                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

[Mark One]
   [X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2004

   [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                         Commission File Number 0-32637

                            AMES NATIONAL CORPORATION
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

             IOWA                                              42-1039071
--------------------------------------------------------------------------------
(State or Other Jurisdiction of                            (I. R. S. Employer
 Incorporation or Organization)                           Identification Number)

                                405 FIFTH STREET
                                AMES, IOWA 50010
                    ----------------------------------------
                    (Address of Principal Executive Offices)

       Registrant's Telephone Number, Including Area Code: (515) 232-6251

                                 Not Applicable
              ----------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

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

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

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

COMMON STOCK, $5.00 PAR VALUE                           3,137,066
--------------------------------------------------------------------------------
        (Class)                            (Shares Outstanding at July 30, 2004)

                                       1
<PAGE>


                            AMES NATIONAL CORPORATION

                                      INDEX

Page

Part I.  Financial Information

         Item 1.  Consolidated Financial Statements (Unaudited)

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

                  Consolidated Statements of Income for the three
                  and six months ended June 30, 2004 and 2003                  4

                  Consolidated Statements of Cash Flows for the six
                  months ended June 30, 2004 and 2003                          5

                  Notes to Consolidated Financial Statements                   6

         Item 2.  Management's Discussion and Analysis
                  of Financial Condition and Results of Operations          6-18

         Item 3.  Quantitative and Qualitative Disclosures
                  About Market Risk                                           18

         Item 4   Evaluation of Disclosure Controls and Procedures            18


Part II. Other Information

         Items 1 through 6                                                    19

         Signatures                                                           20

                                       2
<PAGE>
Part 1.   FINANCIAL INFORMATION
          ITEM 1.

                             AMES NATIONAL CORPORATION AND SUBSIDIARIES
                                    Consolidated Balance Sheets
                                           (unaudited)
<TABLE>
                                                                     June 30,            December 31,
                          Assets                                       2004                  2003
                                                                   -------------        --------------
<S>                                                                <C>                 <C>

Cash and due from banks                                            $  22,365,358        $   31,982,144
Federal funds sold                                                     1,400,000            20,380,000
Interest bearing deposits in financial institutions                    9,053,035             6,363,538
Securities available-for-sale                                        358,055,848           323,115,914
Loans receivable, net                                                382,602,275           355,533,119
Loans held for sale                                                    1,266,300               859,139
Bank premises and equipment, net                                       8,312,472             8,377,807
Accrued income receivable                                              5,696,966             5,842,247
Other assets                                                             579,629               332,556
                                                                  --------------        --------------
            Total assets                                          $  789,331,883        $  752,786,464
                                                                  ==============        ==============

           Liabilities and Stockholders' Equity

Liabilities:
Deposits:
  Demand                                                          $   64,153,372        $   71,372,534
  NOW accounts                                                       150,610,085           138,308,140
  Savings and money market                                           177,314,085           166,387,319
  Time, $100,000 and over                                             67,585,809            69,486,570
  Other time                                                         174,206,039           173,993,964
                                                                  --------------        --------------
            Total deposits                                           633,869,390           619,548,527

Federal funds purchased and securities
  sold under agreements to repurchase                                 44,575,719            18,198,403
Dividends payable                                                      3,070,392             1,441,204
Deferred taxes                                                           445,010             3,238,665
Accrued interest and other liabilities                                 3,132,223             3,034,670
                                                                  --------------        --------------
            Total liabilities                                        685,092,734           645,461,469
                                                                  --------------        --------------

Stockholders' Equity:
  Common stock,  $5 par value;  authorized
    6,000,000  shares;  issued  3,153,230
    shares at June 30, 2004 and December 31, 2003;
    outstanding 3,137,066 shares at
    June 30, 2004 and 3,133,053 shares
    at December 31, 2003                                              15,766,150            15,766,150
Additional paid-in-capital                                            25,378,746            25,351,979
Retained earnings                                                     59,715,644            58,400,660
Treasury stock, at cost; 16,164 shares at June 30, 2004
  and 20,177 shares at December 31, 2003                               (889,020)           (1,109,735)
Accumulated other comprehensive income - net unrealized gain
  on securities available-for-sale                                     4,267,629             8,915,941
                                                                  --------------        --------------
            Total stockholders' equity                               104,239,149           107,324,995
                                                                  --------------        --------------

            Total liabilities and stockholders' equity            $  789,331,883        $  752,786,464
                                                                  ==============        ==============
</TABLE>

                                       3
<PAGE>

                   AMES NATIONAL CORPORATION AND SUBSIDIARIES

                        Consolidated Statements of Income
                                   (unaudited)
<TABLE>
                                                            Three Months Ended                   Six Months Ended
                                                                June 30,                              June 30,
                                                       -------------------------            ---------------------------
                                                           2004          2003                   2004           2003
                                                       -----------   -----------            ------------   ------------
<S>                                                    <C>           <C>                    <C>            <C>
Interest and dividend income:
 Loans                                                 $ 5,471,094   $ 5,651,200            $ 10,823,762   $ 11,207,235
 Securities
  Taxable                                                2,151,710     1,792,746               4,227,791      3,676,285
  Tax-exempt                                             1,093,670       842,090               2,145,656      1,612,390
 Federal funds sold                                         21,223       249,908                  78,096        413,602
 Dividends                                                 371,334       340,180                 748,530        680,845
                                                       -----------   -----------            ------------   ------------
                                                         9,109,031     8,876,124              18,023,835     17,590,357
                                                       -----------   -----------            ------------   ------------
Interest expense:
 Deposits                                                2,357,853     2,646,208               4,674,499      5,272,198
 Other borrowed funds                                       94,099        77,115                 168,627        141,334
                                                       -----------   -----------            ------------   ------------
                                                         2,451,952     2,723,323               4,843,126      5,413,532
                                                       -----------   -----------            ------------   ------------

    Net interest income                                  6,657,079     6,152,801              13,180,709     12,176,825

Provision for loan losses                                  210,353       305,995                 268,708        425,740
                                                       -----------   -----------            ------------   ------------
  Net interest income after provision
    for loan losses                                      6,446,726     5,846,806              12,912,001     11,751,085
                                                       -----------   -----------            ------------   ------------
Non-interest income:
  Trust department income                                  325,287       274,773                 609,158        602,102
  Service fees                                             460,937       383,076                 817,868        742,000
  Securities gains, net                                          0       280,782                  31,542        646,607
  Gain on sale of loans held for sale                      183,553       322,876                 347,741        570,996
  Merchant and ATM fees                                    120,325       108,136                 269,405        248,034
  Other                                                    159,805       142,490                 315,126        297,807
                                                       -----------   -----------            ------------   ------------
    Total non-interest income                            1,249,907     1,512,133               2,390,840      3,107,546
                                                       -----------   -----------            ------------   ------------
Non-interest expense:
  Salaries and employee benefits                         2,269,156     2,324,737               4,528,075      4,494,421
  Occupancy expenses                                       236,975       231,737                 504,952        500,345
  Data processing                                          623,256       617,875               1,217,761      1,085,675
  Other operating expenses                                 546,809       606,720               1,078,162      1,198,230
                                                       -----------   -----------            ------------   ------------
    Total non-interest expense                           3,676,196     3,781,069               7,328,950      7,278,671
                                                       -----------   -----------            ------------   ------------

    Income before income taxes                           4,020,437     3,577,870               7,973,891      7,579,960
Income tax expense                                       1,158,398       928,641               2,147,310      2,060,406
                                                       -----------   -----------            ------------   ------------
    Net income                                         $ 2,862,039   $ 2,649,229            $  5,826,581   $  5,519,554
                                                       ===========   ===========            ============   ============

Basic and diluted earnings per share                        $ 0.91        $ 0.85                  $ 1.86         $ 1.76
                                                       ===========   ===========            ============   ============

Declared dividends per share                                $ 0.98        $ 0.92                  $ 1.44         $ 1.36
                                                       ===========   ===========            ============   ============

Comprehensive Income (Loss)                            $(3,693,418)  $ 6,186,196            $  1,178,269   $  8,673,611
                                                       ===========   ===========            ============   ============

</TABLE>

                                       4
<PAGE>

                   AMES NATIONAL CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (unaudited)
<TABLE>
                                                                                                       Six Months Ended
                                                                                                           June 30,
                                                                                                   ----------------------------
                                                                                                       2004            2003
                                                                                                   -----------     ------------
<S>                                                                                                     <C>             <C>

Cash flows from operating activities:
Net income                                                                                         $ 5,826,581     $  5,519,554
Adjustments to reconcile net income to net cash provided by operating activities:
  Provision for loan losses                                                                            268,708          425,740
  Amortization and accretion, net                                                                      317,223          261,752
  Depreciation                                                                                         443,560          497,536
  Provision for deferred taxes                                                                        (63,694)        (115,052)
  Securities gains, net                                                                               (31,542)        (646,607)
  Change in assets and liabilities:
  (Increase) decrease loans held for sale                                                            (407,161)      (4,235,864)
  (Increase) decrease in accrued income receivable                                                     145,281          687,662
  (Increase) decrease in other assets                                                                (247,073)          405,266
  Increase in accrued interest and other liabilities                                                    97,553          400,075
                                                                                                   -----------     ------------
Net cash provided by operating activities                                                            6,349,436        3,200,062
                                                                                                   -----------     ------------

Cash flow from investing activities:
  Purchase of securities available-for-sale                                                       (108,371,375)     (56,962,306)
  Proceeds from sale of securities available-for-sale                                                1,576,886        3,735,979
  Proceeds from maturities of securities available-for-sale                                         64,190,601       35,163,099
  Net (increase) in interest bearing deposits in financial institutions                             (2,689,497)      (5,000,000)
  Net (increase) decrease in federal funds sold                                                     18,980,000      (46,575,000)
  Net (increase) in loans                                                                          (27,337,864)      (9,631,404)
  Purchase of bank premises and equipment                                                             (378,225)        (481,808)
                                                                                                   -----------     ------------
Net cash used in investing activities                                                              (54,029,474)     (79,751,439)
                                                                                                   ------------    ------------

Cash flows from financing activities:
  Increase in deposits                                                                               14,320,863       53,537,702
  Increase (decrease) in federal funds purchased
    and securities sold under agreements to repurchase                                               26,377,316        2,457,442
  Dividends paid                                                                                     (2,882,409)      (2,753,504)
  Proceeds from issuance of treasury stock                                                              247,482          221,870
                                                                                                   ------------    -------------

Net cash provided by financing activities                                                            38,063,252       53,463,510
                                                                                                   ------------    -------------

Net decrease in cash and cash equivalents                                                            (9,616,786)     (23,087,867)
                                                                                                   ------------    -------------

Cash and cash equivalents at beginning of quarter                                                    31,982,144       51,688,784
                                                                                                   ------------     ------------

Cash and cash equivalents at end of quarter                                                        $ 22,365,358     $ 28,600,917
                                                                                                   ============     ============
Supplemental disclosures of cash flow information:
  Cash paid for interest                                                                           $  4,942,532     $  5,438,043
  Cash paid for taxes                                                                                 2,095,222        2,074,118
</TABLE>

                                       5
<PAGE>

AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1.  Significant Accounting Policies

The consolidated  financial  statements for the six month periods ended June 30,
2004 and 2003 are  unaudited.  In the opinion of the management of Ames National
Corporation (the "Company"), these financial statements reflect all adjustments,
consisting only of normal recurring accruals,  necessary to present fairly these
consolidated  financial  statements.  The results of operations  for the interim
periods are not  necessarily  indicative of results which may be expected for an
entire year. Certain information and footnote  disclosures  normally included in
complete  financial  statements  prepared in accordance with generally  accepted
accounting  principles have been omitted in accordance with the requirements for
interim financial statements. The interim financial statements and notes thereto
should be read in conjunction  with the year-end  audited  financial  statements
contained in the Company's 10-K. The consolidated condensed financial statements
include the accounts of the Company and its  wholly-owned  banking  subsidiaries
(the "Banks"). All significant  intercompany balances and transactions have been
eliminated in consolidation.

2.  Dividends

On May 12,  2004,  the Company  declared a cash  dividend  on its common  stock,
payable on August 16, 2004 to stockholders of record as of August 2, 2004, equal
to $0.49 per share.  Also on May 12, 2004,  the Company  declared an  additional
special  cash  dividend  on  its  common  stock,  payable  October  1,  2004  to
stockholders of record as of September 16, 2004, equal to $0.49 per share.

3.  Earnings Per Share

Earnings per share amounts were  calculated  using the weighted  average  shares
outstanding  during the periods  presented.  The  weighted  average  outstanding
shares for the three  months  ended June 30,  2004 and 2003 were  3,133,714  and
3,129,743,  respectively.  The weighted average  outstanding  shares for the six
months ended June 30, 2004 and 2003 were 3,133,384 and 3,129,364, respectively.

4.  Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business.  These financial  instruments  include commitments to
extend  credit and standby  letters of credit.  These  instruments  involve,  to
varying degrees,  elements of credit risk in excess of the amount  recognized in
the  balance  sheet.  No material  changes in the  Company's  off-balance  sheet
arrangements have occurred since December 31, 2003.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Overview

Ames National  Corporation  is a bank holding  company  established in 1975 that
owns and  operates  five  bank  subsidiaries  in  central  Iowa.  The  following
discussion  is provided for the  consolidated  operations of the Company and its
Banks, First National Bank, Ames, Iowa (First National),  State Bank & Trust Co.
(State  Bank),  Boone Bank & Trust Co. (Boone  Bank),  Randall-Story  State Bank
(Randall-Story  Bank) and United Bank & Trust NA (United  Bank).  The purpose of
this  discussion  is to focus on  significant  factors  affecting  the Company's
financial condition and results of operations.

The Company does not engage in any material  business  activities apart from its
ownership  of the  Banks.  Products  and  services  offered by the Banks are for
commercial and consumer purposes  including loans,  deposits and trust services.
The Banks also offer investment  services  through a third-party  broker dealer.
The Company employs nine individuals to assist with financial  reporting,  human
resources,  audit,  compliance,  technology  systems  and  the  coordination  of
management  activities,  in addition  to 178  full-time  equivalent  individuals
employed by the Banks.

The Company's primary competitive  strategy is to utilize seasoned and competent
Bank  management and local decision making  authority to provide  customers with
faster response times and more flexibility in the products and services offered.
This strategy is viewed as providing an opportunity to increase revenues through
creating a competitive advantage over other financial institutions.  The Company
also strives to remain  operationally  efficient to provide better profitability
while enabling the Company to offer more competitive loan and deposit rates.


                                       6
<PAGE>

The  principal  sources of Company  revenues and cashflow  are: (i) interest and
fees earned on loans made by the Banks; (ii) service charges on deposit accounts
maintained at the Banks;  (iii) interest on fixed income investments held by the
Banks;  (iv) fees on trust  services  provided by those Banks  exercising  trust
powers; and (v) securities gains and dividends on equity investments held by the
Company and the Banks.  The  Company's  principal  expenses  are:  (i)  interest
expense on deposit  accounts and other  borrowings;  (ii)  salaries and employee
benefits;  (iii) data processing  costs  associated with  maintaining the Bank's
loan and deposit  functions;  and (iv) occupancy  expenses for  maintaining  the
Banks'  facilities.  The largest  component  contributing  to the  Company's net
income is net interest income,  which is the difference  between interest earned
on  earning  assets  (primarily  loans and  investments)  and  interest  paid on
interest bearing liabilities  (primarily deposits and other borrowings).  One of
management's principal functions is to manage the spread between interest earned
on earning assets and interest paid on interest bearing liabilities in an effort
to maximize  net interest  income  while  maintaining  an  appropriate  level of
interest rate risk.

The Company  earned net income of  $2,862,000,  or $0.91 per share for the three
months ended June 30, 2004,  compared to net income of $2,649,000,  or $0.85 per
share, for the three months ended June 30, 2003, an increase of 8%. Net interest
income increased $504,000 and was the largest contributor to the higher level of
quarterly earnings. The improved net interest income was partially offset by the
lack of  realized  securities  gains  and lower  gains on the sale of  secondary
market residential mortgage loans.

For the six month period ending June 30, 2004,  the Company earned net income of
$5,827,000,  or $1.86 per share, a 6% increase over net income of $5,520,000, or
$1.76 per share,  earned a year ago. An improved net interest margin resulted in
an additional $1,040,000 in net interest income for the first six months of 2004
compared to the same period one year ago.

The following  management  discussion and analysis will provide a summary review
of important items relating to:

o   Challenges
o   Key Performance Indicators and Industry Results
o   Income Statement Review
o   Balance Sheet Review
o   Asset Quality and Credit Risk  Management
o   Liquidity and Capital Resources
o   Forward-Looking Statements and Business Risks

Challenges

Management  has identified  certain  challenges  that may negatively  impact the
Company's  revenues in the future and is  attempting  to position the Company to
best respond to those challenges.

o  Interest  rates have moved above their  historic  lows;  however,  additional
   rapid  increases  in interest  rates may present a challenge  to the Company.
   Such an increase may negatively  impact the Company's net interest  margin if
   interest expense  increases more quickly than interest income.  The Company's
   earning  assets  (primarily its loan and  investment  portfolio)  have longer
   maturities  than its interest  bearing  liabilities  (primarily  deposits and
   other borrowings); therefore, in a rising interest rate environment, interest
   expense  will  increase  more quickly  than  interest  income as the interest
   bearing  liabilities reprice more quickly than earning assets. In response to
   this  challenge,  the Banks model  quarterly the changes in income that would
   result from  various  changes in interest  rates.  Management  believes  Bank
   assets  have  the  appropriate  maturity  and  repricing  characteristics  to
   optimize earnings and the Banks' interest rate risk positions.

o  The volume of mortgage loan  refinancing  has declined in 2004 and this trend
   is expected to continue for the  remainder of the year.  Income from the sale
   of secondary  market loans totaled $348,000 for the six months ended June 30,
   2004  compared to $571,000 for the same period in 2003.  This  slowdown  will
   have a negative impact on the Company's noninterest income as the refinancing
   activity  generated  record fee income of $1,155,000  in 2003.  The Banks are
   focusing more attention on relationships  with local real estate agents in an
   effort to expand  the  mortgage  loan fees  derived  from home  purchases  as
   refinancing activity begins to diminish.

o  The  Company's  market in central Iowa has  numerous  banks,  credit  unions,
   investment   and  insurance   companies   competing   for  similar   business
   opportunities.  This  competitive  environment  will continue to put downward
   pressure on the Banks' net  interest  margins and thus affect  profitability.
   Activities  the Company is  undertaking  to address  this  challenge  include
   additional focus on improving customer service, packaging products to provide
   more  convenience  for customers,  and remaining  operationally  efficient to
   maintain profitability with lower net interest margins.


                                       7
<PAGE>

o  A potential  challenge to the Company's earnings would be poor performance in
   the Company's  equity  portfolio,  thereby  reducing the historical  level of
   realized security gains. The Company invests capital that may be utilized for
   future  expansion in a portfolio of primarily  financial  and utility  stocks
   totaling $24 million as of June 30, 2004. The Company  focuses on stocks that
   have  historically  paid dividends that may lessen the negative  effects of a
   bear market.

Key Performance Indicators and Industry Results

Certain  key  performance  indicators  for  the  Company  and the  industry  are
presented  in the  following  chart.  The  industry  figures are compiled by the
Federal  Deposit  Insurance  Corporation  (FDIC)  and  are  derived  from  9,116
commercial  banks and  savings  institutions  insured  by the  FDIC.  Management
reviews  these  indicators  on a quarterly  basis for purposes of comparing  the
Company's performance from quarter to quarter and to determine how the Company's
operations compare to the industry as a whole.

<PAGE>

Selected Indicators for the Company and the Industry
<TABLE>

                           June 30, 2004       March 31, 2004
                         ------------------  ------------------            Years Ended December 31,
                         3 Months  6 Months      3 Months         --------------------------------------
                          Ended     Ended          Ended                2003                2002
                         ------------------  ------------------   ------------------  ------------------
                         Company   Company   Company  Industry*   Company   Industry  Company   Industry
                         -------   -------   -------  ---------   -------   --------  -------   --------
<S>            <C>       <C>       <C>      <C>         <C>       <C>       <C>       <C>
Return on assets          1.45%     1.51%     1.56%     1.38%      1.60%      1.38%    1.78%      1.30%

Return on equity         10.76%    10.84%    10.91%    14.86%     11.16%     15.04%   11.54%     14.14%

Net interest margin       3.99%     4.02%     4.09%     3.68%      4.02%      3.73%    4.51%      3.96%

Efficiency ratio         46.49%    47.07%    48.02%    57.44%     47.18%     56.59%   44.64%     56.00%

Capital ratio            13.23%    13.21%    13.87%     8.17%     14.33%      7.88%   15.46%      7.87%
<FN>
*  Latest available data
</FN>
</TABLE>

Key performances indicators include:

o  Return on Assets

   This ratio is calculated by dividing net income by average assets. It is used
   to measure how  effectively  the assets of the Company are being  utilized in
   generating  income.  The Company's  annualized  return on average  assets was
   1.51% and 1.55%, respectively, for the six month periods ending June 30, 2004
   and 2003. Although the Company's return on assets ratio compares favorably to
   that of the industry, this ratio declined in 2004 as assets grew more quickly
   than income.

o  Return on Equity

   This ratio is calculated by dividing net income by average equity. It is used
   to  measure  the  net  income  or  return  the  Company   generated  for  the
   shareholders'  equity  investment in the Company.  The  Company's  annualized
   return on equity ratio is below that of the industry primarily as a result of
   the higher  level of capital  the  Company  maintains  for future  growth and
   acquisitions.  The Company's  return on average equity was 10.84% and 10.70%,
   respectively  for the six month  periods  ending  June 30,  2004 and 2003.  A
   higher  average  level  of  retained  earnings  and net  unrealized  gains on
   securities available for sale led to the lower return on equity in 2004.

                                       8
<PAGE>

o  Net Interest Margin

   The ratio is  calculated by dividing net interest  income by average  earning
   assets.  Earning assets are primarily made up of loans and  investments  that
   earn interest.  This ratio is used to measure how well the Company is able to
   maintain  interest  rates on earning  assets above those of  interest-bearing
   liabilities,  which  is the  interest  expense  paid on  deposits  and  other
   borrowings.  The  Company's  net interest  margin  compares  favorably to the
   industry; however, management expects the competitive nature of the Company's
   market environment to put downward pressure on the Company's margin.

o  Efficiency Ratio

   This ratio is  calculated  by dividing  noninterest  expense by net  interest
   income  and  noninterest  income.  The  ratio is a measure  of the  Company's
   ability  to manage  noninterest  expenses.  The  Company's  efficiency  ratio
   compares  favorably to the  industry's  average and was 47.07% and 47.62% for
   the six months ended June 30, 2004 and 2003, respectively.

o  Capital Ratio

   The capital  ratio is calculated  by dividing  total equity  capital by total
   assets.  It  measures  the  level  of  average  assets  that  are  funded  by
   shareholders' equity. Given an equal level of risk in the financial condition
   of  two  companies,   the  higher  the  capital  ratio,  generally  the  more
   financially  sound the company.  The Company's capital ratio is significantly
   higher than the industry  average.  The capital ratio  declined from December
   31, 2003 as the result of higher interest rates causing the unrealized  gains
   in the Banks' bond portfolios to decline.

Industry Results

The FDIC Quarterly  Banking Profile reported the following results for the first
quarter of 2004:

Strength in mortgage  lending and lower expenses for loan losses helped bank and
thrift  earnings  reach a new  record in the  first  quarter  of 2004.  Industry
earnings of $31.9  billion  were $858  million  (2.8%)  higher than the previous
quarterly record, set in the fourth quarter of 2003. Lower interest rates helped
sustain mortgage  refinancing  activity and made it possible for institutions to
realize  higher gains on sales of fixed-rate  securities  and other assets.  The
industry's  return  on assets  (ROA)  was  1.38%,  slightly  below the  all-time
quarterly  record of 1.39% recorded in the first quarter of 2003. More than half
of all institutions  (55%) reported higher earnings than in the first quarter of
2003,  while half (50.3%)  reported  higher ROAs. The percentage of unprofitable
institutions fell to 5.5%,  compared to 5.9% a year earlier.  This is the lowest
percentage  of  unprofitable  institutions  the  industry  has had in almost six
years, since the second quarter of 1998.

Income Statement Review for Three Months Ended June 30, 2004

The following highlights a comparative discussion of the major components of net
income and their impact for the last two years:

Critical Accounting Policies

The discussion  contained in this Item 2 and other  disclosures  included within
this  report  are  based  on  the  Company's  audited   consolidated   financial
statements.  These  statements  have been prepared in accordance with accounting
principles  generally  accepted in the United  States of America.  The financial
information  contained in these  statements is, for the most part,  based on the
financial  effects  of  transactions  and  events  that have  already  occurred.
However, the preparation of these statements requires management to make certain
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses.

The  Company's  significant  accounting  policies are described in the "Notes to
Consolidated Financial Statements" contained in the Company's 10-K. Based on its
consideration  of  accounting   policies  that  involve  the  most  complex  and
subjective estimates and judgments,  management has identified its most critical
accounting policy to be that related to the allowance for loan losses.

The allowance for loan losses is established through a provision for loan losses
that is treated as an expense and charged  against  earnings.  Loans are charged
against  the   allowance   for  loan  losses  when   management   believes  that
collectibility  of the  principal  is  unlikely.  The Company has  policies  and
procedures for  evaluating  the overall  credit  quality of its loan  portfolio,
including  timely  identification  of potential  problem  loans.  On a quarterly
basis,  management  reviews the  appropriate  level for the  allowance  for loan
losses  incorporating a variety of risk  considerations,  both  quantitative and
qualitative.   Quantitative   factors  include  the  Company's  historical  loss
experience,   delinquency  and  charge-off  trends,   collateral  values,  known
information  about  individual  loans and  other  factors.  Qualitative  factors
include the general  economic  environment in the Company's  market area and the
expected trend of the economic  conditions.  To the extent actual results differ
from forecasts and management's  judgment,  the allowance for loan losses may be
greater or lesser than future charge-offs.

                                       9
<PAGE>

AVERAGE BALANCES AND INTEREST RATES

The  following  two tables are used to  calculate  the  Company's  net  interest
margin.  The first table  includes the Company's  average assets and the related
income to  determine  the  average  yield on earning  assets.  The second  table
includes the average  liabilities  and related  expense to determine the average
rate paid on interest bearing  liabilities.  The net interest margin is equal to
the interest income less the interest expense divided by average earning assets.

<TABLE>

                                                             AVERAGE BALANCE SHEETS AND INTEREST RATES

                                                                     Three Months Ended June 30,
                                              ------------------------------------------------------------------------
                                                               2004                                2003
                                              -----------------------------------    ---------------------------------
ASSETS                                        Average        Revenue/      Yield/    Average      Revenue/      Yield/
(dollars in thousands)                        balance        expense        rate     balance      expense        rate
                                              -----------------------------------    ---------------------------------
<S>                                            <C>             <C>           <C>     <C>          <C>           <C>

         Interest-earning assets
Loans
  Commercial                                  $50,810         $  622       4.90%     $40,116       $  561        5.59%
  Agricultural                                 28,542            449       6.29%      26,035          451        6.93%
  Real estate                                 275,770          4,067       5.90%     263,757        4,293        6.51%
  Installment and other                        23,124            333       5.76%      20,055          346        6.90%
                                             -----------------------------------    ----------------------------------
Total loans (including fees)                 $378,246         $5,471       5.79%    $349,963       $5,651        6.46%

Investment securities
  Taxable                                    $216,973         $2,231       4.11%    $155,141       $1,904        4.91%
  Tax-exempt                                  128,426          2,081       6.48%      90,884        1,607        7.07%
                                             -----------------------------------    ----------------------------------
Total investment securities                  $345,399         $4,312       4.99%    $246,025       $3,511        5.71%

Interest bearing deposits with banks           $8,574            $34       1.59%      $4,974          $10        0.80%
Federal funds sold                              9,127             21       0.92%      89,464          250        1.12%
                                             -----------------------------------    ----------------------------------
Total interest-earning assets                $741,346         $9,838       5.31%    $690,426       $9,422        5.46%

Non-interest-earning assets                    46,521                                 46,660
                                             --------                               --------
TOTAL ASSETS                                 $787,867                               $737,086
                                             ========                               ========
<FN>
1  Average loan balances  include  nonaccrual  loans, if any. Interest income on
   nonaccrual loans has been included.

2  Tax-exempt  income  has been  adjusted  to a  tax-equivalent  basis  using an
   incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
</FN>
</TABLE>

                                       10
<PAGE>
<TABLE>

                                                                       AVERAGE BALANCE SHEETS AND INTEREST RATES

                                                                                Three Months Ended June 30,
                                                             2004                                2003
                                               --------------------------------    --------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY             Average     Revenue/    Yield/    Average      Revenue/     Yield/
(dollars in thousands)                           balance     expense      rate     balance      expense       rate
                                               --------------------------------    --------------------------------
<S>                                            <C>           <C>         <C>       <C>          <C>          <C>


              Interest-bearing liabilities
Deposits
  Savings, NOW accounts, and money markets     $335,098      $  682       0.81%    $310,295       $  767      0.99%
  Time deposits < $100,000                      175,350       1,244       2.84%     171,734        1,410      3.28%
  Time deposits > $100,000                       71,919         432       2.40%      65,571          469      2.86%
                                               --------------------------------    --------------------------------
Total deposits                                 $582,367      $2,358       1.62%    $547,600       $2,646      1.93%
Other borrowed funds                             27,538          94       1.37%      19,612           77      1.57%
                                               --------------------------------    --------------------------------
Total Interest-bearing liabilities             $609,905      $2,452       1.61%    $567,212       $2,723      1.92%
                                                             ------                               ------

              Non-interest-bearing liabilities
Demand deposits                                $ 64,161                            $ 56,711
Other liabilities                                 7,454                               9,115
                                               --------                            --------
Stockholders' equity                           $106,347                            $104,048
                                               --------                            --------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                           $787,867                            $737,086
                                               ========                            ========

Net interest: income  / margin                               $7,386       3.99%                   $6,699      3.88%
                                                             ======                               ======
Spread Analysis
  Interest income/average assets                              9,838       4.99%                   $9,422      5.11%
  Interest expense/average assets                             2,452       1.24%                    2,723      1.48%
  Net interest income/average assets                          7,386       3.75%                    6,699      3.63%
<FN>
1    Tax-exempt  income has been  adjusted  to a  tax-equivalent  basis using an
     incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
</FN>
</TABLE>

                                       11
<PAGE>

Net Interest Income

For the three months ended June 30, 2004 and 2003,  the  Company's  net interest
margin adjusted for tax exempt income was 3.99%. Net interest  income,  prior to
the adjustment for tax-exempt  income,  for the three months ended June 30, 2004
and June 30, 2003 totaled $6,657,000 and $6,153,000, respectively.

For the quarter ended June 30, 2004, net interest income  increased  $504,000 or
8.2% when compared to the same period in 2003. The increase was  attributable to
higher volume of investments and lower interest expense on deposits.

Interest expense decreased $271,000 or 10.0% for the quarter ended June 30, 2004
when  compared to the same period in 2003.  The lower  interest  expense for the
quarter is attributable  to declining  interest rates paid on deposits and other
borrowed funds partially offset by a higher volume of deposits.

Provision for Loan Losses

The Company's provision for loan losses for the three months ended June 30, 2004
was $210,000  compared to $306,000 during the same period last year. Loan growth
at First National Bank was the most significant  factor leading to the provision
expense  recorded for quarter  ended June 30, 2004 while much of 2003  provision
expense related to a problem  commercial  loan. Net charge-offs  totaled $22,000
for the three months ended June 30, 2004 compared to net charge-offs of $350,000
for the three months ended June 30, 2003.

Non-interest Income and Expense

Non-interest income decreased  $262,000,  or 17.3% during the quarter ended June
30, 2004 compared to the same period in 2003.  The decrease can be attributed to
the lack of realized  gains on the sale of securities  in the  Company's  equity
portfolio  in the second  quarter of 2004  compared  to  $281,000  in the second
quarter  of  2003.  Lower  gains  on the sale of  secondary  market  residential
mortgage loans also contributed to lower non-interest income as the record level
of refinancing activity experienced in 2003 slowed down in 2004.

Non-interest  expense decreased  $105,000 or 2.8% for the second quarter of 2004
compared to the same period in 2003.  The  decrease in  non-interest  expense is
primarily  related  to lower  salaries  and  employee  benefits  and lower  data
processing costs relating to internet banking services.

Income Taxes

The  provision  for  income  taxes  for  June 30,  2004  and  June 30,  2003 was
$1,158,000 and $929,000,  respectively.  This amount represents an effective tax
rate of 28.8% for the three months ended June 30, 2004 versus 26.0% for the same
quarter in 2003. The Company's  marginal  federal tax rate is currently 35%. The
difference  between the  Company's  effective and marginal tax rate is primarily
related to investments made in tax exempt securities.

Income Statement Review for Six Months Ended June 30, 2004

The following highlights a comparative discussion of the major components of net
income and their impact for the last two years:

                                       12
<PAGE>

AVERAGE BALANCES AND INTEREST RATES

The  following  two tables are used to  calculate  the  Company's  net  interest
margin.  The first table  includes the Company's  average assets and the related
income to  determine  the  average  yield on earning  assets.  The second  table
includes the average  liabilities  and related  expense to determine the average
rate paid on interest bearing  liabilities.  The net interest margin is equal to
the interest income less the interest expense divided by average earning assets.

ASSETS
(dollars in thousands)
<TABLE>
                                                                  AVERAGE BALANCE SHEETS AND INTEREST RATES

                                                                            Six Months Ended June 30,
                                                 ---------------------------------------------------------------------------
                                                               2004                                    2003
                                                 ----------------------------------      -----------------------------------
                                                 Average      Revenue/       Yield/      Average      Revenue/        Yield/
                                                 balance      expense         rate       balance      expense          rate
                                                 ----------------------------------      -----------------------------------
<S>                                              <C>          <C>            <C>         <C>          <C>            <C>
Loans
  Commercial                                    $ 45,795      $ 1,154        5.04%       $ 38,834      $ 1,112         5.73%
  Agricultural                                    27,624          880        6.37%         26,017          912         7.01%
  Real estate                                    273,805        8,113        5.93%        260,642        8,509         6.53%
  Installment and other                           22,988          677        5.89%         20,051          674         6.72%
                                                ----------------------------------       -----------------------------------
Total loans (including fees)                    $370,212      $10,824        5.85%       $345,544      $11,207         6.49%

Investment securities
  Taxable                                       $206,165      $ 4,396        4.26%       $155,074      $ 3,906         5.04%
  Tax-exempt                                     124,630        4,046        6.49%         86,545        3,101         7.17%
                                                ----------------------------------       -----------------------------------
Total investment securities                     $330,795      $ 8,442        5.10%       $241,619      $ 7,007         5.80%

Interest bearing deposits with banks            $  7,340      $    56        1.53%       $  2,998      $    17         1.13%
Federal funds sold                                15,579           78        1.00%         74,274          414         1.11%
                                                ----------------------------------       -----------------------------------
Total interest-earning assets                   $723,926      $19,400        5.36%       $664,435      $18,645         5.61%


Total noninterest-earning assets                $ 49,564                                 $ 48,307
                                                --------                                 --------

TOTAL ASSETS                                    $773,490                                 $712,742
                                                ========                                 ========
<FN>
1    Average loan balance include  nonaccrual  loans, if any. Interest income on
     nonaccrual loans has been included.

2    Tax-exempt  income has been  adjusted  to a  tax-equivalent  basis using an
     incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
</FN>
</TABLE>

                                       13
<PAGE>

LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
                                                        AVERAGE BALANCE SHEETS AND INTEREST RATES

                                                                 Six Months Ended June 30,
                                        ---------------------------------------------------------------------------
                                                       2004                                       2003
                                        ---------------------------------          --------------------------------
                                         Average     Revenue/      Yield/          Average      Revenue/     Yield/
                                         balance     expense       rate            balance      expense       rate
                                        ---------------------------------          --------------------------------
<S>                                     <C>          <C>           <C>             <C>          <C>         <C>

       Interest-bearing liabilities
Deposits
  Savings, NOW accounts, and
    money markets                       $323,301     $ 1,297      0.80%            $294,608      $ 1,519       1.03%
  Time deposits < $100,000               175,432       2,521      2.87%             168,551        2,817       3.34%
  Time deposits > $100,000                70,642         856      2.42%              63,505          936       2.95%
                                        -------------------------------            ---------------------------------
Total deposits                          $569,375     $ 4,674      1.64%            $526,664      $ 5,272       2.00%
Other borrowed funds                      24,424         169      1.38%              17,377          141       1.62%
                                        -------------------------------            ---------------------------------
Total Interest-bearing                  $593,799     $ 4,843      1.63%            $544,041      $ 5,413       1.99%
liabilities                                          -------                                                  ------

      Noninterest-bearing liabilities
Demand deposits                         $ 64,157                                   $ 57,319
Other liabilities                          8,011                                      8,200
                                        --------                                   --------
Stockholders' equity                    $107,523                                   $103,182
                                        --------                                   --------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                    $773,490                                   $712,742
                                        ========                                   ========

Net interest income / margin                         $14,557      4.02%                          $13,232       3.98%
                                                     =======                                     =======
Spread Analysis
  Interest income/average assets                     $19,400      5.02%                          $18,645       5.23%
  Interest expense/average assets                      4,843      1.25%                            5,413       1.52%
  Net interest income/average assets                  14,557      3.76%                           13,232       3.71%
<FN>
1    Tax-exempt  income has been  adjusted  to a  tax-equivalent  basis using an
     incremental tax rate of 35% and 34% in 2004 and 2003, respectively.
</FN>
</TABLE>

                                       14
<PAGE>

Net Interest Income

For the six months  ended June 30,  2004 and 2003,  the  Company's  net interest
margin adjusted for tax exempt income was 4.02%.  Net interest  income, prior to
the adjustment for tax-exempt income, for the six months ended June 30, 2004 and
June 30, 2003 totaled $13,181,000 and $12,177,000, respectively.

For the six months ended June 30, 2004,  interest income  increased  $433,000 or
2.5% when compared to the same period in 2003. The increase was  attributable to
higher volume of investments and loans that offset a much lower yield on earning
assets.

Interest expense  decreased  $570,000 or 10.5% for the six months ended June 30,
2004 when compared to the same period in 2003.  The lower  interest  expense for
the six  month  period is  attributable  to  declining  interest  rates  paid on
deposits  and  other  borrowed  funds  partially  offset  by a higher  volume of
deposits.

Provision for Loan Losses

The  Company's  provision for loan losses for the six months ended June 30, 2004
was $269,000  compared to $426,000 during the same period last year. Loan growth
at First National Bank was the most significant  factor leading to the provision
expense  recorded for six months ended June 30, 2004. A problem  commercial loan
was the primary factor for higher  provision  expense in 2003.  Net  charge-offs
totaled  $42,000  for the  six  months  ended  June  30,  2004  compared  to net
charge-offs of $301,000 for the six months ended June 30, 2003.

Non-interest Income and Expense

Non-interest  income  decreased  $717,000,  or 23.1% during the six months ended
June  30,  2004  compared  to the  same  period  in 2003.  The  decrease  can be
attributed  to  decreased  realized  gains  on the  sale  of  securities  in the
Company's  equity portfolio of $32,000 in 2004 compared to $647,000 in first six
months of 2003. Lower gains on the sale of secondary market residential mortgage
loans also  contributed  to lower  non-interest  income as the  record  level of
refinancing activity experienced in 2003 slowed down in 2004.

Non-interest expense increased $50,000 or 0.7% for the first six months of 2004
compared to the same period in 2003.

Income Taxes

The  provision  for  income  taxes  for  June 30,  2004  and  June 30,  2003 was
$2,147,000 and $2,060,000, respectively. This amount represents an effective tax
rate of 26.9% for the six months  ended June 30, 2004 versus  27.2% for the same
six months in 2003.  The Company's  marginal  federal tax rate is currently 35%.
The  difference  between  the  Company's  effective  and  marginal  tax  rate is
primarily related to investments made in tax exempt securities.

Balance Sheet Review

As of June 30, 2004,  total assets were  $789,332,000,  a  $36,545,000  increase
compared to December 31, 2003.  This higher level of assets is attributable to a
higher volume of securities and loans that were funded with other borrowed money
and deposits.  United Bank's assets  increased by $12,589,000  from December 31,
2003.

Investment Portfolio

The increase in the volume of investment  securities to $358,056,000 on June 30,
2004 from $323,116,000 on December 31, 2003 resulted primarily from the purchase
of U.S. government agency bonds.

Loan Portfolio

Net loans totaled  $382,602,000  as of June 30, 2004 compared to $355,533,000 as
of December 31, 2003. The increased level of loans relates primarily to new loan
originations at First National and Boone Bank.

Deposits

Deposits  totaled  $633,869,000  as of June 30, 2004, an increase of $14,321,000
from  December  31,  2003 and are  $29,709,000  higher  than  the June 30,  2003
balance. The increase in deposits is attributable to growth in deposits at Boone
Bank,  First  National,  and United Bank  primarily  in the NOW and money market
accounts.

                                       15
<PAGE>

Other Borrowed Funds

Other  borrowed  funds as of June 30, 2004  totaled  $44,576,000  consisting  of
federal funds sold and securities  sold under  agreements to  repurchase.  Other
borrowings  as of  December  31,  2003  totaled  $18,198,000.  The  increase  is
attributable to higher volume of loan  originations and investment  purchases in
excess of the growth in deposits.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business.  These financial  instruments  include commitments to
extend  credit and standby  letters of credit.  These  instruments  involve,  to
varying degrees,  elements of credit risk in excess of the amount  recognized in
the  balance  sheet.  No material  changes in the  Company's  off-balance  sheet
arrangements have occurred since December 31, 2003.

Asset Quality Review and Credit Risk Management

The Company's  credit risk is centered in the loan portfolio,  which on June 30,
2004 totaled $382,602,000  compared to $355,533,000 as of December 31, 2003. Net
loans  comprise 48% of total assets as of June 30, 2004.  The object in managing
loan  portfolio  risk is to reduce the risk of loss  resulting from a customer's
failure to perform  according to the terms of a transaction  and to quantify and
manage credit risk on a portfolio  basis.  The Company's  level of problem loans
consisting  of  non-accrual  loans  and  loans  past  due 90  days  or more as a
percentage  of total  loans of 0.62%  compares  favorably  to the average of the
Company's  peer group of 347 bank holding  companies with assets of $500 million
to $1 billion as of March 31, 2004 of 0.68%.

Impaired loans totaled  $2,428,000 as of June 30, 2004 compared to $2,187,000 as
of December 31,  2003.  A loan is  considered  impaired  when,  based on current
information  and  events,  it is  probable  that the  Company  will be unable to
collect the  scheduled  payments of principal or interest  when due according to
the  contractual  terms of the loan  agreement.  Impaired  loans  include  loans
accounted for on a non-accrual  basis,  accruing  loans which are  contractually
past  due 90  days  or  more  as to  principal  or  interest  payments,  and any
restructured  loans. As of June 30, 2004,  non-accrual loans totaled $2,288,000,
loans  past due 90 days  still  accruing  totaled  $140,000  and  there  were no
restructured loans outstanding.  Other real estate owned as of June 30, 2004 and
December 31, 2003 totaled $354,000 and $159,000, respectively.

The allowance for loan losses as a percentage  of  outstanding  loans as of June
30, 2004 and December 31, 2003 was 1.61% and 1.71%, respectively.  The allowance
for loan and lease losses totaled  $6,278,000 and $6,051,000 as of June 30, 2004
and December 31, 2003, respectively

The allowance for loan losses is  management's  best estimate of probable losses
inherent in the loan portfolio as of the balance sheet date.  Factors considered
in establishing an appropriate allowance include: an assessment of the financial
condition of the borrower,  a realistic  determination  of value and adequacy of
underlying  collateral,  the condition of the local economy and the condition of
the specific  industry of the borrower,  an analysis of the levels and trends of
loan categories and a review of delinquent and classified loans.

Liquidity and Capital Resources

Liquidity  management  is the process by which the  Company,  through its Banks'
Asset and Liability  Committees  (ALCO),  ensures that adequate liquid funds are
available to meet its financial  commitments on a timely basis,  at a reasonable
cost and within acceptable risk tolerances.  These  commitments  include funding
credit  obligations  to  borrowers,  funding of  mortgage  originations  pending
delivery  to  the  secondary  market,  withdrawals  by  depositors,  maintaining
adequate   collateral  for  pledging  for  public  funds,   trust  deposits  and
borrowings,  paying  dividends to shareholders,  payment of operating  expenses,
funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal
and interest payments on loans; principal and interest payments,  sale, maturity
and prepayment of investment securities;  net cash provided from operations; and
access to other funding  sources.  Other funding  sources  include federal funds
purchased lines, Federal Home Loan Bank (FHLB) advances and other capital market
sources.

As of June 30, 2004, the level of liquidity and capital resources of the Company
remain at a  satisfactory  level and  compare  favorably  to that of other  FDIC
insured  institutions.  Management believes that the Company's liquidity sources
will be  sufficient  to support  its  existing  operations  for the  foreseeable
future.

                                       16
<PAGE>

The liquidity and capital resources discussion will cover the follows topics:

o  Review the Company's Current Liquidity Sources
o  Review of the Statements of Cash Flows
o  Company Only Cash Flows
o  Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and
     Known Trends in Liquidity and Cash Flows Needs
o  Capital Resources

Review of the Company's Current Liquidity Sources

Liquid assets of cash on hand, balances due from other banks, federal funds sold
and  interest-bearing  deposits in financial  institutions for June 30, 2004 and
December 31, 2003 totaled  $32,818,000  and  $58,726,000,  respectively.  Higher
levels of loans and securities available for sale resulted in the lower level of
liquid assets.

Other  sources of  liquidity  available to the Banks as of June 30, 2004 include
outstanding lines of credit with the Federal Home Loan Bank of Des Moines,  Iowa
of $27,000,000 and federal funds borrowing  capacity at  correspondent  banks of
$37,500,000 with current outstanding  federal fund balances of $22,500,000.  The
Company had securities sold under agreements to repurchase totaling  $22,076,000
and did not have any outstanding FHLB advances as of June 30, 2004.

Total investments as of June 30, 2004 were $358,056,000 compared to $323,116,000
as of year end 2003.  These  investments  provide the Company with a significant
amount of liquidity since all of the investments are classified as available for
sale as of June 30, 2004.

The  investment  portfolio  serves an important  role in the overall  context of
balance  sheet  management  in  terms  of  balancing  capital   utilization  and
liquidity. The decision to purchase or sell securities is based upon the current
assessment  of economic and  financial  conditions,  including the interest rate
environment,  liquidity and credit  considerations.  The  portfolio's  scheduled
maturities represent a significant source of liquidity.

Review of Statements of Cash Flows

Operating  cash  flows  for  June  30,  2004 and  2003  totaled  $6,349,000  and
$3,200,000,  respectively.  The primary variance in operating cash flows for the
first half of 2004 compared to the same period in 2003 was the cash used to fund
secondary market residential loans in the first half of 2003.

Net  cash  used in  investing  activities  through  June  30,  2004 and 2003 was
$54,029,000 and $79,751,000,  respectively.  The largest investing  activity was
the purchase of U.S. government agency bonds in the first half of 2004.

Net cash  provided by  financing  activities  for June 30, 2004 and 2003 totaled
$38,063,000  and  $53,464,000,  respectively.  A higher  level of federal  funds
purchased was the largest  source of financing cash flows in 2004 and the growth
in deposits was the primary  source of financing  funds in 2003.  As of June 30,
2004,  the Company did not have any external debt  financing,  off balance sheet
financing arrangements, or derivative instruments linked to its stock.

Company Only Cash Flows

The Company's  liquidity on an  unconsolidated  basis is heavily  dependent upon
dividends  paid to the  Company  by the Banks.  The  Company  requires  adequate
liquidity to pay its expenses and pay stockholder dividends.  In 2003, dividends
from the Banks  amounted to $7,868,000  compared to $5,978,000 in 2002.  Various
federal and state  statutory  provisions  limit the amount of dividends  banking
subsidiaries are permitted to pay to their holding companies without  regulatory
approval.  Federal Reserve policy further limits the  circumstances  under which
bank  holding  companies  may declare  dividends.  For  example,  a bank holding
company  should not continue its existing  rate of cash  dividends on its common
stock unless its net income is  sufficient  to fully fund each  dividend and its
prospective  rate of  earnings  retention  appears  consistent  with its capital
needs, asset quality and overall financial condition.  In addition,  the Federal
Reserve and the FDIC have issued  policy  statements  which provide that insured
banks and bank holding  companies  should  generally pay  dividends  only out of
current  operating  earnings.  Federal  and state  banking  regulators  may also
restrict the payment of dividends by order.

The  Company  has  unconsolidated   interest  bearing  deposits  and  marketable
investment  securities  totaling  $33,447,000  that are  presently  available to
provide additional liquidity to the Banks.


                                       17
<PAGE>

Review of Commitments  for Capital  Expenditures,  Cash Flow  Uncertainties  and
Known Trends in Liquidity and Cash Flows Needs


No material capital expenditures or material changes in the capital resource mix
are  anticipated  at this time.  The primary  cash flow  uncertainty  would be a
sudden  decline  in  deposits   causing  the  Banks  to  liquidate   securities.
Historically,  the  Banks  have  maintained  an  adequate  level of  short  term
marketable investments to fund the temporary declines in deposit balances. There
are no known trends in  liquidity  and cash flows needs as of June 30, 2004 that
is a concern to management.

Capital Resources

The Company's total  stockholders'  equity  decreased to $104,239,000 as of June
30, 2004,  from  $107,325,000  at December  31, 2003.  The decrease in equity is
attributable  to a lower level of net unrealized  gains on securities  available
for  sale as  result  of a  decline  in the  market  value  of the  Banks'  bond
portfolios.  At June 30, 2004 and December 31, 2003,  stockholders'  equity as a
percentage  of total  assets was 13.2% and  14.26%,  respectively.  The  capital
levels of the Company  currently exceed applicable  regulatory  guidelines as of
June 30, 2004.

Forward-Looking Statements and Business Risks

The discussion in the foregoing Management Discussion and Analysis and elsewhere
in this  Report  contains  forward-looking  statements  about the  Company,  its
business and its prospects.  Forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current facts. They often
include use of the words "believe",  "expect",  "anticipate",  "intend", "plan",
"estimate" or words of similar meaning,  or future or conditional  verbs such as
"will", "would",  "should",  "could" or "may".  Forward-looking  statements,  by
their nature, are subject to risks and uncertainties.  A number of factors, many
of which are beyond the Company's control, could cause actual conditions, events
or results to differ  significantly from those described in the  forward-looking
statements.  Such risks and  uncertainties  with respect to the Company include,
but are not limited to, those related to the economic  conditions,  particularly
in the areas in which the Company and the Banks  operate,  competitive  products
and pricing,  fiscal and monetary  policies of the U.S.  government,  changes in
governmental  regulations affecting financial institutions (including regulatory
fees and capital  requirements),  changes in prevailing  interest rates,  credit
risk  management and  asset/liability  management,  the financial and securities
markets and the availability of and costs associated with sources of liquidity.

These factors may not  constitute all factors that could cause actual results to
differ  materially from those discussed in any  forward-looking  statement.  The
Company operates in a continually  changing  business  environment and new facts
emerge from time to time.  It cannot  predict such factors nor can it assess the
impact,  if any,  of such  factors on its  financial  position or its results of
operations. Accordingly, forward-looking statements should not be relied upon as
a predictor of actual  results.  The Company  disclaims  any  responsibility  to
update any forward-looking statement provided in this document.

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

The Company's  market risk is comprised  primarily of interest rate risk arising
from its core banking  activities of lending and deposit  taking.  Interest rate
risk  results  from the changes in market  interest  rates  which may  adversely
affect the Company's net interest income.  Management  continually  develops and
applies  strategies to mitigate this risk.  Management does not believe that the
Company's  primary  market risk exposure and how it has been managed  to-date in
2004 changed significantly when compared to 2003.

Item 4.           Evaluation of Disclosure Controls and Procedures

The principal  executive officer and principal  financial officer of the Company
have  evaluated  the  effectiveness  of the  Company's  disclosure  controls and
procedures  (as such terms are defined in Rule  13a-15(e)  under the  Securities
Exchange  Act of 1934,  as amended  (the  "Exchange  Act")) as of the end of the
period  covered by this annual  report (the  "Evaluation  Date").  Based on such
evaluation,  such officers have concluded  that, as of the Evaluation  Date, the
Company's  disclosure controls and procedures are effective in bringing to their
attention  on a  timely  basis  material  information  relating  to the  Company
(including  its  consolidated  subsidiaries)  required  to be  included  in  the
Company's periodic filings under the Exchange Act.

Changes in Internal Controls

There was no change in the Company's  internal control over financial  reporting
identified in connection  with the evaluation  required by Rule 13a-15(d) of the
Exchange Act that  occurred  during the Company's  last fiscal  quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


                                       18
<PAGE>

PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

         Not applicable

Item 2.  Changes in Securities and Use of Proceeds

         Not applicable

Item 3.  Defaults Upon Senior Securities

         Not applicable

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

         (a)  Exhibits

              31.1     Certification of Principal Executive Officer Pursuant to
                         Section 302 of Sarbanes-Oxley Act of 2002.
              31.2     Certification of Principal Financial Officer Pursuant to
                         Section 302 of Sarbanes-Oxley Act of 2002.
              32.1     Certification of Principal Executive Officer Pursuant to
                         18 U.S.C. Section 1350.
              32.2     Certification of Principal Financial Officer Pursuant to
                         18 U.S.C. Section 1350.

        (b)  Reports on Form 8-K

             On May 14, 2004,  the Company  filed a Form 8-K pursuant to Item 5,
             announcing  an increase in the dividend from $.46 per share to $.49
             per share payable August 16, 2004 to  shareholders of record August
             2, 2004.  The board also  declared  an extra  dividend  of $.49 per
             share payable October 1, 2004 to  shareholders of record  September
             16, 2004.

             On July 16, 2004,  the Company filed a Form 8-K pursuant to Item 5,
             announcing  financial  results  for the three and six months  ended
             June 30, 2004.

                                       19
<PAGE>
                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                                 AMES NATIONAL CORPORATION

DATE: August 5, 2004                             By:  /s/ Daniel L. Krieger
                                                 -------------------------------
                                                 Daniel L. Krieger, President
                                                 Principal Executive Officer

                                                 By:  /s/ John P. Nelson
                                                 -------------------------------
                                                 John P. Nelson, Vice President
                                                 Principal Financial Officer

                                       20
<PAGE>


