capital requirements or in whichearnings are impaired.    The Company's ability to pay any cash dividends to itsstockholders in the future will depend primarily on the Bank's ability to paydividends to the Company. In order to pay dividends to the Company, the Bankmust comply with the requirements of all applicable laws and regulations. UnderMaryland law, the Bank must pay a cash dividend only from the following, afterproviding for due or accrued expenses, losses, interest, and taxes: (i) itsundivided profits, or (ii) with the prior approval of the Department ofFinancial Regulation, its surplus in excess of 100% of its required capitalstock. Under FDICIA, the Bank may not pay a dividend if, after paying thedividend, the Bank would be undercapitalized. See "Capital Regulations" below.See Item 5 for a discussion of dividends paid by the Company in the past threeyears.    In addition to the availability of funds from the Bank, thefuture dividend policy of the Company is subject to the discretion of the Boardof Directors and will depend upon a number of factors, including futureearnings, financial condition, cash needs, and general business conditions. Theamount of dividends that might be declared in the future presently cannot beestimated and it cannot be known whether such dividends would continue forfuture periods.
**Capital Regulations   The federal bank regulatory authorities have adoptedrisk-based capital guidelines for banks and bank holding companies that aredesigned to make regulatory capital requirements more sensitive to differencesin risk profile among banks and bank holding companies, account for off-balancesheet exposure, and minimize disincentives for holding liquid assets. Theresulting capital ratios represent qualifying capital as a percentage of totalrisk-weighted assets and off-balance sheet items. The guidelines are minimums,and the regulators have noted that banks and bank holding companiescontemplating significant expansion programs should not allow expansion todiminish their capital ratios and should maintain ratios well in excess of theminimums.    Current guidelines require bank holding companies andfederally regulated banks to maintain a minimum ratio of total risk-basedcapital to risk-weighted assets equal to 8%, of which at least 4% must be Tier 1capital. Tier 1 capital includes common stockholders' equity before theunrealized gains and losses on securities available for sale, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, but excludes goodwill and most other intangibles, andexcludes the allowance for loan losses. Tier 2 capital includes the excess ofany preferred stock not included in Tier 1 capital, mandatory convertiblesecurities, hybrid capital instruments, subordinated debt and intermediateterm-preferred stock, and general reserves for loan losses up to 1.25% ofrisk-weighted assets. Total capital is the sum of Tier 1 plus Tier 2 capital.The federal bank regulatory authorities have also implemented a leverage ratio,which is Tier 1 capital as a percentage of average total assets lessintangibles, to be used as a supplement to the risk-based guidelines. Theprincipal objective of the leverage ratio is to place a constraint on themaximum degree to which a bank holding company may leverage its equity capitalbase. The minimum required leverage ratio for top-rated institutions is 4%, butmost institutions are required to maintain an additional cushion of at least 100to 200 basis points.    FDICIA established a new capital-based regulatory schemedesigned to promote early intervention for troubled banks and requires the FDICto choose the least expensive resolution of bank failures. The new capital-basedregulatory framework contains five categories for compliance with regulatorycapital requirements, including "well capitalized," "adequately capitalized,""undercapitalized," "significantly undercapitalized," and "criticallyundercapitalized." To qualify as a "well capitalized" institution, a bank musthave a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no lessthan 6%, and a total risk-based capital ratio of no less than 10%, and the bankmust not be under any order or directive from the appropriate regulatory agencyto meet and maintain a specific capital level. As of December 31, 2007, theCompany and the Bank were qualified as "well capitalized." For furtherdiscussions, see "Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operation - Capital."
**Recent Legislative Developments   Periodically, the federal and state legislatures considerbills with respect to the regulation of financial institutions. Some of theseproposals could significantly change the regulation of banks and the financialservices industry. The Company cannot predict if such proposals will be adoptedor the affect to the Company.

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**Item 1A. Risk Factors    The Company and the Bank are subject to various types of riskduring the normal conduct of business. There has been no material increase inany level of risk incurred by the Company or the Bank during the period coveredby this report. Following are descriptions of the significant categories of riskmost relevant to the Company.

Credit risk    Credit risk is the risk to the bank’s earnings or capitalfrom the potential of an obligor to fulfill its contractual commitment to thebank. Credit risk is most closely associated with a bank’s lending. Itencompasses the potential loss on a particular loan as well as the potential forloss from a group of related loans, i.e., a credit concentration. Credit riskalso extends to less traditional bank activities. It includes the credit behindthe bank’s investment portfolio.    A primary source of revenue for the Bank is lending, which isalso the area of greatest credit risk. To ameliorate credit risk, the Board andmanagement have adopted conservative lending practices. Board approved policiesprovide underwriting guidance. Individual loan authorities are low with noindividual officer having a secured loan authority over $200,000. One result ofthe low individual limits is that the Executive Committee or the full Boardapproves most mortgage loans and many commercial non-mortgages. The Bank’sproduct offerings are non-complex and no new loan products have been introducedthis year.    Credit risk attributable to concentrations relates to thegeography in which the Bank operates. There are no other significantconcentrations related to an individual borrowing relationship or industry.

Interest-rate risk    Interest rate risk is the risk to earnings or capital fromthe potential movement in interest rates. It is the sensitivity of the bank’sfuture earnings to interest rate changes. Interest rate risk is generallymeasured on the basis of duration analysis or gap analysis. Duration analysismeasures the degree of risk in a particular instrument or portfolio and gapanalysis defines the timing when loss may occur. In a community bank, anadequate interest rate risk measurement can be fairly simplistic.     The Bank controls interest rate risk by keeping bothinterest-bearing assets and liabilities short-term. As of December 31, 2007,approximately 97.6% of the Bank’s loans are either variable rate or written ondemand, and investment securities generally mature within three years. Thelongest term offered on a customer certificate of deposit is 24 months. Thisstrategy has carried the Bank through rate cycles successfully in the past.

Liquidity Risk   Liquidity risk is the risk to earnings or capital from abank’s inability to meet its obligations when they come due without incurringunacceptable losses or costs. An example would be: Depositors withdrawing theirdeposits when the bank does not have the liquid assets to fund the withdrawalswhile meeting loan-funding obligations.    The Company’s consolidated liquidity ratio was 42.0% in 2007,down from 45.6% in 2006. The Company anticipates that it will be able to fundloan demand and meet deposit withdrawal requests through the reduction ofovernight investment in federal funds sold, maturity of investment securities,and, if necessary, borrowing against lines of credit with correspondent banks.

Market Risk    Market risk is the risk to earnings or capital from changesin the value of portfolios of financial instruments. For most banks market riskis the risk of a decline in market value of its securities portfolio. Becausethe value of bank securities is driven primarily by interest rates, market riskand interest-rate risk frequently go hand in hand.     The Bank generally invests in short term investmentsecurities of high quality. Market rates influence the fair market value of theportfolio and, therefore, the carrying value of securities classified asavailable for sale. The impact on the Bank’s earnings relates to interest-ratesand related risk. Management has not identified any investment securities asbeing other than temporarily impaired.

Transaction Risk    Transaction risk is the risk to earnings or capital arisingfrom problems with service or product delivery. Transaction risk is the risk ofa failure in a bank’s operating processes. It is a risk of failure in a bank’sautomation, its employee integrity, or its internal controls.     The Company and the Bank are subject to transaction risk.Management believes that a sound system of internal controls along withmanagement and audit oversight control this risk at an acceptable level. 

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Compliance risk    Compliance risk is the risk to earnings or capital fromnoncompliance with laws, rules, and regulations. Compliance risk is often thegreatest risk a bank faces. Compliance risk weighs heavily in every bankregardless of its size or products.    The Company and the Bank devote significant resources tomeeting the challenge of complying with all applicable laws and regulations.Management employs a qualified compliance officer and uses supplementary legalor compliance resources as needed. Additionally, compliance is examined by teamsof regulatory specialists.

Reputation risk   Reputation risk is the risk to earnings or capital fromnegative public opinion. Community and customer relations are critical to abank’s success. A bank’s reputation is extremely important and anything thatwould impair that reputation is a significant risk.    Management and the Board consider the Bank’s reputation to beone of its most valuable non-financial assets. The Bank has earned a reputationfor providing good customer service, exercising safe and sound bankingpractices, dealing fairly with customers, employees and vendors, andparticipating as a good neighbor in the community. The maintenance of thesequalities requires continued commitment and effort.

Strategic Risk    Strategic risk is the risk to earnings or capital arisingfrom adverse business decisions or improper implementation of those decisions. Abanks strategic plan is the route it is going to follow based on management’sperception of the future. If the plan is wrong or improperly implemented, thebank is at risk.    The Company’s Strategic Plan is general in nature,emphasizing customer service and profitability as its mission and profitabilityas its primary objective. The Plan mentions basic loan underwriting criteria asa foundation for asset quality. It includes sections on management successionand community involvement. The Plan does not include specific measurable goalsor timeframes for goal achievement.
**Item 1B. Unresolved Staff Comments

   The Company has received comments from the Commission staffdated April 16, 2007, June 6, 2007, June 27, 2007, and November 26, 2007, whichremain unresolved as of December 31, 2007.  The substance of these commentsrelates to the Company’s disclosure of the Allowance for Loan Losses (ALLL) inits Annual Report on Form 10-K for the year ended December 31, 2006 (Form 10-K2006), including the Company’s methodology for its determination of the ALLL. As further discussed in Item 6, Selected Financial Data, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andNote 2 to the Company’s audited financial statements appearing in Item 8 of thisForm 10-K 2007, the Company revised its methodology for determining its ALLL. An explanation of this change and detailed restatement information is presentedin Item 6 Selected Financial Data, and Item 7 Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Loan Quality and theAllowance for Loan Losses, within this Form 10-K 2007.  The Companybelieves it has addressed the staff’s comments in this Form 10-K 2007.
****
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**Item 2. Properties**
    The Company has ten branch locations, all of which are ownedby the Company or the Bank. The Bank leases the land on which the East Berlinbranch is located. The locations are described as follows:

Office
Location
Square FootageMain Office, Berlin24 North Main Street,		Berlin, Maryland 2181124,229East Berlin Office10524 Old Ocean City		Boulevard, Berlin, Maryland 21811
1,50020th Street		Office100 20th Street,		Ocean City, Maryland 21842
3,100Ocean Pines Office11003 Cathell Road, Berlin,		Maryland 21811
2,420Mid-Ocean City Office9105 Coastal Highway, Ocean		City, Maryland 21842
1,984North Ocean City Office14200 Coastal Highway, Ocean		City, Maryland 21842
2,545West Ocean City Office9923 Golf Course Road, Ocean		City, Maryland 21842
2,496Pocomoke Office2140 Old Snow Hill Road,		Pocomoke, Maryland 21851
2,624Snow Hill Office108 West Market Street, Snow		Hill, Maryland 21863
3,773Ocean View, Delaware Office50 Atlantic Avenue, Ocean		View, Delaware 19970
4,900
    The Berlin office is the centralized location for the Companyand the Bank. Executive offices, loan processing, proof, bookkeeping, and thecomputer department are housed there. Most branches have a manager who alsoserves as a loan officer. All offices participate in normal day-to-day bankingoperations. The Company operates automated teller machines in all branches andat one non-branch location in a local hospital.
**Item 3. Legal Proceedings**
    (a)  There are no material pending legal proceedings to		which the Company or the Bank or any of their properties are subject.		   		(b) 		No proceedings were terminated during the fourth		quarter of the fiscal year covered by this report.

 
**Item 4. Submission of Matters to a Vote of Security Holders**
    There were no matters submitted to a vote of the stockholdersof the Company during the fourth quarter of the fiscal year covered by thisreport.

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**PART II****Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**
    The Company's Articles of Incorporation, as amended,authorize it to issue up to 10,000,000 shares of common stock.   As of February 29, 2008 there were approximately 1,027stockholders of record and 3,096,072 shares of Common Stock issued andoutstanding. There is no established public trading market in the stock, andthere is no likelihood that a trading market will develop in the near future.Transactions in the common stock are infrequent and are frequently negotiatedprivately between the persons involved in those transactions.    All outstanding shares of common stock of the Company areentitled to share equally in dividends from funds legally available, when, as,and if declared by the Board of Directors. The Company paid or declareddividends of $.80 per share in 2007, $.75 per share in 2006, and $2.10 per sharein 2005. Included in 2005 is a special cash dividend of $1.40 per share which isnot expected to be an annual event. The following table presents information about the Company’srepurchase of its equity securities during the calendar quarter ended on thedate of this Form 10-K.
 		                            		(a) Total Number of shares		(b)  Average Price Paid per Share		(c ) Total Number of Shares Purchased as Part of a Publicly Announced		Program		(d) Maximum Number of Shares that may yet be Purchased Under the Program		Period     		  October		-0-		N/A 		-0-		280,220		  November		             2,912 		$39.00  		             2,912 		277,308		  December		             1,448 		$38.80  		             1,448 		275,860		Totals		             4,360 		$38.93  		             4,360  
    The Company publicly announced on August 14, 2003, that itwould repurchase up to 10% of its outstanding equity stock at that time, whichequated to a total of 324,000 common shares available for repurchase. As ofJanuary 1, 2005, and again on May 18, 2007, this plan was renewed by publicannouncement, making up to 10% of the Company’s outstanding equity stockavailable for repurchase at the time of each renewal. This equated to a total of314,072 common shares available for repurchase as of May 18, 2007.     There is no expiration date for this program. No other stockrepurchase plan or program existed or exists simultaneously, nor has any otherplan or program expired during the period covered by this table. Common sharesrepurchased under this plan are retired. 

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**Item 6. Selected Financial Data**
    The following table presents selected financial data for thefive years ended December 31, 2007, including restated balances and other datafor the years ended December 31, 2006, 2005, 2004, and 2003. The Company hasdetermined that the allowance for loan losses was overstated as a result ofprovisions charged to earnings in years prior to 2003. The Company hasexperienced minimal loan losses, including in recent years and, as a result, hasnot recorded provisions for loan losses since prior to 2003. Managementdetermined that the balance in the allowance for loan losses could not besupported given the Company’s loan loss history combined with an analysis ofprobable losses in the current loan portfolio. A prior period adjustment tore-value the allowance for loan losses has been recorded, resulting in therestatement of balances previously reported for years prior to 2007.     No restatement has been made to the Consolidated Statementsof Income for the years ended December 31, 2006, 2005, 2004 or 2003. Inaccordance with Paragraph 3 of Financial Accounting Standard No. 16, *PriorPeriod Adjustments*, no adjustment has been made to the estimate of loanlosses in prior periods. In management’s opinion, had adjustments been made toprior period Consolidated Statements of Income, they would have been immaterial.    Please see Note 2 to the audited financial statements foradditional information.
 		2007		2006		2005		2004		2003		Restated		Restated		Restated		Restated 		(Dollars in thousands, except for per share data)		At Year End     		*		Total assets		$369,146 		$369,512 		$391,054 		$395,312 		$388,465 		Total deposits		$288,944 		$290,325 		$310,858 		$319,772 		$317,946 		*		Total loans, net of unearned income and     		   allowance for loan losses		$238,076 		$233,231 		$206,421 		$163,489 		$164,222 		*		Total stockholders’ equity		$74,476 		$71,381 		$67,530 		$67,909 		$64,847 		Common shares issued and outstanding		      3,102,510 		      3,149,356 		      3,187,556 		      3,208,478 		      3,227,966       		For the Year     		*		Average total assets		$372,006 		$377,211 		$399,345 		$396,695 		$383,074 		*		Average stockholders' equity		$72,569 		$69,268 		$69,138 		$66,160  				$62,986  				Net interest income		$17,032 		$16,963 		$15,912 		$13,698 		$13,647 		Net income		$7,297 		$7,400 		$6,798 		$5,613 		$5,540 		Cash dividend		$2,485 		$2,368 		$6,694 		$2,087 		$1,937       		Per share data     		*		Book value		$24.01 		$22.67 		$21.19 		$21.17 		$20.09 		Net income		$2.33 		$2.33 		$2.13 		$1.74 		$1.71 		Cash dividends declared		$0.80 		$0.75 		$2.10 		$0.65 		$0.60       		Other ratios     		*		Return on average assets		1.96%		1.96%		1.70%		1.41%		1.45%		*		Return on average equity		10.06%		10.68%		9.83%		8.48%		8.80%		Dividend payout ratio		34.33%		32.19%		98.59%		37.36%		35.09%		*		Average equity to average assets ratio		19.51%		18.36%		17.31%		16.68%		16.44%                  		*		Denotes items restated for years 2006, 2005, 2004, and 2003.   
 

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The following tables detail the accounts and balances thatare affected by the restatement for the quarterly and annual periods rangingfrom December 31, 2003 through September 30, 2007 as previously reported inAnnual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
 		 As Originally    		 Reported 		 Adjustment 		 Restated 		Restatement of September 30, 2007 balances   		Allowance for loan losses		                  2,174,631 		                (1,979,335)		                     195,296 		Loans, less allowance for loan losses		              226,929,094 		                  1,979,335 		              228,908,429 		Total assets		              383,927,933 		                  1,979,335 		              385,907,268 		Deferred income taxes		                     778,296 		                     767,950 		                  1,546,246 		Total liabilities		              309,631,960 		                     767,950 		              310,399,910 		Retained earnings		                56,699,156 		                  1,211,385 		                57,910,541 		Total stockholders' equity		                74,295,973 		                  1,211,385 		                75,507,358 		Total liabilities and stockholders' equity		              383,927,933 		                  1,979,335 		              385,907,268     		Restatement of June 30, 2007 balances   		Allowance for loan losses		                  2,180,894 		                (1,979,335)		                     201,559 		Loans, less allowance for loan losses		              231,522,497 		                  1,979,335 		              233,501,832 		Total assets		              378,757,758 		                  1,979,335 		              380,737,093 		Deferred income taxes		                     760,995 		                     767,950 		                  1,528,945 		Total liabilities		              305,463,744 		                     767,950 		              306,231,694 		Retained earnings		                54,738,012 		                  1,211,385 		                55,949,397 		Total stockholders' equity		                73,294,014 		                  1,211,385 		                74,505,399 		Total liabilities and stockholders' equity		              378,757,758 		                  1,979,335 		              380,737,093     		Restatement of March 31, 2007 balances   		Allowance for loan losses		                  2,180,894 		                (1,979,335)		                     201,559 		Loans, less allowance for loan losses		              238,523,197 		                  1,979,335 		              240,502,532 		Total assets		              365,300,387 		                  1,979,335 		              367,279,722 		Deferred income taxes		                     841,996 		                     767,950 		                  1,609,946 		Total liabilities		              293,292,532 		                     767,950 		              294,060,482 		Retained earnings		                52,843,357 		                  1,211,385 		                54,054,742 		Total stockholders' equity		                72,007,855 		                  1,211,385 		                73,219,240 		Total liabilities and stockholders' equity		              365,300,387 		                  1,979,335 		              367,279,722 
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 		 As Originally    		 Reported 		 Adjustment 		 Restated 		Restatement of December 31, 2006 balances   		Allowance for loan losses		                  2,175,418 		                (1,979,335)		                     196,083 		Loans, less allowance for loan losses		              231,251,783 		                  1,979,335 		              233,231,118 		Total assets		              367,532,166 		                  1,979,335 		              369,511,501 		Deferred income taxes		                     719,714 		                     767,950 		                  1,487,664 		Total liabilities		              297,362,610 		                     767,950 		              298,130,560 		Retained earnings		                51,053,985 		                  1,211,385 		                52,265,370 		Total stockholders' equity		                70,169,556 		                  1,211,385 		                71,380,941 		Total liabilities and stockholders' equity		              367,532,166 		                  1,979,335 		              369,511,501     		Restatement of September 30, 2006 balances   		Allowance for loan losses		                  2,190,778 		                (1,979,335)		                     211,443 		Loans, less allowance for loan losses		              228,845,965 		                  1,979,335 		              230,825,300 		Total assets		              389,864,010 		                  1,979,335 		              391,843,345 		Deferred income taxes		                     796,293 		                     767,950 		                  1,564,243 		Total liabilities		              318,837,086 		                     767,950 		              319,605,036 		Retained earnings		                51,590,238 		                  1,211,385 		                52,801,623 		Total stockholders' equity		                71,026,924 		                  1,211,385 		                72,238,309 		Total liabilities and stockholders' equity		              389,864,010 		                  1,979,335 		              391,843,345     		Restatement of June 30, 2006 balances   		Allowance for loan losses		                  2,190,778 		                (1,979,335)		                     211,443 		Loans, less allowance for loan losses		              233,648,286 		                  1,979,335 		              235,627,621 		Total assets		              381,334,496 		                  1,979,335 		              383,313,831 		Deferred income taxes		                     738,829 		                     767,950 		                  1,506,779 		Total liabilities		              311,350,141 		                     767,950 		              312,118,091 		Retained earnings		                49,602,690 		                  1,211,385 		                50,814,075 		Total stockholders' equity		                69,984,355 		                  1,211,385 		                71,195,740 		Total liabilities and stockholders' equity		              381,334,496 		                  1,979,335 		              383,313,831     		Restatement of March 31, 2006 balances   		Allowance for loan losses		                  2,190,734 		                (1,979,335)		                     211,399 		Loans, less allowance for loan losses		              219,875,078 		                  1,979,335 		              221,854,413 		Total assets		              374,920,157 		                  1,979,335 		              376,899,492 		Deferred income taxes		                     720,462 		                     767,950 		                  1,488,412 		Total liabilities		              306,828,948 		                     767,950 		              307,596,898 		Retained earnings		                47,784,529 		                  1,211,385 		                48,995,914 		Total stockholders' equity		                68,091,209 		                  1,211,385 		                69,302,594 		Total liabilities and stockholders' equity		              374,920,157 		                  1,979,335 		              376,899,492 
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 		 As Originally    		 Reported 		 Adjustment 		 Restated 		Restatement of December 31, 2005 balances   		Allowance for loan losses		                  2,190,709 		                (1,979,335)		                     211,374 		Loans, less allowance for loan losses		              204,441,957 		                  1,979,335 		              206,421,292 		Total assets		              389,074,624 		                  1,979,335 		              391,053,959 		Deferred income taxes		                     635,336 		                     767,950 		                  1,403,286 		Total liabilities		              322,756,240 		                     767,950 		              323,524,190 		Retained earnings		                46,021,128 		                  1,211,385 		                47,232,513 		Total stockholders' equity		                66,318,384 		                  1,211,385 		                67,529,769 		Total liabilities and stockholders' equity		              389,074,624 		                  1,979,335 		              391,053,959     		Restatement of September 30, 2005 balances   		Allowance for loan losses		                  2,193,108 		                (1,979,335)		                     213,773 		Loans, less allowance for loan losses		              195,943,991 		                  1,979,335 		              197,923,326 		Total assets		              411,853,354 		                  1,979,335 		              413,832,689 		Deferred income taxes		                     725,531 		                     767,950 		                  1,493,481 		Total liabilities		              340,524,075 		                     767,950 		              341,292,025 		Retained earnings		                51,011,122 		                  1,211,385 		                52,222,507 		Total stockholders' equity		                71,329,279 		                  1,211,385 		                72,540,664 		Total liabilities and stockholders' equity		              411,853,354 		                  1,979,335 		              413,832,689     		Restatement of June 30, 2005 balances   		Allowance for loan losses		                  2,192,258 		                (1,979,335)		                     212,923 		Loans, less allowance for loan losses		              189,264,687 		                  1,979,335 		              191,244,022 		Total assets		              409,898,941 		                  1,979,335 		              411,878,276 		Deferred income taxes		                     730,971 		                     767,950 		                  1,498,921 		Total liabilities		              340,453,487 		                     767,950 		              341,221,437 		Retained earnings		                49,105,752 		                  1,211,385 		                50,317,137 		Total stockholders' equity		                69,445,454 		                  1,211,385 		                70,656,839 		Total liabilities and stockholders' equity		              409,898,941 		                  1,979,335 		              411,878,276     		Restatement of March 31, 2005 balances   		Allowance for loan losses		                  2,192,552 		                (1,979,335)		                     213,217 		Loans, less allowance for loan losses		              171,607,950 		                  1,979,335 		              173,587,285 		Total assets		              399,767,645 		                  1,979,335 		              401,746,980 		Deferred income taxes		                     612,153 		                     767,950 		                  1,380,103 		Total liabilities		              331,651,975 		                     767,950 		              332,419,925 		Retained earnings		                47,417,886 		                  1,211,385 		                48,629,271 		Total stockholders' equity		                68,115,670 		                  1,211,385 		                69,327,055 		Total liabilities and stockholders' equity		              399,767,645 		                  1,979,335 		              401,746,980 
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 		 As Originally    		 Reported 		 Adjustment 		 Restated 		Restatement of December 31, 2004 balances   		Allowance for loan losses		                  2,177,926 		                (1,979,335)		                     198,591 		Loans, less allowance for loan losses		              161,510,157 		                  1,979,335 		              163,489,492 		Total assets		              393,332,982 		                  1,979,335 		              395,312,317 		Deferred income taxes		                     549,070 		                     767,950 		                  1,317,020 		Total liabilities		              326,635,414 		                     767,950 		              327,403,364 		Retained earnings		                45,917,427 		                  1,211,385 		                47,128,812 		Total stockholders' equity		                66,697,568 		                  1,211,385 		                67,908,953 		Total liabilities and stockholders' equity		              393,332,982 		                  1,979,335 		              395,312,317     		Restatement of September 30, 2004 balances   		Allowance for loan losses		                  2,184,884 		                (1,979,335)		                     205,549 		Loans, less allowance for loan losses		              158,288,994 		                  1,979,335 		              160,268,329 		Total assets		              412,155,404 		                  1,979,335 		              414,134,739 		Deferred income taxes		                     431,724 		                     767,950 		                  1,199,674 		Total liabilities		              344,824,253 		                     767,950 		              345,592,203 		Retained earnings		                46,553,204 		                  1,211,385 		                47,764,589 		Total stockholders' equity		                67,331,151 		                  1,211,385 		                68,542,536 		Total liabilities and stockholders' equity		              412,155,404 		                  1,979,335 		              414,134,739     		Restatement of June 30, 2004 balances   		Allowance for loan losses		                  2,190,706 		                (1,979,335)		                     211,371 		Loans, less allowance for loan losses		              163,097,097 		                  1,979,335 		              165,076,432 		Total assets		              395,458,255 		                  1,979,335 		              397,437,590 		Deferred income taxes		                     308,577 		                     767,950 		                  1,076,527 		Total liabilities		              329,459,535 		                     767,950 		              330,227,485 		Retained earnings		                45,105,240 		                  1,211,385 		                46,316,625 		Total stockholders' equity		                65,998,720 		                  1,211,385 		                67,210,105 		Total liabilities and stockholders' equity		              395,458,255 		                  1,979,335 		              397,437,590     		Restatement of March 31, 2004 balances   		Allowance for loan losses		                  2,187,860 		                (1,979,335)		                     208,525 		Loans, less allowance for loan losses		              163,040,952 		                  1,979,335 		              165,020,287 		Total assets		              383,075,508 		                  1,979,335 		              385,054,843 		Deferred income taxes		                     378,324 		                     767,950 		                  1,146,274 		Total liabilities		              318,163,092 		                     767,950 		              318,931,042 		Retained earnings		                43,734,147 		                  1,211,385 		                44,945,532 		Total stockholders' equity		                64,912,416 		                  1,211,385 		                66,123,801 		Total liabilities and stockholders' equity		              383,075,508 		                  1,979,335 		              385,054,843 
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 		 As Originally    		 Reported 		 Adjustment 		 Restated 		Restatement of December 31, 2003 balances   		Allowance for loan losses		                  2,187,277 		                (1,979,335)		                     207,942 		Loans, less allowance for loan losses		              162,243,008 		                  1,979,335 		              164,222,343 		Total assets		              386,486,401 		                  1,979,335 		              388,465,736 		Deferred income taxes		                     355,632 		                     767,950 		                  1,123,582 		Total liabilities		              322,850,369 		                     767,950 		              323,618,319 		Retained earnings		                42,391,363 		                  1,211,385 		                43,602,748 		Total stockholders' equity		                63,636,032 		                  1,211,385 		                64,847,417 		Total liabilities and stockholders' equity		              386,486,401 		                  1,979,335 		              388,465,736     		Restatement of September 30, 2003 balances   		Allowance for loan losses		                  2,185,520 		                (1,979,335)		                     206,185 		Loans, less allowance for loan losses		              163,816,310 		                  1,979,335 		              165,795,645 		Total assets		              418,966,108 		                  1,979,335 		              420,945,443 		Other liabilities		                     277,767 		                     767,950 		                  1,045,717 		Total liabilities		              354,755,076 		                     767,950 		              355,523,026 		Retained earnings		                43,019,687 		                  1,211,385 		                44,231,072 		Total stockholders' equity		                64,211,032 		                  1,211,385 		                65,422,417 		Total liabilities and stockholders' equity		              418,966,108 		                  1,979,335 		              420,945,443     		Restatement of June 30, 2003 balances   		Allowance for loan losses		                  2,183,265 		                (1,979,335)		                     203,930 		Loans, less allowance for loan losses		              170,139,580 		                  1,979,335 		              172,118,915 		Total assets		              383,824,280 		                  1,979,335 		              385,803,615 		Other liabilities		                     347,756 		                     767,950 		                  1,115,706 		Total liabilities		              320,479,269 		                     767,950 		              321,247,219 		Retained earnings		                41,590,563 		                  1,211,385 		                42,801,948 		Total stockholders' equity		                63,345,011 		                  1,211,385 		                64,556,396 		Total liabilities and stockholders' equity		              383,824,280 		                  1,979,335 		              385,803,615     		Restatement of March 31, 2003 balances   		Allowance for loan losses		                  2,182,665 		                (1,979,335)		                     203,330 		Loans, less allowance for loan losses		              167,819,932 		                  1,979,335 		              169,799,267 		Total assets		              363,997,795 		                  1,979,335 		              365,977,130 		Other liabilities		                       59,746 		                     767,950 		                     827,696 		Total liabilities		              302,647,335 		                     767,950 		              303,415,285 		Retained earnings		                40,140,523 		                  1,211,385 		                41,351,908 		Total stockholders' equity		                61,350,460 		                  1,211,385 		                62,561,845 		Total liabilities and stockholders' equity		              363,997,795 		                  1,979,335 		              365,977,130 
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** 

Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operation   The following discussion of the Company's financial conditionand results of operations should be read in conjunction with the Company'sfinancial statements and related notes and other statistical informationincluded in this report.
**Critical Accounting Policies   The Company’s financial condition and results of operationsare sensitive to accounting measurements and estimates of inherently uncertainmatters. When applying accounting policies in areas that are subjective innature, management uses its best judgment to arrive at the carrying value ofcertain assets. One of the most critical accounting policies applied is relatedto the valuation of the loan portfolio.     The allowance for loan losses (ALLL) represents management’sbest estimate of inherent probable losses in the loan portfolio as of thebalance sheet date. It is one of the most difficult and subjective judgments.The adequacy of the allowance for loan losses is evaluated no less thanquarterly. The determination of the balance of the allowance for loan losses isbased on management’s judgments about the credit quality of the loan portfolioas of the review date. It should be sufficient to absorb losses in the loanportfolio as determined by management’s consideration of factors including ananalysis of historical losses, specific reserves for non-performing or past dueloans, delinquency trends, portfolio composition (including segment growth orshifting of balances between segments, products and processes, andconcentrations of credit, both regional and by relationship), lending staffexperience and changes, critical documentation and policy exceptions, riskrating analysis, interest rates and the competitive environment, economicconditions in the Bank’s service area, and results of independent reviews,including audits and regulatory examinations.
**Prior Period Adjustment**
    In 2007, the Company determined that the allowance for loanlosses was overstated as a result of provisions charged to earnings in yearsprior to 2003. A prior period adjustment to revalue the ALLL has been recorded,resulting in the restatement of balances, variances, and ratios previouslyreported for years ended December 31, 2006, 2005, 2004, and 2003, and for allquarter ends in years 2007, 2006, 2005, 2004, and 2003. No provision for loanloss was charged to earnings in 2003 or any year after, therefore the priorperiod adjustment has no impact on previously reported earnings. Item 6,Selected Financial Data, provides details of the accounts and balances that havebeen restated for each of the affected periods.    The origin of the overstatement of the Bank’s allowance forloan loss is in the practice of federal and state financial institutionregulatory agencies which for many decades strongly recommended that commercialbanks establish a reserve for loan losses as a percentage of gross loans. Thetarget percentage increased through the real estate market downturn of the1980s. It was common practice for banking regulators to recommend that a bankreserve a percentage of gross loans comparable to the average of its peers. Peergroups for this purpose might be determined by size or geography. A bank withhigher than peer losses might be required to reserve at a higher rate, but bankswith lower than peer losses were requested to reserve based on peer experience,not their own. The result was that banks like ours with conservative lendingpractices and lower loan losses recorded reserves, through gradual provisionscharged to earnings over many years, which exceeded their identifiable or likelylosses. Therefore, throughout the 1990s the Bank maintained an ALLL ofapproximately 1.35% of loans. Although the Bank did not make additionalprovisions to the ALLL after 2002, its ALLL did not decrease in the ensuingyears due to its low level of net charge-offs. However, based on itsconservative practices and uncertainty as to the proper method to determine theALLL, as further discussed below, management determined to keep the ALLL at thethen-current level until 2007.    In recent years, bank regulatory agencies have shifted theirfocus to the methodology, or thought process, underlying the balance in theALLL. They recommend that banks, like other industries, estimate their reservefor uncollectible receivables (loans), in accordance with generally acceptedaccounting principles. In December 1993, the *Interagency Policy Statement onthe Allowance for Loan and Lease Losses* focused on the responsibilities offinancial institution management and boards of directors regarding the ALLL. InJuly 1999, guidance jointly issued by banking regulators and the Securities andExchange Commission (SEC) marked the beginning of the regulatory shift to GAAP,from what had become known in the banking industry as regulatory accountingprinciples (RAP). In July 2001, banking regulators issued the *PolicyStatement on Allowance for Loan and Lease Losses Methodology and Documentationfor Banks and Savings Institutions*, which instructed banking boards ofdirectors to ensure that their ALLL is determined consistent with "theinstitutions’ stated policies and procedures, generally accepted accountingprinciples (GAAP), and ALLL supervisory guidance." Throughout the 2001statement, the regulators acknowledge that variables such as the size of aninstitution and the complexity of its lending products and activities willresult in policies and procedures "appropriately tailored" to the institution.Parallel guidance to registrants that are creditors in lending transactions wasreleased in July 2001 by SEC as Staff Accounting Bulletin 102, *Selected LoanLoss Allowance and Documentation Issues*. The 2001 guidance, which reinforcedthe regulatory shift toward GAAP, recommended that reserves be based onhistorical and identified losses in the loan portfolio. As a result, the Companyceased to build its ALLL through charges to income until it was confident thatthe current guidance was widely applied by its regulators and implemented by theindustry. 
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    In December 2006, federal financial institution examinersreleased the *Interagency Policy Statement on the Allowance for Loan and LeaseLosses* (2006 Statement). The stated purpose of this policy statement was torevise the prior policy statement issued in 1993 and to "ensure consistency withgenerally accepted accounting principals (GAAP) and more recent supervisoryguidance." Management believes that guidance issued from 1999 up to the issuanceof the 2006 Statement was not universally applied by the regulatory agencies. Asa result, the Bank continued to apply its previous methodology to thecalculation of the ALLL. Management’s position that guidance issued from 1999until the 2006 Statement was not universally implemented is further supported bythe issuance of the 2006 Statement, which banking regulators felt necessary toensure consistent implementation. In a cover letter accompanying the release ofthe 2006 Statement, Federal Reserve further evidenced the existing lack of fullcompliance with prior guidance for the ALLL. An extract from Federal Reserve’sSR 06-17 dated December 13, 2006 follows:

Although the revised policy statement reiterates key		concepts and requirements in GAAP and existing supervisory guidance on		the ALLL, the agencies recognize that institutions may not have		sufficient time to complete any enhancements needed to bring their ALLL		processes and documentation into full compliance with the revised		guidance for year-end 2006 reporting purposes. Nevertheless, these		enhancements should be completed in the near term.

    In response to the definitive guidance provided in the 2006Statement, which management believes, unlike the prior statements, was acceptedin the industry as definitive guidance, management determined that a revaluationof the ALLL was necessary. Management and the boards of directors of the Bankand the Company agreed that the accounting adjustment required to bring the ALLLto its appropriate level, based on the application of current methodology, wouldmaterially distort earnings if adjusted in the prescribed manner, throughcurrent earnings. With the concurrence of its independent auditors, managementhas elected to record the revaluation of the ALLL as a prior period adjustment.The result of the restatement of prior years is to increase net loans, totalassets, the net credit for deferred income taxes, and retained earnings in eachrestated year. The restatement of these balances results in restated variancesbetween years and relationship ratios within a single year, such as loans todeposits and capital ratios. These restatements are referenced throughout thefollowing Management’s Discussion and Analysis. It is the belief of managementthat the restatements of balances, variances and ratios support the positionthat this adjustment will not alter conclusions drawn by those who relied on theCompany’s originally filed statements for the restated periods, or those whorely on the Company’s current financial reports including the restatements forquarterly and annual reports from March 2003, through September 2007.    See "Loan Quality and the Allowance for Loan Losses" foradditional related disclosure and discussion.
**Overview    Consolidated income of the Company is derived primarily fromoperations of the Bank. Net income for 2007 was $7,296,587 compared to$7,400,369 for 2006 and $6,797,638 for 2005. The Company had a return on averageequity of 10.06% and return on average assets of 1.96% for 2007, compared toreturns on average equity of 10.68% and 9.83%, and returns on average assets of1.96% and 1.70%, for 2006 (restated) and 2005 (restated), respectively. Theeffect of restatement is to reduce returns on average equity by .19% and .18%and returns on average assets by .01% and .01%, for 2006 and 2005, respectively.
**Results of Operations    The Company’s net income of $7,296,587, or $2.33 per share,for the year ended December 31, 2007, was a decrease of $103,782 (1.40%) fromnet income of 7,400,369, or $2.33 per share, for the year ended December 31,2006. Contributing to this decrease were a $69,810 (0.41%) increase in netinterest income, a $15,808 (0.81%) decrease in noninterest revenue, and a$207,404 (2.82%) increase in noninterest expense.     The Company’s net income of $7,400,369, or $2.33 per share,for the year ended December 31, 2006, was an increase of $602,731 (8.87%) fromnet income of $6,797,638, or $2.13 per share, for the year ended December 31,2005. Contributing to this increase was a $1,050,666 (6.60%) increase in netinterest income. Noninterest revenue increased $149,370 (8.30%) from 2005 to2006, while noninterest expense increased $195,005 (2.72%) during the sameperiod.     The Company’s net income of $1,651,416 or $.53 per share, forthe quarter ended December 31, 2007, was a decrease of $179,843 (9.82%) from thenet income of $1,831,259 or $.58 per share, for the quarter ended December 31,2006. Lower net interest income, the primary reason for the decrease, resultedfrom the repricing of deposit accounts initiated in mid-2006. Deposit rateincreases were targeted at deposit retention in a highly competitiveenvironment.    The Company’s net income of $1,831,259or $.58 per share, for the quarter ended December 31, 2006, was an increase of$127,316 (7.47%) from the net income of $1,703,943 or $.53 per share, for thequarter ended December 31, 2005. Increased net interest income, the primaryreason for the increase, was due to a second year of continued growth in theBank’s loan portfolio and higher earnings rates on the Bank’s investments.Deposit interest expense increased due to rate increases targeted at depositretention.
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**Net Interest Income    The primary source of income for the Company is net interestincome, which is the difference between revenue on interest-earning assets, suchas investment securities and loans, and interest expense incurred oninterest-bearing sources of funds, such as deposits and borrowings. The level ofnet interest income is determined primarily by the average balances ofinterest-earning assets and the Company’s funding sources, and the rate spreadsbetween interest-earning assets and funding sources. Changes in net interestincome from period to period result from increases or decreases in the volume ofinterest-earning assets and interest-bearing liabilities, and increases ordecreases in the average rates earned and paid on such assets and liabilities.The volume of interest-earning assets and interest-bearing liabilities isaffected by the ability to manage the earning-asset portfolio, which includesloans, and the availability of particular sources of funds, such asnoninterest-bearing deposits.    The key performance measure for net interest income is the"net margin on interest-earning assets," or net interest income divided byaverage interest-earning assets. The Company's net interest margin for 2007 on anon-GAAP tax-equivalent basis was 5.07%, compared to 5.00% and 4.43% for 2006(restated) and 2005 (restated), respectively. The effect of restatement was tolower the net interest margin from the originally reported levels of 5.02% and4.45% for 2006 and 2005, respectively. Because most of the Bank’s loans arewritten with a demand feature, the income of the Bank should not changedramatically as interest rates change. Management of the Company expects tomaintain the net margin on interest-earning assets. The net margin may decline,however, if competition increases, loan demand decreases, or the cost of fundsrises faster than the return on loans and securities. Although such expectationsare based on management's judgment, actual results will depend on a number offactors that cannot be predicted with certainty, and fulfillment of management'sexpectations cannot be assured.    The following tables present information including averagebalances of interest-earning assets and interest-bearing liabilities, the amountof related interest income and interest expense, and the resulting yields bycategory of interest-earning asset and interest-bearing liability. In thesetables, dividends and interest on tax-exempt securities and loans are reportedon a fully taxable equivalent basis, which is a non-GAAP measure as defined inSEC Regulation G and Item 10 of SEC Regulation S-K. Management believes thatthese measures provide better yield comparability as a tool for managing netinterest income.

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		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		For the Year Ended		December 31, 2007		December 31, 2006 Restated		December 31, 2005 Restated		Average  		Average     		Balance		Interest		Yield		Balance		Interest		Yield   		Assets         		Federal funds sold		 $  37,826 		 $   1,919 		5.07%		 $  22,547 		 $   1,137 		5.04%		 $  34,233 		 $   1,078 		3.15%		Interest-bearing deposits		3,494		168		4.82%		2,173		79		3.64%		2,175		56		2.56%		Investment securities:         		  U. S. Treasury		55,061		2,636		4.79%		71,441		2,614		3.66%		105,456		2,881		2.73%		  U. S. Government Agency		6,568		310		4.73%		13,378		398		2.98%		19,666		525		2.67%		  State and municipal		2,397		95		3.97%		7,443		219		2.94%		16,618		388		2.34%		  Other		       1,927 		         101 		5.27%		       1,900 		         102 		5.37%		       1,882 		           90 		4.80%		   Total investment securities		     65,953 		      3,142 		4.77%		     94,162 		      3,333 		3.54%		   143,622 		      3,884 		2.70%		Loans:         		  Commercial		23,812		1,691		7.10%		23,804		1,711		7.19%		19,134		1,322		6.91%		  Mortgage		208,936		14,870		7.12%		200,588		14,020		6.99%		165,415		11,485		6.94%		  Consumer		       2,465 		         206 		8.37%		       2,491 		         206 		8.27%		       2,083 		         178 		8.53%		   Total loans		235,213		16,767		7.13%		226,883		15,937		7.02%		186,632		12,985		6.96%		Allowance for loan losses		          199   		          211   		          214   		   Total loans, net of allowance		   235,014 		    16,767 		7.13%		   226,672 		    15,937 		7.03%		   186,418 		    12,985 		6.97%		Total interest-earning assets		342,287		    21,996 		6.43%		345,554		    20,486 		5.93%		366,448		    18,003 		4.91%		Noninterest-bearing cash		16,179  		17,694  		19,946  		Premises and equipment		6,548  		6,605  		6,757  		Other assets		       6,992   		       7,358   		       6,194   		        Total assets		 $372,006   		 $377,211   		 $399,345   		Interest-bearing deposits         		  NOW 		 $  51,297 		         183 		0.36%		 $  57,052 		         141 		0.25%		 $  67,452 		         101 		0.15%		  Money market		33,590		317		0.94%		41,810		335		0.80%		50,537		218		0.43%		  Savings		44,137		327		0.74%		47,812		285		0.60%		54,988		218		0.40%		  Other time		     84,867 		      3,789 		4.46%		     68,359 		      2,414 		3.53%		     63,710 		      1,202 		1.89%		Total interest-bearing deposits		213,891		4,616		2.16%		215,033		3,175		1.48%		236,687		1,739		0.73%		Securities sold under agreements         		  to repurchase		4,248		29		0.69%		5,878		40		0.68%		6,325		22		0.34%		Borrowed funds		          109 		             7 		6.10%		          145 		             8 		5.52%		          151 		             9 		6.07%		Total interest-bearing liabilities		218,248		4,652		2.13%		221,056		3,223		1.46%		243,163		1,770		0.73%		Noninterest-bearing deposits		     79,807 		              -  		     84,380 		              -  		     85,526 		              -  		298,055		      4,652 		1.56%		305,436		      3,223 		1.06%		328,689		      1,770 		0.54%		Other liabilities		       1,382   		       2,507   		       1,518   		Stockholders' equity		     72,569   		     69,268   		     69,138   		        Total liabilities and         		        stockholders' equity		 $372,006   		 $377,211   		 $399,345   		Net interest spread  		4.30%  		4.47%  		4.18%		Net interest income 		 $ 17,344   		 $ 17,263   		 $ 16,233  		Net margin on interest-earning assets 		5.07%  		5.00%  		4.43%        		Tax equivalent adjustment included in:        		    Investment income 		 $      191   		 $      231   		 $      291  		    Loan income 		 $      121   		 $        69   		 $        27  
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		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		December 31, 2004 Restated		December 31, 2003 Restated		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Assets      		Federal funds sold		 $  41,762 		 $      547 		1.31%		 $  53,715 		 $      541 		1.01%		Interest-bearing deposits		2,201		48		2.16%		1,706		42		2.48%		Investment securities:      		  U. S. Treasury		116,537		2,442		2.10%		99,711		2,411		2.42%		  U. S. Government Agency		18,844		503		2.67%		18,172		531		2.92%		  State and municipal		19,004		407		2.14%		12,119		332		2.74%		  Other		       1,786 		           79 		4.43%		       1,600 		           70 		4.40%		   Total investment securities		   156,171 		      3,431 		2.20%		   131,602 		      3,344 		2.54%		Loans:      		  Commercial		15,243		1,053		6.91%		13,780		987		7.16%		  Mortgage		146,121		10,289		7.04%		150,491		10,879		7.23%		  Consumer		       2,305 		         201 		8.73%		       3,108 		         284 		9.15%		   Total loans		163,669		11,543		7.05%		167,379		12,150		7.26%		Allowance for loan losses		          209   		          206   		   Total loans, net of allowance		   163,460 		    11,543 		7.06%		   167,173 		    12,150 		7.28%		Total interest-earning assets		363,594		    15,569 		4.28%		354,196		    16,077 		4.54%		Noninterest-bearing cash		19,705  		19,091  		Premises and equipment		6,968  		6,567  		Other assets		       6,428   		       3,220   		        Total assets		 $396,695   		 $383,074   		Interest-bearing deposits      		  Savings and NOW 		 $117,733 		         310 		0.26%		 $110,638 		         422 		0.38%		  Money market		49,733		198		0.40%		50,141		305		0.61%		  Other time		     72,621 		      1,028 		1.42%		     77,668 		      1,384 		1.78%		Total interest-bearing deposits		240,087		1,536		0.64%		238,447		2,111		0.89%		Securities sold under agreements      		  to repurchase		5,021		8		0.16%		4,135		10		0.24%		Borrowed funds		          171 		           10 		6.06%		          189 		           11 		6.05%		Total interest-bearing liabilities		245,279		1,554		0.63%		242,771		2,132		0.88%		Noninterest-bearing deposits		     83,498 		              -  		     75,898 		              -  		328,777		      1,554 		0.47%		318,669		      2,132 		0.67%		Other liabilities		       1,758   		       1,419   		Stockholders' equity		     66,160   		     62,986   		        Total liabilities and      		        stockholders' equity		 $396,695   		 $383,074   		Net interest spread  		3.65%  		3.66%		Net interest income 		 $ 14,015   		 $ 13,945  		Net margin on interest-earning assets 		3.85%  		3.94%     		Tax equivalent adjustment included in:     		    Investment income 		 $      286   		 $      263  		    Loan income 		 $        31   		 $        35  
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		Analysis of Changes in Net Interest Income		(Dollars stated in thousands) 		Year ended December 31,		Year ended December 31, 		2007 compared with 2006		2006 compared with 2005 		variance due to		variance due to 		Total		Rate		Volume		Total		Rate		Volume		Interest-earning assets      		  Federal funds sold		            782 		              12 		            770 		              59 		            427 		           (368)		  Interest-bearing deposits		              89 		              41 		              48 		              23 		              23 		                 - 		  Investment securities:      		    U. S. Treasury		              22 		            621 		           (599)		           (267)		            662 		           (929)		    U. S. Government Agency		             (88)		            115 		           (203)		           (127)		              41 		           (168)		    State and municipals		           (124)		              25 		           (149)		           (169)		              45 		           (214)		    Other		               (1)		               (2)		                1 		              12 		              11 		                1 		  Loans:      		    Commercial		             (20)		             (21)		                1 		            389 		              66 		            323 		    Mortgage		            850 		            267 		            583 		         2,535 		              93 		         2,442 		    Consumer		  -  		                2 		               (2)		              28 		               (7)		              35 		        Total interest revenue		         1,510 		         1,060 		            450 		         2,483 		         1,361 		         1,122 		Interest-bearing liabilities      		  NOW		              42 		              56 		             (14)		              40 		              56 		             (16)		  Money market		             (18)		              48 		             (66)		            117 		            155 		             (38)		  Savings		              42 		              64 		             (22)		              67 		              95 		             (28)		  Other time deposits		         1,375 		            792 		            583 		         1,212 		         1,124 		              88 		  Other borrowed funds		             (12)		  -  		             (12)		              17 		              19 		               (2)		        Total interest expense		         1,429 		            960 		            469 		         1,453 		         1,449 		                4 		Net interest income		              81 		            100 		             (19)		         1,030 		             (88)		         1,118 
       In the preceding table, the variance that is both rate andvolume related is reported with the rate variance.
**Composition of Loan Portfolio**
    Because loans are expected to produce higher yields thaninvestment securities and other interest-earning assets (assuming that loanlosses are not excessive), the absolute volume of loans and the volume as apercentage of total earning assets is an important determinant of net interestmargin. Average loans, net of the allowance for loan losses, were $235,014,000,$226,672,000, and $186,418,000 during 2007, 2006 (restated), and 2005(restated), respectively, which constituted 68.66%, 65.60%, and 50.87%, ofaverage interest-earning assets for the periods. The Company’s ratio of netloans to deposits was 82.40%, 80.33%, and 66.40% at December 31, 2007, 2006(restated), and 2005 (restated), respectively. Average net loans to averagedeposits were 80.02%, 75.71%, and 57.86% for 2007, 2006 (restated), and 2005(restated). The increase in the loan to deposit ratio from 2006 to 2007 isattributable to 3.68% growth in the average loan portfolio accompanied by amodest 1.91% reduction in average deposits during 2007. The increase in the loanto deposit ratio from 2005 to 2006 is attributable to 21.59% growth in theaverage loan portfolio accompanied by a 7.08% reduction in average depositsduring 2006. Throughout 2005, 2006 and 2007, the Bank continued to enjoyincreased loan opportunity due to steady demand and competitive pricing. Theeffect of restatement of the ratios in this section is to increase each restated2006 and 2005 ratio by less than 1.00%.
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    The Company extends loans primarily to customers located inand near Worcester County, Maryland and Sussex County, Delaware. There are noindustry concentrations in the Company’s loan portfolio. The Company does,however, have a substantial portion of its loans in real estate and performancewill be influenced by the real estate market in the region.     During 2004 through 2006, the Bank experienced rapid growthin construction, land development and land loans as a result of a robust realestate market and favorable competitive conditions. While this type of loan maygenerally be considered to be more risky than other real estate secured loans,the Bank did not deviate from its conservative underwriting practices relativeto these transactions. While increasing the outstanding balances in this type ofcredit, management did not incur any more than its historically low level ofrisk. This is consistent with the Company’s philosophy that safe and soundpractice, coupled with high earnings, are higher priorities than asset growth.The Bank has not engaged in risky lending practices such as subprime mortgages,high loan-to-value lending, or high volume of loans on condominiums. Althoughthe economy has caused a general decline in real estate values and an increasein time to market many properties, the Bank’s conservative underwritingpractices have sheltered it from the adverse portfolio effects that arecurrently receiving public attention. Further, management monitors fluctuationsin the value of real estate held as collateral and, if deemed necessary, obtainsadditional collateral to limit the Bank’s loss exposure.    The following table sets forth the composition of theCompany's loan portfolio for each of the five most recent year ends.
		Composition of the Loan Portfolio Stated in Dollars and Percentages		2007		2006		2005		2004		2003 		Restated		Restated		Restated		Restated		     Real estate mortgages		       Construction, land development,		          and land		 $      38,230,033 		 $      37,331,256 		 $      23,430,345 		 $      14,304,860 		 $      17,467,578 		       Residential 1 to 4 family		         87,327,448 		         88,599,071 		         81,327,154 		         74,211,899 		         79,624,476 		       Second mortgages		           3,287,734 		           2,395,178 		           2,094,749 		           1,900,559 		           1,353,800 		       Commercial properties		         84,568,665 		         79,484,039 		         76,103,526 		         57,252,929 		         50,153,929 		     Commercial		         22,283,007 		         23,264,997 		         21,461,593 		         14,007,430 		         13,199,879 		     Consumer		           2,574,916 		           2,352,660 		           2,215,299 		           2,010,406 		           2,630,623 		           Total loans		238,271,803		233,427,201		206,632,666		163,688,083		164,430,285		     Less allowance for loan losses		              195,525 		              196,083 		              211,374 		              198,591 		              207,942 		           Loans, net		 $    238,076,278 		 $    233,231,118 		 $    206,421,292 		 $    163,489,492 		 $    164,222,343      		     Real estate mortgages     		       Construction, land development,     		          and land		16.04%		15.99%		11.34%		8.74%		10.62%		       Residential 1 to 4 family		36.66%		37.95%		39.36%		45.33%		48.43%		       Second mortgages		1.38%		1.03%		1.01%		1.16%		0.82%		       Commercial properties		35.49%		34.05%		36.83%		34.98%		30.50%		     Commercial		9.35%		9.97%		10.39%		8.56%		8.03%		     Consumer		1.08%		1.01%		1.07%		1.23%		1.60%		           Total loans		100.00%		100.00%		100.00%		100.00%		100.00%
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    The following table sets forth the maturity distribution,classified according to sensitivity to changes in interest rates, for selectedcomponents of the Company's loan portfolio as of December 31, 2007.
		Loan Maturity Schedule and Sensitivity to Changes in Interest Rates		December 31, 2007  		Over one   		One year		through		Over five  		or less		five years		years		Total		     Real estate mortgages    		       Construction, land development,    		          and land		 $      38,122,358 		 $             67,633 		 $             40,042 		 $      38,230,033 		       Residential 1 to 4 family		         87,100,033 		                44,167 		              183,248 		         87,327,448 		       Second mortgages		           3,287,734 		                         - 		                         - 		           3,287,734 		       Commercial properties		         84,261,953 		                57,106 		              249,606 		         84,568,665 		     Commercial		         20,417,709 		           1,250,710 		              614,588 		         22,283,007 		     Consumer		           1,207,444 		           1,202,106 		              165,366 		           2,574,916  		 $    234,397,231 		 $        2,621,722 		 $        1,252,850 		 $    238,271,803      		     Fixed interest rate		 $        1,937,600 		 $        2,621,722 		 $        1,252,850 		 $        5,812,172 		     Variable interest rate (or demand)		       232,459,631 		                    -    		                    -    		       232,459,631 		           Total 		 $    234,397,231 		 $        2,621,722 		 $        1,252,850 		 $    238,271,803 
    As of December 31, 2007, $232,459,631 or 97.56%, of the totalloans were either variable rate loans or loans written on demand. 

    The Company has the following commitments, lines of credit,and letters of credit outstanding as of December 31, 2007, 2006, and 2005,respectively.
 		2007		2006		2005		       Construction and land development loans		 $   12,582,162 		 $   18,866,083 		 $   21,845,161 		       Other loan commitments		      20,941,323 		      21,557,185 		      24,252,637 		       Standby letters of credit		        1,582,050 		        1,682,942 		        1,272,000 		                Total		 $   35,105,535 		 $   42,106,210 		 $   47,369,798 
    Loan commitments are agreements to lend to a customer as longas there is no violation of any condition to the contract. Loan commitmentsgenerally have interest at current market rates, fixed expiration dates, and mayrequire the payment of a fee. Letters of credit are commitments issued toguarantee the performance of a customer to a third party. Loan commitments andletters of credit are made on the same terms, including collateral, asoutstanding loans. The Company's exposure to loss in the event of nonperformanceby the borrower is represented by the contract amount of the commitment. 
**Loan Quality and the Allowance for Loan Losses**
    The allowance for loan lossesrepresents an amount which management believes to be adequate to absorbidentified and inherent losses in the loan portfolio as of the balance sheetdate. Valuation of the allowance is completed no less than quarterly. Thedetermination of the allowance is inherently subjective as it relies onestimates of potential loss related to specific loans, the effects of portfoliotrends, and other internal and external factors.     The ALLL consists of (i) formula-based reserves comprised ofpotential losses in the balance of the loan portfolio segmented into homogeneouspools, (ii) specific reserves comprised of potential losses on loans thatmanagement has identified as impaired, and (iii) unallocated reserves.Unallocated reserves are not associated with a specific portfolio segment or aspecific loan, but may be appropriate if properly supported and in accordancewith GAAP. Management anticipates having low levels of unallocated reserves infuture years, as discussed in conjunction with the table titled Allocation ofthe Allowance for Loan losses, below.
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   The Company evaluates loan portfolio risk for the purpose ofestablishing an adequate allowance for loan losses. In determining an adequatelevel for the formula-based portion of the ALLL, management considers historicalloss experience for major types of loans. Homogenous categories of loans areevaluated based on loss experience in the most recent five years, applied to thecurrent portfolio. This formulation gives weight to portfolio size and lossexperience for categories of real-estate secured loans (i.e. real estate –construction and real estate – mortgage), other loans to commercial borrowers,and other consumer loans. However, historical data may not be an accuratepredictor of loss potential in the current loan portfolio. Management alsoevaluates trends in delinquencies, the composition of the portfolio,concentrations of credit, and changes in lending products, processes, orstaffing. Management further considers external factors such as the interestrate environment, competition, current local and national economic trends, andthe results of recent independent reviews by auditors and banking regulators.The recent slow-down in the real-estate market has affected both the price andtime to market residential and commercial properties. Management closelymonitors such trends and the potential effect on the Company, but to date theyhave not impacted the quality of the Bank’s loan portfolio. For all periodspresented, there were no specific adjustments made to the ALLL in connectionwith management’s evaluation of these trends as management determined that theyhave not impacted the quality of the loan portfolio.    Management has also adopted a risk rating system which givesweight to collateral status (secured vs. unsecured), and to the absence orimproper execution of critical contract or collateral documents. Unsecured loansand those loans with critical documentation exceptions, as defined bymanagement, are considered to have greater loss exposure. Managementincorporates these factors in the formula-based portion of the ALLL.Additionally, consideration is given to those segments of the loan portfoliowhich management deems to pose the greatest likelihood of loss. In an economicdownturn, such as the region is experiencing in late 2007, management believesthe Bank’s greatest likelihood of loss is in unsecured loans - commercial andconsumer, and in secured consumer loans. Reserves for these segments of theportfolio are included in the formula-based portion of the ALLL at December 31,2007. Although the real estate market is less robust than in recent years,management does not expect losses in the real estate portfolio due to the Bank’sconservative underwriting practices. Management closely monitors conditions thatmight indicate deterioration of collateral value on significant loans andobtains additional collateral as required to protect the Bank from exposure.    In determining an adequate level for the specific reserveportion of the ALLL, management reviews the current portfolio givingconsideration to problem loans. The allowance may include reserves for specificloans identified as impaired during management's loan review or the Company’sindependent loan review or internal audit functions. For significant problemloans, management's review consists of evaluation of the financial strengths ofthe borrowers and guarantors, the related collateral, and the effects ofeconomic conditions.     The provision for loan losses is a charge to earnings in thecurrent period to replenish the allowance and maintain it at a level managementhas determined to be adequate. The allowance is increased by current periodprovisions and by recoveries of amounts previously charged-off. The allowance isdecreased when loans are charged-off as losses, which occurs when they aredeemed to be uncollectible. Adjustments are made to bring the balance in theallowance to the level established by application of management’s allowancemethodology, and may result in an increase or decrease to expense. No provisionfor loan losses was made in 2007, 2006, 2005, 2004 or 2003 as discussed in thesection above titled Prior Period Adjustment.    In 2007, the Company determined that the allowance for loanlosses was overstated as a result of provisions charged to earnings in yearsprior to 2003 combined with the Bank’s history of low loan losses. A priorperiod adjustment to revalue the allowance for loan losses (ALLL) has beenrecorded, resulting in the restatement of balances, variances, and ratiospreviously reported for years ended December 31, 2006, 2005, 2004, and 2003, andfor all quarter ends in years 2007, 2006, 2005, 2004, and 2003. No provision forloan loss was charged to earnings in 2003 or any year after, therefore the priorperiod adjustment has no impact on previously reported earnings. Item 6,Selected Financial Data, provides details of the accounts and balances that havebeen restated for each of the affected periods.    Management considers the December 31, 2007 allowanceappropriate and adequate to absorb identified and inherent losses in the loanportfolio. As of December 31, 2007, management has identified one loan with abalance of $1,060 which is anticipated to be charged-off within the next 12months. However, there can be no assurance that charge-offs in future periodswill not exceed the allowance for loan loss or that additional increases in theloan loss allowance will not be required.    The following is a schedule of transactions in the allowancefor loan losses for each of the five most recent years ended December 31. TheBank experienced net recoveries in two of these years and net charge-offs inthree years. Management does not detect any meaningful trend in the year-to-yearrelationship of net recoveries to net charge-offs. Rather, these are naturalswings of activity in a loan portfolio that experiences minimal losses.
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		Allowance for Loan Losses		2007		2006		2005		2004		2003 		Restated		Restated		Restated		Restated		Balance at beginning of year		 $      196,083 		 $      211,374 		 $      198,591 		 $      207,942 		 $      201,800 		Loans charged-off:     		  Commercial		                     - 		             5,357 		                     - 		                     - 		                     - 		  Real estate - construction		                     - 		                     - 		                     - 		                     - 		                     - 		  Real estate - mortgage		                     - 		                     - 		                     - 		                     - 		                     - 		  Consumer		             6,263 		           10,029 		             8,131 		           13,874 		             3,423 		        Total loan losses		             6,263 		           15,386 		             8,131 		           13,874 		             3,423 		Recoveries on loans previously charged off:     		  Commercial		                     - 		                     - 		                     - 		             2,577 		                533 		  Real estate - construction		                     - 		                     - 		                     - 		                     - 		                     - 		  Real estate - mortgage		                     - 		                     - 		           15,263 		                     - 		                     - 		  Consumer		             5,705 		                  95 		             5,651 		             1,946 		             9,032 		        Total loan recoveries		             5,705 		                  95 		           20,914 		             4,523 		             9,565      		Net loan charge-offs (recoveries)		                558 		           15,291 		         (12,783)		             9,351 		           (6,142)		Provision for loan losses charged to expense		                     - 		                     - 		                     - 		                     - 		                     - 		Balance at end of year		 $      195,525 		 $      196,083 		 $      211,374 		 $      198,591 		 $      207,942      		Allowance for loan losses to loans     		 outstanding at end of year		0.08%		0.08%		0.10%		0.12%		0.13%     		Net charge-offs to average gross loans		0.00%		0.01%		-0.01%		0.01%		0.00%
    The following table details the allocation of the allowancefor loan losses to major categories of loans and the percentage of loans in eachcategory relative to total loans at the five most recent year-ends. This tablerestates the allocation for years ended December 31, 2006, 2005, 2004 and 2003,as presented in previously filed Forms 10-K for years then ended. In 2007,management revised its methodology for valuing the ALLL. The current methodologyconforms to the requirements of the federal banking regulators’ "InteragencyPolicy Statement on the Allowance for Loan and Lease Losses (ALLL)," released inDecember 2006. Prior to 2007, the Bank’s methodology gave weight to industryloss percentages in the allocation of the ALLL to major categories of loans.This resulted in an overstatement in the allocations to individual loancategories. The current methodology more accurately reflects the Bank’shistorical loss experience and current portfolio quality. Management believesthat the current methodology provides the flexibility necessary to reflectchanging estimates of loss in a timely manner and that it will be appropriatefor future valuations.     The prior period adjustment recorded in 2007, results inrestated total ALLL balances as of December 31, 2006, 2005, 2004, and 2003, asdetailed in Item 6, Selected Financial Data. The following table presents theallocation of the ALLL after application of the prior period adjustment andcurrent methodology. Management believes that this presentation provides ameaningful comparison, as the formula-based components are stated on comparableterms in all years presented.     The loan portfolio is divided into homogeneous categories ofloans for the purpose of calculating formula-based reserves. The categories ofreal estate – construction and real estate – mortgage loans share similar risksof potential collateral deterioration or devaluation. However, these loans tendto be more adequately secured than those commercial and consumer loans that arenot real estate secured. The Bank has not incurred a mortgage loan loss since1997, and therefore no reserves are allocated to the real estate – constructionor real estate – mortgage portions of the loan portfolio in determining theALLL. Non-real estate secured loans, commercial and consumer, pose a greaterrisk of loss due to erosion of the borrower’s ability to repay the loan in atimely manner. Collateral on these loans is generally, although not always, lessreliable than real estate as a source of recovery if default occurs. The Bank’srecent loan losses have been either consumer loans or unsecured commercialloans.

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		Allocation of Allowance for Loan Losses   		December 31, 2006 		December 31, 2005  		December 31, 2007 		Restated 		Restated  		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Commercial         		Formula-based		 $        34,952   		 $        10,556   		 $          9,738   		Specific reserves		         109,200   		                   -     		                   -     		Total commercial		         144,152 		        9.35 		%		           10,556 		        9.97 		%		             9,738 		      10.39 		%		Real estate - construction         		Total real estate - construction		                   -   		      16.04 		%		                   -   		      15.99 		%		                   -   		      11.34 		%		Real estate - mortgage         		Total real estate - mortgage		                   -   		      73.53 		%		                   -   		      73.03 		%		                   -   		      77.20  				%		Consumer         		Formula-based		           21,636   		           24,347   		           22,926   		Specific reserves		           29,314   		                   -     		                   -     		Total consumer		           50,950 		        1.08  		           24,347 		        1.01  		           22,926 		        1.07  		Subtotal		         195,102 		    100.00 		%		           34,903 		    100.00 		%		           32,664 		    100.00 		%		Unallocated		                423   		         161,180   		         178,710   		Total		 $      195,525   		 $      196,083   		 $      211,374   
 
		December 31, 2004 		December 31, 2003  		Restated 		Restated  		Amount		% of Loans		Amount		% of Loans		Commercial      		Formula-based		 $        47,218   		 $        52,549   		Specific reserves		                   -     		                   -     		Total commercial		           47,218 		        8.56 		%		           52,549 		        8.03 		%		Real estate - construction      		Total real estate - construction		                   -   		        8.74  		                   -   		      10.62  		Real estate - mortgage      		Total real estate - mortgage		                   -   		      81.47  		                   -   		      79.75  		Consumer      		Formula-based		           20,805   		           53,459   		Specific reserves		                   -     		                   -     		Total consumer		           20,805 		        1.23  		           53,459 		        1.60  		 		Subtotal		           68,023 		    100.00 		%		         106,008 		    100.00 		%		Unallocated		         130,568   		         101,934   		Total		 $      198,591   		 $      207,942   
    Unallocated reserves are not associated with a specificportfolio segment or a specific loan, but may be appropriate if properlysupported and in accordance with GAAP. Because no portion of the ALLL iscalculated on a total loan portfolio basis, management anticipates having lowlevels of unallocated reserves in future periods. The unallocated portion in thepreceding table appears higher in years prior to 2007, because management hadnot adopted this methodology at those year-ends. The unallocated reserves inyears prior to 2007 cannot be allocated as specific reserves due to applicationof FAS 16 *Prior Period Adjustments*, paragraph 3, which prohibits theretrospective valuation of aged accounts receivable (past due loans) because thepassage of time has revealed their ultimate resolution. Management believes thatthe ALLL reflected in this table for years prior to 2007 does not materiallydiffer from the balance that would have been calculated at each of thoseyear-ends had current methodology been applied then.
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    The accrual of interest on a loan is discontinued whenprincipal or interest is ninety days past due or when the loan is determined tobe impaired, unless collateral is sufficient to discharge the debt in full andthe loan is in process of collection. When a loan is placed in nonaccruingstatus, any interest previously accrued but unpaid, is reversed from interestincome. Interest payments received on nonaccrual loans may be recorded as cashbasis income, or as a reduction of principal, depending on management’s judgmenton a loan by loan basis. Accrual of interest may be restored when all principaland interest are current and management believes that future payments will bereceived in accordance with the loan agreement.    Nonperforming loans are loans past due 90 or more days andstill accruing plus nonaccrual loans. Nonperforming assets are comprised ofnonperforming loans combined with real estate acquired in foreclosure and heldfor sale. There were no nonperforming assets other than nonperforming loans asof December 31, 2007, 2006, 2005, 2004, or 2003, as shown in the followingtable.
 		2007		2006		2005		2004		2003		Loans 90 days or more past due and still accruing		 $          9,100 		 $      239,620 		 $      131,717 		 $      391,676 		 $      315,395 		Nonaccruing loans		           40,916 		                     - 		                     - 		                     - 		                     - 		        Total nonperforming loans		 $        50,016 		 $      239,620 		 $      131,717 		 $      391,676 		 $      315,395       		Interest not accrued on nonaccruing loans		 $          1,509 		 $                -   		 $                -   		 $                -   		 $                -   		Interest included in net income on     		       nonaccruing loans		 $                -   		 $                -   		 $                -   		 $                -   		 $                -   
    Loans are considered impaired when, based on currentinformation, management considers it unlikely that collection of principal andinterest payments will be made according to contractual terms. Generally, loansare not reviewed for impairment until the accrual of interest has beendiscontinued, although management may categorize a performing loan as impairedbased on knowledge of the borrower’s financial condition, devaluation ofcollateral, or other circumstances that are deemed relevant to loan collection.Impaired loans may have specific reserves, or valuation allowances, allocated tothem in the ALLL. Estimates of loss reserves on impaired loans are determinedbased on two of the measurement methods described in Financial AccountingStandard 114 (FAS 114): (1) the loan’s observable fair price, or (2) the fairvalue of collateral, if repayment of the loan is expected to be provided byunderlying collateral. Loans determined to be impaired, but for which nospecific valuation allowance is made because management believes the loan issecured with adequate collateral or the Bank will not take a loss on such loan,are grouped with other homogeneous loans for evaluation under formula-basedcriteria described previously.    The following table sets forth principal balances of impairedloans and the related valuation allowances as of December 31, 2007. Included inprincipal balances of impaired loans as of December 31, 2007, is $436,802 whichis guaranteed by a government agency. Management had identified no impairedloans as of December 31, 2006, 2005, 2004, and 2003.
 		2007		Impaired loans with valuation allowances,  		including nonaccruing loans		 $      554,858 		Valuation allowances on impaired loans		 $      118,056   		Impaired loans with no valuation allowances		 $                -   
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**Liquidity and Interest Rate Sensitivity    The primary objective of asset/liability management is toensure the steady growth of the Company's primary source of earnings, netinterest income. Net interest income can fluctuate with significant interestrate movements. To lessen the impact of these margin swings, the balance sheetshould be structured so that repricing opportunities exist for both assets andliabilities in roughly equivalent amounts at approximately the same timeintervals. Imbalances in these repricing opportunities at any point in timeconstitute interest rate sensitivity.    Liquidity represents the ability to provide steady sources offunds for loan commitments and investment activities, as well as to providesufficient funds to cover deposit withdrawals and payment of debt and operatingobligations. These funds can be obtained by converting assets to cash or byattracting new deposits. Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) were 42.03% of average deposits for 2007, compared to 45.61% and62.06% for 2006 and 2005, respectively.     Average net loans to average deposits were 80.12%, 75.71%,and 57.86% for 2007, 2006 (restated), and 2005 (restated). The increase in theloan to deposit ratio from 2006 to 2007 is attributable to 3.68% growth in theaverage loan portfolio accompanied by a 1.91% reduction in average depositsduring 2007. The increase in the loan to deposit ratio from 2005 to 2006 isattributable to 21.59% growth in the average net loan portfolio accompanied by a7.08% reduction in average deposits during 2006. Funding for loan growth wasprovided by reduction of the investment portfolio. As loans earn at higheraverage rates than investments, this shift has a positive effect on earnings.The increase in loans does not negatively impact the Company’s ability to meetliquidity demands. Restatement of loan to deposit ratios for 2006 and 2005resulted in increases of 67 and 62 basis points, respectively.    As of December 31, 2007, $33,390,316 (50.15%) of total debtsecurities mature in one year or less, of which, $16,935,694 are classified as"available-for-sale." Federal funds sold provide additional liquidity. Othersources of liquidity include letters of credit, overnight federal funds, andreverse repurchase agreements available from correspondent banks. The totallines and letters of credit available from correspondent banks were $21,000,000as of December 31, 2007 and 2006, and $19,000,000 as of December 31, 2005.
		Investment Securities Maturity Distribution and Yields		December 31, 2007		December 31, 2006		December 31, 2005		Amount		  Yield		Amount		  Yield		Amount		  Yield		U. S. Treasury      		  One year or less		 $   32,430,184 		4.51%		 $   37,408,625 		4.04%		 $   57,192,124 		2.66%		  Over one through five years		      19,979,251 		4.60%		      18,479,455 		4.69%		      27,462,872 		3.48%		  Over ten years		        2,567,812 		7.28%		        2,524,375 		7.28%		        2,587,187 		7.28%		Total U.S. Treasury securities		      54,977,247 		4.67%		      58,412,455 		4.38%		      87,242,183 		3.05%      		U.S. Government Agencies      		  One year or less 		                       - 		0.00%		        8,749,280 		3.11%		        9,999,514 		2.31%		  Over one through five years		      10,000,000 		5.07%		                       - 		              - 		        7,746,483 		3.13%		Total U. S. Government Agencies		      10,000,000  				5.07%		        8,749,280 		3.11%		      17,745,997  				2.67%      		State, county, and municipal      		  One year or less		           960,132 		2.76%		        2,788,056 		2.43%		        6,822,528 		1.59%		  Over one through five years		           647,294 		3.68%		        1,062,744 		2.82%		        3,551,782 		2.32%		Total state, county, and municipal		        1,607,426 		3.13%		        3,850,800 		2.54%		      10,374,310  				1.84%      		Total debt securities      		  One year or less		      33,390,316 		4.46%		      48,945,961 		3.78%		      74,014,166 		2.51%		  Over one through five years		      30,626,545 		4.73%		      19,542,199 		4.59%		      38,761,137 		3.30%		  Over ten years		        2,567,812 		7.28%		        2,524,375 		7.28%		        2,587,187 		7.28%		Total debt securities		      66,584,673  				4.69%		      71,012,535  				4.13%		    115,362,490 		2.89%      		Equity securities		        4,177,279 		3.64%		        4,113,288 		3.72%		        3,721,950 		2.95%      		Total securities		 $   70,761,952 		4.63%		 $   75,125,823 		4.11%		 $ 119,084,440 		2.89%
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    Interest rate sensitivity refers to the responsiveness ofinterest-bearing assets and liabilities to changes in market interest rates. Therate-sensitive position, or gap, is the difference in the volume ofrate-sensitive assets and liabilities at a given time interval. The generalobjective of gap management is to actively manage rate-sensitive assets andliabilities to reduce the impact of interest rate fluctuations on the netinterest margin. Management generally attempts to maintain a balance betweenrate-sensitive assets and liabilities as the exposure period is lengthened tominimize the overall interest rate risk to the Company.    Interest rate sensitivity may be controlled on either side ofthe balance sheet. On the asset side, management exercises some control overmaturities. Also, loans are written to provide repricing opportunities on fixedrate notes. The Company's investment portfolio, including federal funds sold,provides the most flexible and fastest control over rate sensitivity since itcan generally be restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured tooffer incentives to attain the maturity distribution desired. Competitivefactors sometimes make control over deposits more difficult and, therefore, lesseffective as an interest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluatedin terms of several variables: yield, credit quality, appropriate fundingsources, and liquidity. Management of the liability mix of the balance sheetfocuses on expanding the various funding sources.    As of December 31, 2007, the Company was cumulativelyasset-sensitive for all time horizons. For asset-sensitive institutions, ifinterest rates should decrease, the net interest margins should decline. Sinceall interest rates and yields do not adjust at the same velocity, the gap isonly a general indicator of rate sensitivity.
		Interest Sensitivity Analysis     		December 31, 2007 		After three   		Within		but within		After one  		three		twelve		but within		After 		months		months		five years		five years		Total		Assets     		Earning assets     		  Federal funds sold 		 $      23,121,256 		  $                -    		  $                -    		  $                -    		 $      23,121,256 		  Interest-bearing deposits		           4,441,661 		           1,470,241 		              100,580 		                    -    		           6,012,482 		  Investment debt securities 		         23,728,833 		         18,644,304 		         21,625,128 		           1,995,775 		         65,994,040 		  Loans		       232,850,357 		           1,546,873 		           2,622,311 		           1,252,262 		       238,271,803 		Total earning assets		 $    284,142,107 		 $      21,661,418 		 $      24,348,019 		 $        3,248,037 		 $    333,399,581      		Liabilities     		Interest-bearing deposits     		   NOW 		 $      51,218,087 		  $                -    		  $                -    		  $                -    		 $      51,218,087 		   Money market 		         31,719,473 		                     -    		                    -    		                     -    		         31,719,473 		   Savings		         41,698,409 		                     -    		                    -    		                     -    		         41,698,409 		   Certificates $100,000 and over		         11,845,761 		         22,101,027 		           1,914,159 		                     - 		         35,860,947 		   Certificates under $100,000		         19,485,629 		         28,984,010 		           6,619,414 		                     - 		         55,089,053 		Securities sold under agreements    		                         - 		   to repurchase		           3,426,173 		                     -    		                    -    		                     -    		           3,426,173 		Note payable		                  5,877 		                18,167 		                74,046 		                         - 		                98,090 		Total interest-bearing liabilities		 $    159,399,409 		 $      51,103,204 		 $        8,607,619 		 $                      - 		 $    219,110,232      		Period gap		 $    124,742,698 		 $    (29,441,786)		 $      15,740,400 		 $        3,248,037 		 $    114,289,349 		Cumulative gap		 $    124,742,698 		 $      95,300,912 		 $    111,041,312 		 $    114,289,349 		   		Ratio of cumulative gap to     		   total earning assets		37.42%		28.58%		33.31%		34.28% 
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**Deposits and Other Interest-Bearing Liabilities    Average interest-bearing liabilities decreased $2,808,000(1.27%) to $218,248,000 in 2007, from $221,056,000 in 2006. Averageinterest-bearing deposits decreased $1,142,000 (.53%) to $213,891,000 in 2007from $215,033,000 in 2006, while average noninterest-bearing demand depositsdecreased $4,573,000 (5.42%) to $79,807,000 in 2007 from $84,380,000 in 2006. AtDecember 31, 2007, total deposits were $288,943,547, compared to $290,324,760 atDecember 31, 2006, a decrease of .48%.     Average interest-bearing liabilities decreased $22,107,000(9.09%) to $221,056,000 in 2006, from $243,163,000 in 2005. Averageinterest-bearing deposits decreased $21,654,000 (9.15%) to $215,033,000 in 2006from $236,687,000 in 2005, while average noninterest-bearing demand depositsdecreased $1,146,000 (1.34%) to $84,380,000 in 2006 from $85,526,000 in 2005. AtDecember 31, 2006, total deposits were $290,324,760, compared to $310,857,607 atDecember 31, 2005, a decrease of 6.61%.     Management believes that decreasing deposit volume in 2006resulted from a return by investors to non-deposit investment products andstrong competition for deposits in the local market. Deposit balances stabilizedin 2007 with only modest balance reductions relative to the previous year.During 2007, non-deposit investment products became less attractive as the stockmarket experienced a downturn. Competition for deposits continued although banksbegan to lower the high rates on time deposits that were offered in 2006.Management monitors deposit decreases closely and implements counter-measures asneeded, including but not limited to rate increases on existing products and thedevelopment of new products.     The following table sets forth the deposits of the Company bycategory as of December 31, 2007, 2006, and 2005, respectively.
 		December 31, 		2007		2006		2005  		Percent of 		Percent of 		Percent of 		Amount		deposits		Amount		deposits		Amount		deposits       		Non-interest bearing		 $       73,357,578 		25.38%		 $       79,625,853 		27.43%		 $       88,236,133 		28.39%		NOW		          51,218,087 		17.73%		          54,458,814 		18.76%		          62,601,973 		20.14%		Money market		          31,719,473 		10.98%		          36,413,676 		12.54%		          46,464,340 		14.95%		Savings		          41,698,409 		14.43%		          45,844,558 		15.79%		          51,648,088 		16.61%		Time deposits less than $100,000		          55,089,053 		19.07%		          46,020,077 		15.85%		          44,028,847 		14.16%		     Core deposits		        253,082,600  		        262,362,978  		        292,979,381  		Time deposits of $100,000 or more		          35,860,947 		12.41%		          27,961,782 		9.63%		          17,878,226 		5.75%		     Total deposits		 $     288,943,547 		100.00%		 $     290,324,760 		100.00%		 $     310,857,607 		100.00%
    Core deposits, which exclude certificates of deposit of$100,000 or more, provide a relatively stable funding source for the Company'sloan portfolio and other earning assets. The Company's core deposits decreased$9,280,378 during 2007, $30,616,403 during 2006 and $8,168,720 during 2005.Management attributes the variance from 2005 to 2006 to aggressive competitionfor time deposits in a rising rate environment. Rate increases implemented in2006 to retain deposits caused a shift of funds from core deposits into timedeposits of $100,000 or more. From December 31, 2005 to 2006, time deposits of$100,000 or more increased $10,083,556 (56.40%). During 2006, as in 2005,management believes that market conditions lead to a reversal of some of thedeposit influx that occurred in 2001 through 2004 as funds migrated from thestock market into insured deposits. During 2007, deposits continued to shiftfrom more liquid demand and savings products to higher rate time deposits. Overyear ended December 31, 2007, time deposits of $100,000 or more increased$7,899,165 (28.25%).
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    Deposits, and particularly core deposits, have been theCompany's primary source of funding and have enabled the Company to meet bothits short-term and long-term liquidity needs. Management anticipates that whilesuch deposits will continue to be the Company's primary source of funding in thefuture, continued reductions in deposit levels, if coupled with growth in theCompany’s loan portfolio, could require periodic borrowing of funds. In thisevent, it is likely that Management would liquidate investment securities fromthe available for sale portfolio or purchase overnight federal funds as needed.    The maturity distribution of the Company's time deposits of$100,000 or more at December 31, 2007, is shown in the following table.

Maturities of Certificates of Deposit of $100,000 or		More
December 31, 2007
After six
After three
through
Within three
through
twelve
After twelve
months
six months
months
months
TotalTime deposits of		$100,000 or more
$ 11,845,761
$ 9,729,493
$ 12,371,534 
$ 1.914.159 
$ 35,860,947 
    Large certificate of deposit customers tend to be extremelysensitive to interest rate levels, making these deposits less reliable sourcesof funding for liquidity planning purposes than core deposits. Some financialinstitutions partially fund their balance sheets using large certificates ofdeposit obtained through brokers. These brokered deposits are generallyexpensive and are unreliable as long-term funding sources. Accordingly, theCompany does not accept brokered deposits under these conditions. During 2007,the Bank joined the Certificate of Deposit Account Registry Service (CDARS).This service allows the Bank to offer depositors up to $50 million in FDICinsurance through a network of member banks. While CDARS deposits are consideredto be brokered deposits for regulatory reporting, they are not consideredvolatile as they typically remain in the program until maturity.
**Noninterest revenue    Noninterest revenue for 2007 decreased$15,808 (.81%) from the previous year. Service charges on deposit accountsdropped by $96,686 (8.64%) due to reduced volume of fees for items presentedagainst insufficient funds and overdrafts. ATM and debit card revenue increased$56,944 (12.70%) due to increased card usage. Miscellaneous revenues exceed theprevious year by $23,934 (6.28%) which includes an increase of $27,997 (17.23%)in the annual increase in cash surrender value of bank owned life insurance.    Noninterest revenue for 2006 increased$149,370 (8.30%) from the previous year. Service charges on deposit accountsincreased $65,715 (6.24%) due to fee increases effective in early January 2006.ATM and debit card revenue increased $75,776 (20.35%) due to a combination offee increases and card usage.     The following table presents the principal components ofnoninterest revenue for the years ended December 31, 2007, 2006, and 2005,respectively.****		Noninterest revenue   		2007		2006		2005		Service charges on deposit accounts 		 $     1,022,472 		 $     1,119,158 		 $     1,053,443 		ATM and debit card revenue 		           505,146 		           448,202 		           372,426  		Miscellaneous revenue 		           405,318 		           381,384 		           373,505  		Total noninterest revenue 		 $     1,932,936 		 $     1,948,744 		 $     1,799,374      		Noninterest revenue as a percentage     		of average total assets (restated) 		0.52%		0.52%		0.45%
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**Noninterest Expense    Noninterest expense increased $207,404 (2.82%) from 2006 to2007. Increased personnel costs of $275,975 include a $102,262 (28.96%) increasein group insurance expense. Occupancy expense decreased $9,527, including a$32,313 (30.69%) decrease in building maintenance related to non-recurringrepairs to branches in 2006. Furniture and equipment expense is down $14,969,which is attributable to lower service contract costs. Other operating expensedecreased $44,075, which includes a $50,367 (46.22%) reduction in courier costsresulting from the Bank’s implementation of branch-based electronic imagecapture. .     Noninterest expense increased $195,005 (2.72%) from 2005 to2006. Increased personnel costs of $159,652 include a $48,300 cash bonus paid inFebruary 2006, and a $28,197 increase in expense related to the Bank’s employeeretirement plan. Occupancy expense increased $69,284 which includes a $29,430(24.93%) increase in utility costs. Furniture and equipment expense are down$12,404, which is largely attributable to lower depreciation expense. Otheroperating expense decreased $21,527, as the net result of several increases anddecreases. Increased directors’ fees resulted from a fee increase, an additionalBoard seat, and one additional meeting in 2006 as compared to 2005. Postagecosts are down by $30,200 due to the timing of as-needed meter replenishment,and the Company’s efforts to reduce unnecessary mailings. Professional fees in2005 included non-recurring consulting fees of $19,052.     The following table presents the principal components ofnoninterest expense for the years ended December 31, 2007, 2006, and 2005,respectively.
****   		2007		2006		2005 		Salaries and employee benefits 		 $        4,533,160 		 $        4,257,185 		 $        4,097,533  		Occupancy expense 		              700,092 		              709,619 		              640,335  		Furniture and equipment expense 		              463,582 		              478,551 		              490,955  		Advertising 		              177,567 		              166,441 		              147,541  		Armored car service 		                64,710 		                52,513 		                76,068  		ATM and debit card 		              272,479 		              234,409 		              234,732  		Business and product development 		                78,703 		                79,623 		                78,399  		Computer software amortization 		                79,768 		              111,765 		              121,982  		Computer software maintenance 		              127,959 		              111,777 		              101,875  		Courier service 		                58,594 		              108,961 		              105,148  		Deposit insurance 		                33,831 		                36,275 		                42,098  		Director fees 		              149,400 		              140,200 		                99,900  		Dues, donations, and subscriptions 		                85,179 		                88,255 		                94,385  		Liability insurance 		                36,294 		                39,402 		                40,380  		Postage 		              161,595 		              149,262 		              179,462  		Professional fees 		                47,206 		                41,337 		                65,090  		Stationery and supplies 		                95,854 		              123,652 		              111,593  		Telephone  		              152,855 		              170,960 		              152,464  		Miscellaneous 		              243,263 		              254,500 		              279,742  		  Total noninterest expense 		 $        7,562,091 		 $        7,354,687 		 $        7,159,682        		Noninterest expense as a percentage of   		    average total assets (restated)		2.03%		1.95%		1.79%
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**Capital    Under capital guidelines adopted by the Federal Reserve Boardand the FDIC, the Company and the Bank are currently required to maintain aminimum risk-based total capital ratio of 8%, with at least 4% being Tier 1capital. Tier 1 capital consists of common stockholders’ equity, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, less certain intangibles. In addition, the Companyand the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital tototal assets) of at least 4%, but this minimum ratio is increased by 100 to 200basis points for other than the highest-rated institutions.     At December 31, 2007, 2006, and 2005, the Company and theBank were well-capitalized, exceeding all minimum requirements, as set forth inthe following table.
  		Analysis of Capital   		Consolidated 		To be well		Required 		Company		Bank		capitalized		minimums		2007    		Total risk-based capital ratio		33.7%		32.0%		10.0%		8.0%		Tier 1 risk-based capital ratio		33.1%		31.9%		6.0%		4.0%		Tier 1 leverage ratio		19.5%		18.6%		5.0%		4.0%      		2006 Restated    		Total risk-based capital ratio		33.4%		31.7%		10.0%		8.0%		Tier 1 risk-based capital ratio		32.8%		31.6%		6.0%		4.0%		Tier 1 leverage ratio		18.6%		17.8%		5.0%		4.0%      		2005 Restated    		Total risk-based capital ratio		34.8%		32.8%		10.0%		8.0%		Tier 1 risk-based capital ratio		34.2%		32.7%		6.0%		4.0%		Tier 1 leverage ratio		16.5%		15.6%		5.0%		4.0%
 

    The effect of the restatement of prior years is to increase the totalrisk-based capital ratios for both the Company and the Bank, with no increasegreater than 1.0%, and to lower the Tier 1 risk-based capital ratios and theTier 1 leverage capital ratios for both the Company and the Bank, with noreduction greater than .4%.
**Website Access to Securities and Exchange Commission Reports    The Bank maintains an Internet website at www.taylorbank.com.The Company’s periodic SEC reports, including annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessiblethrough this website. Access to these filings is free of charge. The reports areavailable as soon as practicable after they are filed electronically with theSEC. **Accounting Rule Changes    The following accounting pronouncements have been approved bythe Financial Accounting Standards Board but have not become effective as ofDecember 31, 2007. These pronouncements would apply to the Company if theCompany or the Bank entered into an applicable activity.    FASB Statement No. 157, "Fair Value Measurements" definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements.  SFAS No. 157 will be appliedprospectively and is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  Management does notexpect SFAS No. 157 to have a material impact on the Company’s consolidatedfinancial statements. It will require additional disclosure as to ranking ofvaluation methods in deriving fair value.    FASB Statement No. 159, "The Fair Value Option for FinancialAssets and Financial Liabilities" permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  Management does not expectSFAS No. 159 to have a material impact on the Company’s consolidated financialstatements.

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    FASB Statement No. 141R, "Business Combinations" establishesprincipals and requirements for how an acquirer a) recognizes and measures inits financial statements the identifiable assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree, b) recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase, and c) determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS No. 141R will be applied prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first fiscal year beginning on or after December 15, 2007. Management does not expect SFAS No. 141R to have a material impact on theCompany’s consolidated financial statements.    FASB Statement No. 160, "Noncontrolling Interests inConsolidated Financial Statements" improves the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  SFAS No. 160 is effective for fiscalyears beginning on or after December 15, 2008, and interim periods within thosefiscal years.  Management does not expect SFAS No. 160 to have a materialimpact on the Company’s consolidated financial statements.    In September 2006, the FASB ratified the consensus reached bythe EITF on Issue No. 06-4, *Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*. EITF 06-4 requires the recognition of a liability and relatedcompensation costs for endorsement split-dollar life insurance policies thatprovide a benefit to an employee that extends to postretirement periods asdefined in SFAS No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*. The EITF reached a consensus that Bank Owned LifeInsurance policies purchased for this purpose do not effectively settle theentity’s obligation to the employee in this regard and, thus, the entity mustrecord compensation costs and a related liability. Entities should recognize theeffects of applying this Issue through either, (a) a change in accountingprinciple through a cumulative-effective adjustment to retained earnings or toother components of equity or net assets in the balance sheet as of thebeginning of the year of adoption, or (b) a change in accounting principlethrough retrospective application to all prior periods. This Issue is effectivefor fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 isnot expected to have a material effect on the Bank’s financial statements.    The accounting policies adopted by management are consistentwith accounting principles generally accepted in the United States of Americaand are consistent with those followed by peer Banks.
**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk

Impact of Inflation    Unlike most industrial companies, the assets and liabilitiesof financial institutions such as the Company and the Bank are primarilymonetary in nature. Therefore, interest rates have a more significant effect onthe Company's performance than do the effects of changes in the general rate ofinflation and change in prices. In addition, interest rates do not necessarilymove in the same direction or in the same magnitude as the prices of goods andservices. As discussed previously, management seeks to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation. See"Liquidity and Interest Rate Sensitivity" above. 
**Item 8. Financial Statements and Supplementary Data**
    In response to this Item, the information included on pages 1through 22 of the Company's Annual Report to Stockholders for the year endedDecember 31, 2007, is incorporated herein by reference.
**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures**
    There have been no changes in or disagreements with accountants on accountingor financial disclosure during the fiscal year covered by this report.

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**Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures**
    Disclosure controls and procedures are designed andmaintained by the Company to ensure that information required to be disclosed inthe Company’s publicly filed reports is recorded, processed, summarized andreported in a timely manner. Such information must be available to management,including the Chief Executive Officer (CEO) and Treasurer, to allow them to maketimely decisions about required disclosures. Even a well-designed and maintainedcontrol system can provide only reasonable, not absolute, assurance that itsobjectives are achieved. Inherent limitations in any system of controls includeflawed judgment, errors, omissions, or intentional circumvention of controls.    The Company’s management, including the CEO and Treasurer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of December 31, 2007. Based onthat evaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**Internal Control Over Financial Reporting**
Management Report on Internal Control over Financial Reporting

    Calvin B. Taylor Bankshares, Inc. maintains a system ofinternal control over financial reporting, which is designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation of reliable published financial statements. The systemincludes an organizational structure and division of responsibility, establishedpolicies and procedures including a code of conduct to foster a strong ethicalclimate, and the careful selection, training and development of our staff. Thesystem contains self-monitoring mechanisms, and an internal auditor monitors theoperation of the internal control system and reports findings andrecommendations to management and the board of directors. Corrective actions aretaken to address control deficiencies and other opportunities for improving thesystem as they are identified. The board, operating through its audit committee,which is composed entirely of directors who are not officers or employees of theCompany, provides oversight to the financial reporting process.    There are inherent limitations in the effectiveness of anysystem of internal controls, including the possibility of human error and thecircumvention or overriding of controls. Accordingly, even an effective internalcontrol system can provide only reasonable assurance with respect to financialstatement preparation. Furthermore, the effectiveness of an internal controlsystem may vary over time and with circumstances.    The Company assessed its internal control system as ofDecember 31, 2007 in relation to criteria for effective internal control overfinancial reporting as described in *Internal Control – Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on its assessment, the Company believes that, as of December 31, 2007, itssystem of internal control over financial reporting met those criteria.

**                                                                            Calvin B. Taylor Bankshares, Inc.**                                                                           Registrant

 

Date: March 12, 2008                                  By: /s/ Raymond M. Thompson                                                                            Raymond M. Thompson, Director                                                                           President and Chief Executive Officer

 

Date: March 11, 2008                                 By: /s/Jennifer G. Hawkins                                                                           Jennifer G. Hawkins                                                                           Treasurer / Principal Financial Officer

 

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Attestation Report of the Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and StockholdersCalvin B. Taylor Bankshares, Inc.Berlin, Maryland

    We have audited management’s assessment, included in theaccompanying Management Report on Internal Control Over Financial Reporting,that Calvin B. Taylor Bankshares, Inc. and Subsidiary maintained effectiveinternal control over financial reporting as of December 31, 2007, based oncriteria established in *Internal Control – Integrated Framework* issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinion onmanagement’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

    We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board in the United States of America.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

    A company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

    Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

    In our opinion, management’s assessment that Calvin B. TaylorBankshares, Inc. and Subsidiary maintained effective internal control overfinancial reporting as of December 31, 2007, is fairly stated, in all materialrespects, based on criteria established in *Internal Control – IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Also, in our opinion, Calvin B. Taylor Bankshares,Inc. and Subsidiary maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on criteriaestablished in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). 

    We have audited, in accordance with the standards of thePublic Company Accounting Oversight Board in the United States of America, thebalance sheets and the related statements of income, changes in stockholders’equity and cash flows of Calvin B. Taylor Bankshares, Inc. and Subsidiary, andour report dated March 12, 2008, expressed an unqualified opinion.

/s/ Rowles & Company, LLPBaltimore, Maryland

March 12, 2008
** **
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**Changes in Internal Controls**
    During the quarter ended on the date of this report, therewere no significant changes in the Company’s internal controls over financialreporting that have had or are reasonably likely to have a material affect onthe Company’s internal control over financial reporting. As of December 31,2007, the Company’s management, including the CEO and Treasurer, has concludedthat the Company’s internal controls over financial reporting are effective.
**Audit Committee and Financial Expert**
    The Board of Directors has adopted a written Audit Policy,which serves as a charter for the Audit Committee. The Audit Committee iscomprised of seven independent directors, including Chairman James R. Bergey,Jr. who serves as the financial expert. The Audit Committee is scheduled to meetquarterly and held six meetings in 2007.
**PART III

Item 10. Directors and Executive Officers of the Registrant**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2008 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 11. Executive Compensation

    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2008 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2008 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 13. Certain Relationships and Related Transactions**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2008 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 14. Principal Accounting Fees and Services**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2008 Annual Meetingof Stockholders, and is incorporated herein by reference.
****
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**PART IV

Item 15. Exhibits, Financial Statement Schedules**
    (a) Exhibits
    (a)(1), (2) Annual Report to Stockholders for the year endedDecember 31, 2007

    3.1 Articles of Incorporation of the Company, incorporated byreference to Exhibit 3.1 of Registration Statement Form S-4, File No. 33-99762.

    3.2 Bylaws of the Company, incorporated by reference toExhibit 3.2 of Registration Statement Form S-4, File No. 33-99762.

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SIGNATURES

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

                                                                    CALVIN B. TAYLOR BANKSHARES, INC.                                                                   (Registrant)

Date: March 12, 2008                                 By: /s/ Raymond M. Thompson                                                                            Raymond M. Thompson, Director                                                                           President and Chief Executive Officer

Date: March 11, 2008                                 By: /s/ Jennifer G. Hawkins                                                                           Jennifer G. Hawkins                                                                           Treasurer / Principal Financial Officer

    Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

Date: March 12, 2008                                 By: /s/ James R. Bergey, Jr.                                                                            James R. Bergey, Jr., Director

Date: March 12, 2008                                 By: /s/ John H. Burbage, Jr.                                                                            John H. Burbage, Jr., Director

Date: March 12, 2008                                 By: /s/ Todd E. Burbage                                                                            Todd E. Burbage, Director

Date: March 12, 2008                                 By: /s/ Charlotte K. Cathell                                                                            Charlotte K. Cathell, Director

Date: March 12, 2008                                 By: /s/ Reese F. Cropper, Jr.                                                                            Reese F. Cropper, Jr.                                                                            Chairman of the Board of Directors

Date: March 12, 2008                                  By: /s/ Reese F. Cropper, III                                                                            Reese F. Cropper, III, Director

Date: March 12, 2008                                 By: /s/ Hale Harrison                                                                            Hale Harrison, Director

Date: March 12, 2008                                 By: /s/ Gerald T. Mason                                                                            Gerald T. Mason, Director

Date: March 12, 2008                                 By: /s/ William H. Mitchell                                                                            William H. Mitchell, Director                                                                           Vice President

Date: March 12, 2008                                 By: /s/ Joseph E. Moore                                                                            Joseph E. Moore, Director 

Date: March 12, 2008                                 By: /s/ Michael L. Quillin, Sr.                                                                            Michael L. Quillin, Sr., Director

Date: March 12, 2008                                 By: /s/ Raymond M. Thompson                                                                            Raymond M. Thompson, Director                                                                           President and Chief Executive Officer

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Certification - Pursuant to 18 U.S.C. 1350Section 906 of the Sarbanes-Oxley Act of 2002

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Annual Report on Form 10-K for the period ended December 31, 2007of the Registrant (the "Report"):

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

(2) The information contained in the Report fairly presents, in all material	respects, the financial condition and results of operations of the	Registrant.

 

 

**                                                                            Calvin B. Taylor Bankshares, Inc.**
 

Date: March 12, 2008                                  By: /s/ Raymond M. Thompson                                                                            Raymond M. Thompson, Director                                                                           President and Chief Executive Officer

 

Date: March 11, 2008                                 By: /s/Jennifer G. Hawkins                                                                           Jennifer G. Hawkins                                                                           Treasurer / Principal Financial Officer

 

 

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Certification of Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

I have reviewed this annual report on Form 10-K of Calvin B. TaylorBankshares, Inc.;

Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for theregistrant and have:

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

b)   designed such internal control over financial reporting, or			caused such internal control over financial reporting to be designed			under our supervision, to provide reasonable assurance regarding the			reliability of financial reporting and the preparation of financial			statements for external purposes in accordance with generally			accepted accounting principles;

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

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

The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors:

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

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

 

**                                                                        Calvin B. Taylor Bankshares, Inc.**
 

Date: March 12, 2008                                  By: /s/ Raymond M. Thompson                                                                            Raymond M. Thompson, Director                                                                           President and Chief Executive Officer

 

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Certification of Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

I have reviewed this annual report on Form 10-K of Calvin B. TaylorBankshares, Inc.;

Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for theregistrant and have:

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

b)   designed such internal control over financial reporting, or			caused such internal control over financial reporting to be designed			under our supervision, to provide reasonable assurance regarding the			reliability of financial reporting and the preparation of financial			statements for external purposes in accordance with generally			accepted accounting principles;

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

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

The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors:

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

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

 

**                                                                        Calvin B. Taylor Bankshares, Inc.**
 

Date: March 11, 2008                                 By: /s/Jennifer G. Hawkins                                                                           Jennifer G. Hawkins                                                                           Treasurer / Principal Financial Officer

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