Item 1. Business.
Description of the Company
		Fulton Bancshares Corporation (the "Company"), a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company was incorporated on March 29, 1989 under the business corporation law of the Commonwealth of Pennsylvania for the purpose of becoming a bank holding company. Since commencing operations, the Company's business has consisted primarily of managing and supervising the Fulton County National Bank and Trust Company (the "Bank"), and its principal source of income has been dividends paid by the Bank. The Company has two wholly-owned subsidiaries - the Bank, and Fulton County Community Development Corporation ("FCCDC"), which was formed on June 7, 1996 to support efforts of the local downtown business revitalization project by making low interest loans to eligible small businesses for the purpose of facade improvement. FCCDC had minimal activity in 2001, and has no employees. 		The principal executive office of the Company is located at 100 Lincoln Way East, McConnellsburg, Fulton County, Pennsylvania 17233. The telephone number of the Company is (717) 485-3144. 		The Company has no employees.
Supervision and Regulation - The Company 		The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision by the Federal Reserve Board. The Bank Holding Company Act requires the Company to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any institution, including another bank. The Bank Holding Company Act prohibits acquisition by the Company of more than five percent (5%) of the voting shares of, or interest in, all or substantially all of the assets of any bank located outside of Pennsylvania unless such acquisition is specifically authorized by the laws of the state in which such bank is located. 		A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in nonbanking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. 		The Company is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Company and any or all of its subsidiaries. 		Federal law prohibits acquisitions of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the Management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. A person or group holding revocable proxies to vote 25% or more of the stock of a bank or its holding company would presumably be deemed to control the institution for purposes of this federal law. 		Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. Permitted Activities 		The Federal Reserve Board permits bank holding companies to engage in activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company does not at this time engage in any of the permissible activities described below, nor does the Company have any current plans to engage in these activities in the foreseeable future. 		While the types of permissible activities are subject to a variety of limitations and to change by the Federal Reserve Board, the principal activities that presently may be conducted by a bank holding company and may in the future be engaged by the Company are: (1) making, acquiring or servicing loans and other extensions of credit for its own account or for the account of others, such as would be made by consumer finance, credit card, mortgage, commercial finance and factoring companies; (2) operating as an industrial bank or similar entity in the manner authorized by state law so long as the institution does not both accept demand deposits and make commercial loans; (3) operating as a trust company in the manner authorized by federal or state law so long as the institution does not make certain types of loans or investments or accept deposits, except as may be permitted by the Federal Reserve Board; (4) acting as an investment or financial advisor to investment companies and other persons; (5) leasing personal and real property or acting as agent, broker or advisor in leasing property; (6) making equity and debt investments in corporations or projects designed primarily to promote community welfare; (7) providing to others financially oriented data processing or bookkeeping services; (8) acting as an insurance agent or broker in relation to insurance for itself and its subsidiaries or for insurance directly related to extensions of credit; (9) acting as underwriter for credit life insurance and credit accident and health insurance: (10) providing courier services of a limited character; (11) providing management consulting advice to nonaffiliated banks and nonbank depository institutions; (12) selling money orders, travelers' checks and United States savings bonds; (13) performing appraisals of real estate; (14) acting as intermediary for the financing of commercial or industrial income-producing real estate by arranging for the transfer of the title, control and risk of such a real estate project to one or more investors; (15) providing securities brokerage services, related securities credit activities and incidental activities such as offering custodial services, individual retirement accounts and cash management services, if the securities brokerage services are restricted to buying and selling securities solely as agent for the account of customers and do not include securities underwriting or dealing or investment advice or research services; (16) underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions such as bankers' acceptances and certificates of deposit; (17) providing general information, advisory services and statistical forecasting with respect to foreign exchange markets; (18) acting as a futures commission merchant in the execution and clearance on major commodity exchanges of futures contracts and options on futures contracts for bullion, foreign exchange, government securities, certificates of deposit and other money market instruments; (19) performing personal property appraisals that require expertise regarding all types of personal and business property, including intangible property such as corporate securities; (20) providing commodity trading and futures commission merchant advice; (21) providing consumer financial counseling to individuals on consumer-oriented financial management matters, including debt consolidation, mortgage applications, bankruptcy, budget management, real estate tax shelters, tax planning, retirement and estate planning, insurance and general investment management, so long as this activity does not include the sale of specific products or investments; (22) providing tax planning and preparation advice to corporations and individuals; (23) providing check guaranty services to subscribing merchants; (24) operating a collection agency and credit bureau; and (25) acquiring and operating thrift institutions, including savings and loan associations, building and loan associations and FDIC-insured savings banks. Certain Provisions of Pennsylvania Banking Law 		Under the Pennsylvania Banking Code of 1965, as amended, (the "Code"), the Company has been permitted since March 4, 1990 to control an unlimited number of banks. However, the Company would be subject to the requirements of the Bank Holding Company Act as discussed in the "Supervision and Regulation - The Company" section above. 		Also since March 4, 1990, the Code authorizes reciprocal interstate banking without any geographic limitation. Reciprocity between states exists when a foreign state's law authorizes Pennsylvania bank holding companies to acquire banks or bank holding companies located in that state on terms and conditions substantially no more restrictive than those applicable to such an acquisition by a bank holding company located in that state. For a further discussion of interstate banking and branching, see the section entitled "Legislation and Regulatory Changes" below. Legislation and Regulatory Changes 		From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company and its subsidiary, the Bank. Certain changes of potential significance to the Company are discussed below. 		The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branch Act") permits interstate banking to occur. Bank holding companies, pursuant to an amendment to the Bank Holding Company Act, can acquire a bank located in any state, as long as the acquisition does not result in the bank holding company controlling more than 10% of the deposits in the United States, or 30% of the deposits in the target bank's state. The legislation permits states to waive the concentration limits and require that the target institution be in existence for up to five years before it can be acquired by an out-of-state bank or bank holding company. Interstate branching and merging of existing banks is permitted after September 29, 1997 if the bank is adequately capitalized and demonstrates good management. 		The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was enacted in August of 1989. This law was enacted primarily to improve the supervision of savings associations by strengthening capital, accounting and other supervisory standards. In addition, FIRREA reorganized the FDIC by creating two deposit insurance funds to be administered by the FDIC: The Savings Association Insurance Fund and the Bank Insurance Fund. Customers' deposits held by the Bank are insured under the Bank Insurance Fund. FIRREA also regulates real estate appraisal standards and the supervisory/enforcement powers and penalty provisions in connection with the regulation of the Bank. Effects of Inflation 		Inflation has some impact on the Company's, the Bank's, and FCCDC's operating costs. Unlike many industrial companies, however, substantially all of the Bank's and FCCDC's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company's, the Bank's, and FCCDC's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. Monetary Policy 		The earnings of the Company, the Bank, and FCCDC are affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. An important function of the Federal Reserve System is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits. 		The Bank is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank's operations in the future. The effect of such policies and regulations upon the future business and earnings of the Company, the Bank, and FCCDC cannot be predicted. Environmental Regulation 		There are several federal and state statutes which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the Bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the Bank. Currently, the Company, the Bank, and FCCDC are not party to any pending legal proceeding pursuant to any environmental statute, nor is the Company, the Bank, or FCCDC aware of any circumstances which may give rise to liability under any such statute. Description of the Bank 		The Bank was organized on February 24, 1887 as a Pennsylvania state-chartered banking institution. It converted to a national banking association on September 5, 1933, and is presently under the supervision of the Office of the Comptroller of the Currency (the "Comptroller"). The Bank is a member of the Federal Reserve System. Customers' deposits held by the Bank are insured by the FDIC to the maximum extent permitted by law. The Bank's legal headquarters are located at 100 Lincoln Way East, McConnellsburg, Fulton County, Pennsylvania 17233. 		The Bank engages in a full service commercial and consumer banking business, including the acceptance of time and demand deposits and the making of secured and unsecured commercial and consumer loans, and offering trust services. The Bank's primary service area is located in Fulton County, Pennsylvania. Specifically, the main office of the Bank is located in McConnellsburg, the county seat. Within the defined service area of the Bank's main office, the banking business is highly competitive. In addition to local community banks, the Bank competes with regionally-based commercial banks, all of which have greater assets, capital and lending limits. The Bank also competes with savings banks, savings and loan associations, money market funds, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and with the issuers of commercial paper and other securities. 		In order to compete effectively in this market and to obtain business from individuals, small and medium-sized businesses and professionals, the Bank offers specialized services such as extended hours of operation and personal and business checking accounts at competitive rates in addition to traditional commercial and consumer banking and trust services. The Bank accepts time, demand and savings deposits, including passbook accounts, statement savings accounts, NOW accounts, money market accounts, certificates of deposit and club accounts. The Bank makes secured and unsecured commercial, consumer, mortgage and construction loans. Consumer loans include revolving credit lines. The following support services are offered by the Bank to make financial management more efficient and convenient for its customers: bank by mail, direct deposit, drive-in banking, Federal Tax Depository, automatic teller machine, night deposit services, notary public services, payroll deduction plan, bond coupon collections, foreign money exchange, safe deposit boxes, signature guarantees, travelers checks, money orders, cashiers checks, treasury securities, U.S. Savings Bonds, individual retirement accounts, and utility and municipal payments. The Bank also offers its customers access to discount brokerage services, mutual funds, and other alternative investment products through its affiliation with Sentry Trust Company. The Bank expects to experience a modest increase in growth. Lending Activities 		It is the Bank's general policy to grant all of its loans in its primary trade area. This trade area includes all of Fulton County, southern Huntington County, western Franklin County, eastern Bedford County and the Hancock, Maryland area. The Bank's lending objectives are as follows: (1) to establish a diversified loan portfolio composed of a predetermined mix of mortgage loans, commercial loans, consumer loans and all other loan types; (2) to provide a satisfactory rate of return to its shareholders by properly pricing loans to include the cost of funds, administrative costs, bad debts, local economic conditions, competition, customer relationships, the term of the loan, credit risk, and collateral quality; and, (3) to provide protection for its depositors by maintaining a predetermined level of loans to deposits to ensure liquidity. The Bank recognizes that the lending of money is a community responsibility which involves a degree of credit risk and is willing to undertake such risks by utilizing standard banking procedures and making prudent judgments when extending credit. 		The Bank makes loans to both individual consumers and commercial entities. The types of loans offered include: (1) loans for businesses and individuals on a short term or seasonal basis; (2) mortgage and construction loans, (3) loans to individuals for consumer purchases such as appliances, furniture, vacations, etc.: (4) loans secured by marketable stock and bonds providing adequate margins for market fluctuations; (5) short term working capital loans secured by the assignment of accounts receivable and inventory; (6) automobile loans, (7) second liens on commercial and residential real estate, (8) home equity lines of credit, and (9) PHEAA student loans. Loans of these types will be considered desirable by the Bank provided such loans meet the test of sound credit. 		The Bank has adopted the following loan-to-value ratios, in accordance with standards adopted by its bank supervisory agencies:
The Bank does not assume undue risk on any loan within the loan portfolio, and takes appropriate steps to secure all loans as necessary. Concentration 		The Bank is neither dependent upon deposits from nor exposed to loan concentrations to a single customer, the loss of which would have a material adverse effect on the financial condition of the Bank. Although the Bank has a diversified loan portfolio, a significant portion of its customers' ability to honor their contracts is dependent upon the agribusiness economic sector (approximately 20% of loan portfolio). Employees 		As of December 31, 2001, the Bank has forty-seven (47) full-time equivalent employees. Supervision and Regulation - The Bank 		The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. The operations of the Bank are also subject to regulations of the Comptroller, the Federal Reserve Board and the FDIC. The primary supervisory authority of the Bank is the Comptroller, which regulates and examines the Bank. The Comptroller has authority to prevent national banks from engaging in unsafe or unsound practices in conducting their businesses. 		Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations and the establishment of branches. Under Pennsylvania law, the Bank may establish or acquire branch offices, subject to certain limitations, in any county of the state. National bank branches, however may be established within the permitted area only after approval by the Comptroller. 		As a subsidiary bank of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by the Bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary Bank maintains a correspondent relationship. FDIC 		Under the Federal Deposit Insurance Act, the Comptroller possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or would otherwise be in violation of the law. Moreover, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally expanded the circumstances under which officers or directors of a bank may be removed by the institution's federal supervisory agency, restricts lending by a bank to its executive officers, directors, principal shareholders or related interests thereof and restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts management personnel from borrowing from another institution that has a correspondent relationship with their bank. Additionally, FIRA requires that no person may acquire control of a bank unless the appropriate federal supervisory agency has been given sixty (60) days prior written notice and within that time has not disapproved the acquisition or otherwise extended the period for disapproval. Control for purposes of FIRA, means the power, directly or indirectly, to direct the management or policies or to vote twenty-five percent (25%) or more of any class of outstanding stock of a financial institution or its respective holding company. A person or group holding revocable proxies to vote twenty-five percent (25%) or more of the outstanding common stock of a financial institution or holding company such as the Company, would presumably be deemed to control the institution for purposes of FIRA. Garn-St Germain 		The Garn-St Germain Depository Institutions Act of 1982 ("1982 Act") removed certain restrictions on a bank's lending powers and liberalized its depository capabilities. The 1982 Act also amended FIRA (see above) by changing the statutory limits on lending by a bank to its executive officers, directors, principal shareholders or related interests thereof and by relaxing certain reporting requirements. The 1982 Act, however, also tightened FIRA provisions respecting management interlocks and correspondent bank relationships involving a bank's management personnel. CRA 		Under the Community Reinvestment Act of 1977, as amended ("CRA"), the Comptroller is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the Comptroller make publicly available the evaluation of a bank's record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation will include a descriptive rating and a statement describing the basis for the rating, which is publicly disclosed. BSA 		Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $ 10,000 or multiple transactions of which the Bank is aware in any one day that aggregate in excess of $ 10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. CEBA 		An omnibus federal banking bill, known as the Competitive Equality Banking Act ("CEBA"), was signed into law in August of 1987. Included in the legislation were measures: (1) imposing certain restrictions on transactions between banks and their affiliates; (2) expanding the powers available to Federal bank regulators in assisting failed and failing banks; (3) limiting the amount of time banks may hold certain deposits prior to making such funds available for withdrawal and any interest thereon; and (4) requiring that any adjustable rate mortgage loan secured by a lien on a one-to-four family dwelling include a limitation on the maximum rate at which interest may accrue on the principal balance during the term of such loan. FDICIA 	Capital Categories 		In December of 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must be classified, based on their risk-based
capital ratios into one of five defined categories, as illustrated below:
	* 3.0 for those banks having the highest available
regulatory rating.
	Based on the above criteria, the Bank is classified
as "well capitalized". Prompt Corrective Action 		In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Operational Controls 		Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. 		FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits. Examinations and Audits 		Annual full-scope, on site examinations are required for all FDIC-insured institutions except institutions with assets under $ 250 million which are well capitalized, well managed and not subject to a recent change in control, in which case, the examination period is every eighteen (18) months. Banks with total assets of $ 150 million or more are required to submit to their supervising federal and state banking agencies a publicly available annual audit report and are subject to additional accounting and reporting regulations. Truth-In-Savings 		A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991", requires "truth-in-savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision, the Bank is required to provide information to depositors concerning the terms of their deposit accounts, and in particular, to disclose the annual percentage yield. There are some operational costs of complying with the Truth-In-Savings law. 		Federal regulators recently issued regulations to implement the privacy provisions of the Gramm-Leach-Bliley Act (Financial Services Modernization Act). This new law took effect in 2000 and requires banks to notify consumers about their privacy policies and to give them an opportunity to "opt-out" or prevent the bank from sharing "nonpublic personal information" about them with nonaffiliated third parties. The Bank has developed privacy policies and procedures to provide timely disclosure of such policies and a convenient means for consumers to opt out of the sharing of their information with unaffiliated third parties. 		The earnings of the Bank, and therefore the earnings of the Company are affected by general economic conditions, management policies, and the legislative and governmental actions of various regulatory authorities including the FRB, the Comptroller and the FDIC. 		In addition to banking and securities laws, regulations and regulatory agencies, the Company also is subject to various other laws, regulations and regulatory agencies throughout the United States. Further more, various proposals, bills and regulations have been and are being considered in the United States Congress, and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Company. It cannot be predicted whether new legislation or regulations will be adopted and, if so, how they would affect the Company. 	References under the caption "Supervision and Regulation" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Important Factors relating to Forward Looking Statements 		The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Company which are identified as forward-looking statements, the Company notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statement. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 		The business and profitability of a financial services organization such as the Company is influenced by prevailing economic conditions and governmental policies. The actions and policy directives of the FRB determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. FRB polices and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Company. The nature and impact on the Company of future changes in economic and market conditions and monetary and fiscal policies, both foreign and domestic, are not predictable and are beyond the Company's control. In addition, these conditions and policies can impact the Company's customers and counterparties which may increase the risk of default on their obligations to the Company and its affiliates. They can also affect the competitive conditions in the markets and products within which the Company operates, which can have an adverse impact on the Company's ability to maintain its revenue streams. 		As part of its ongoing business, the Company assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Company is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity and those markets which in turn can impact the Company's ability to hedge and trade the positions concerned. In addition, the Company is dependent on its ability to access the financial markets for its funding needs. 		As noted in "Supervision and Regulation", the Company is regulated by and subject to various regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Company's profitability. 		The Company is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or lack of compliance with the procedures on which they rely either within the Company or within the broader financial systems infrastructure. 	As with any financial institution, the Company and its affiliates are also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Company's services. Ultimately, the Company's businesses and their success are dependent on the Company's ability to attract and retain high quality employees. Item 2.
Item 2.	Properties 		The main administrative office of the Bank, which also includes a drive-up facility, is located in McConnellsburg, Pennsylvania. The Bank currently has seven branch offices one of which is located at Penn's Village on Route 16 at the east end of McConnellsburg, Pennsylvania. This branch office opened on May 11, 1981. In addition, the Bank installed an ATM at the Penn's Village Shopping Center in March, 1989. The Bank also serves the communities surrounding the Pennsylvania/Maryland border through its branch office located in Warfordsburg, Pennsylvania. This branch opened for business on April 4, 1983. On the same day, a third branch office was opened in Hustontown, Pennsylvania, which services northern Fulton County. Finally, to service the southern end of Huntington County, the Bank acquired a branch in Shade Gap, Pennsylvania, on September 26, 1988. On July 15, 1999, the Bank opened a branch, including an ATM, at the Sandy Ridge Mall in Orbisonia, PA. To service the western portion of Franklin County, the Bank opened a branch, including an ATM, on Route 30 in St. Thomas, PA on November 15, 1999. On February 11, 2002, the Bank opened a branch in Breezwood, Pennsylvania, including an ATM, to service eastern Bedford County. On January 7, 1997 ATM's were opened at the Warfordsburg and Hustontown branches. In June, 1998 the Bank opened an ATM at the Shade Gap branch and added an ATM to its main office drive-up facility. The main office, Warfordsburg, Hustontown, Orbisonia and Breezewood branches are owned by the Bank. The Penn's Village branch is rented. 		The Bank closed its Shade Gap branch (except for the ATM facility) on June 30, 2000. Item 3.
Item 3.	Legal Proceedings. 		Fulton Bancshares Corporation is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of the Company's management, Fulton Bancshares Corporation has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Company's operations or financial position. Item 4.
Item 4. Submission of Matters to Vote of Security Holders. 		None Item 5.
Item 5.	Market for Registrant's Common Stock and Related 		 Security Holder Matters.
		The corporation's common stock is traded on a limited basis in the local over-the-counter market. As of December 31, 2001, the approximate number of shareholders of record was 525. Market prices at the end of each quarter are based on the latest sales prices.
		Dividend restrictions are detailed in Note 15 of the annual shareholders report and are incorporated herein by reference. 		The Company occasionally reissues shares of stock held in Treasury as compensation for services rendered to employees. In 2001, 25 shares of treasury stock were reissued, covering $ 837 in compensation. In 2000, 45 shares of treasury stock were reissued, covering compensation of $ 1,800. Item 6.
Item 6.	Selected Financial Data. 		The selected five-year financial data on page 23 of the annual shareholders' report for the year ended December 31, 2001 is incorporated herein by reference. Item 7.
Item 7.	Management's Discussion and Analysis of Financial 		 Condition and Results of Operations.
		Management's discussion and analysis of financial condition and results of operations included on pages 28 through 33 of the annual shareholders' report is incorporated herein by reference.
Item 8.
Item 8.	Financial Statements and Supplementary Data. 		The financial statements and supplementary data, some of which is required under Guide 3 (statistical disclosures by bank holding companies) are shown on pages 2 through 27 of the annual shareholders' report for the year ended December 31, 2001 and are incorporated herein by reference. Additional schedules required in addition to those included in the annual shareholders' report are submitted herewith.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY 	For additional information concerning liquidity, refer to statistical disclosures applicable to the investment and loan portfolio. 	Closely related to the management of liquidity is the management of rate sensitivity which focuses on maintaining stability in the net interest margin. As illustrated in the table below the tax equivalent net interest margin ranged from 3.6% to 3.9% of average earning assets during the past 3 years. An asset/liability committee monitors and coordinates the overall asset/liability strategy. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY Interest Rates and Interest Differential Tax Equivalent Yields Years Ended December 31
			For purposes of calculating loan yields, the average loan volume includes nonaccrual loans. For purposes of calculating yields on nontaxable interest income, the taxable equivalent adjustment is made to equate nontaxable interest on the same basis as taxable interest. The marginal tax rate was 34% for 2001, 2000, and 1999.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
				Changes which are attributed in part to volume and in part to rate are allocated in proportion to their relationships to the amounts of changes.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
	The following table shows the maturities of investment securities at book value as of December 31, 2001, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% federal income tax rate.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOAN PORTFOLIO
	The following table presents the loan portfolio at the end of each of the last five years:
		Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages and installments) at December 31, 2001:
		The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December 31, 2001:
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
			The provision is based on an evaluation of the adequacy of the allowance for possible loan losses. The evaluation includes, but is not limited to, review of net loan losses for the year, the present and prospective financial condition of the borrowers and evaluation of current and projected economic conditions.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
LOANS
	The following table sets forth the outstanding balances of those loans on a nonaccrual status and those on accrual status which are contractually past due as to principal or interest payments for 30 days or more at December 31.
		See Note 3 of the notes to consolidated financial statements for details of income recognized and foregone revenue on nonaccrual loans for the past three years.
		Management has not identified any significant problem loans in the accrual loan categories shown above.
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
	The following is an allocation by loan categories of the allowance for loan losses at December 31 for the last five years. In retrospect the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current conditions. Accordingly, the entire allowance is available to absorb losses in any category: (000 omitted)
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
DEPOSITS
	The average amounts of deposits are summarized below:
	The following is a breakdown of maturities of time deposits of $ 100,000 or more as of December 31, 2001:
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
	The following table presents a summary of significant earnings and capital ratios:
FULTON BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
		 * Based on 495,000 shares issued
Item 9.
Item 9.	Disagreements on Accounting and Financial Disclosures. Not applicable.
PART III 	The information required by Items 10, 12 and 13 is incorporated by reference from Fulton Bancshares Corporation's definitive proxy statement for the 2002 Annual Meeting of shareholders filed pursuant to Regulation 14A.
Item 11.
Item 11.	Executive Compensation 		Shown below is information concerning the annual compensation for services in all capacities to the Company, the Bank, and FCCDC for the fiscal years ended December 31, 2001, 2000, and 1999 of the Chief Executive Officer. There were no other officers of the Company, the Bank, or FCCDC whose total annual salary and bonus during that time frame exceeded $ 100,000. Summary Compensation Table
Footnotes: (1) All other compensation includes the following:
	The supplemental executive retirement plan was funded by single premium life insurance policies on the 	CEO, with the Bank named as beneficiary. Actual payments to the CEO amounting to $ 96,000 annually will not begin until 2005. At December 31, 2001, the cash surrender value of the policies was $ 1,234,048.
PART IV Item 14.
Item 14.	Exhibits, Financial Statement Schedules and 	 Reports on Form 8-K. 		(a)	Certain documents filed as part of Form 10-K 			Financial Statement Schedules and Exhibits 			(1)	Financial statements. See Item 8 of this 			report for the index to financial 		statements. (2)	Financial statement schedules. See Item 8 of this report. Schedule I - Distribution of assets, liabilities and stockholders' equity, interest rates and interest differential tax equivalent yields Schedule II - Changes in net interest income tax equivalent yields Schedule III - Investment portfolio Schedule IV - Loan portfolio Schedule V - Summary of loan loss experience Schedule VI - Nonaccrual and delinquent loans Schedule VII - Allocation of allowance for loan losses Schedule VIII - Schedule of deposits, return on equity and assets Schedule IX - Consolidated summary of operations
			(3)	Exhibits. 	Exhibit Numbers 			(2)		Plan of acquisition, reorganization, 				arrangement, liquidation or succession. 				Not applicable. 			(3)		(a) Articles of incorporation. Incorporated by reference to Exhibit 3A to the Registrant's Registration Statement on Form SB-2, Registration No. 33-85626. 					(b)	By-laws. Incorporated by reference to 				Exhibit 3B to the Registrant's 				Registration Statement on Form SB-2, 				Registration No. 33-85626. 			(4)		Instruments defining the rights of 				security holders including indentures. 				The rights of the holders of Registrant's 				common stock are contained in: 				(i)	Articles of Incorporation of Fulton Bancshares Corporation, filed as Exhibit 3A to Registrant's Registration Statement on Form SB-2 (Registration No. 33-85626). 					(ii)	By-laws of Fulton Bancshares Corporation, filed as Exhibit 3B to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-85626). (9)	Voting trust agreement. Not applicable. 		(10)	Material contracts. None. 		(11)	Statement re: computation of per share 		earnings. See Item 5 of this report. 		(12)	Statements re: computation of ratios. Not 		applicable. 		(13)	Annual report to security holders. Filed herein. 		(16)	Letter re: change in certifying accountant. 		not applicable. 		(18)	Letter re: change in accounting principles. 		Not applicable. 		(21)	Subsidiaries of the registrant. Filed 		herewith as Exhibit 21. 		(22)	Published report regarding matters submitted 		to vote of security holders. Not applicable. (23)	Consents of experts and counsel. Filed 			herewith. 		(24)	Power of attorney. Not applicable. 		(27)	Financial data schedule. Filed herewith under Item 8. 		(28)	Information from reports furnished to state 		insurance regulatory authorities. Not 	applicable. 		(99)	Additional exhibits. Not applicable. 	(b)	Reports on Form 8-K. None.
SIGNATURES
	In accordance with the requirements of Section 13 or 15(d) of the Securities Act of 1934, this report was signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/S/ Clyde H. Bookheimer 	Director, President &	March 28, 2002 Clyde H. Bookheimer	CEO (Principal Executive 	Officer)
/S/ David L. Seiders 	Director	March 28, 2002 David L. Seiders
/S/ Cecil B. Mellott 	Director & Vice	March 28, 2002 Cecil B. Mellott	Chairman
/S/ Robert C. Snyder 	Director &	March 28, 2002 Robert C. Snyder 	Chairman
/S/ Ellis L. Yingling 	Director & Vice	March 28, 2002 Ellis L. Yingling	Chairman
/S/ Clair R. Miller		Director	March 28, 2002 Clair R. Miller
Exhibit Index
Exhibit No.
	13	Annual report to shareholders 	21	Subsidiaries of the Registrant 	23.1	Independent Auditor's Consent 	27	Financial data schedule
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1.	Fulton County National Bank and Trust, Pennsylvania; a 	national bank organized February 24, 1887 under the 	Pennsylvania Banking Code.
It converted to a national banking association on September 5, 1933.
2.	Fulton County Community Development Corporation, which 	was formed on June 7, 1996 under the Pennsylvania Business Corporation Law of 1988, as amended.
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
Board of Directors and Shareholders Fulton Bancshares Corporation
	We consent to the incorporation by reference in registration statements (Form SB-2 No. 33-85626) of Fulton Bancshares Corporation of our report dated February 11, 2002, appearing in this annual report on Form 10-K of Fulton Bancshares Corporation for the year ended December 31, 2001.
						/S/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA March 20, 2002
EX-27
12-MOS DEC-31, 2001 DEC-31, 2001 5,529 0 30,799 30,799 104,501 150,855 117,038 2,325 1,248 15,000 14,935 150,855 8,585 1,546 10,185 4,471 5,433 4,752 3,451 1,926 1,486
1,486 3.02 3.02 3.59 0 845
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