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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-QSB



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QUARTERLY REPORT PURSUANT TO

SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarter ended March 31, 2004



Commission File No. 0-28780



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CARDINAL BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Virginia                 |  | 54-1804471                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



101 Jacksonville
Circle, P. O. Box 215, Floyd, Virginia 24091

(Address of principal executive offices)



(540) 745-4191

(Registrants telephone number)



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Indicate by a 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 ̈.



The number of shares outstanding of the issuers Common Stock, $10 par value as of May
15, 2004 was 1,535,733.



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CARDINAL BANKSHARES CORPORATION



FORM
10-QSB



March 31, 2004



INDEX



|                              |  |                                                                                                      |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                      |  | Page
|Part I. Financial Information |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003 (Audited)         |  | 3   
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Income for the three months ended March 31, 2004 and 2003 (Unaudited)     |  | 4   
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited) |  | 5   
|                              |  |                                                                                                     
|                              |  | Notes to Consolidated Statements (Unaudited)                                                         |  | 6   
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 6   
|                              |  |                                                                                                     
|Item 3.                       |  | Controls and Procedures                                                                              |  | 10  
|                              | 
|Part II. Other Information    |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Legal Proceedings                                                                                    |  | 11  
|                              |  |                                                                                                     
|Item 2.                       |  | Changes in Securities                                                                                |  | 11  
|                              |  |                                                                                                     
|Item 3.                       |  | Defaults Upon Senior Securities                                                                      |  | 11  
|                              |  |                                                                                                     
|Item 4.                       |  | Results of Votes of Security Holders                                                                 |  | 11  
|                              |  |                                                                                                     
|Item 5.                       |  | Other Information                                                                                    |  | 11  
|                              |  |                                                                                                     
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                     |  |     
|                              |  | (a)
Exhibits                                                                                         |  | 11  
|                              |  | (b)
Reports on Form 8-K                                                                              |  | 11  



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##### Table of Contents

Consolidated Balance Sheets

Cardinal Bankshares Corporation and Subsidiary



|                                                                                                  |  |                            |         |   |                        |   |         |  
|------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---------------------- | - | ------- | -
|                                                                                                  |  | (Unaudited) March 31, 2004 |         |   | (Audited) December2003 |  
|(In thousands, except share data)                                                                 |  |                           
|Assets                                                                                            |  |                            |         |   |                        |   |         |  
|Cash and due from banks                                                                           |  | $                          | 3,221   |   |                        | $ | 3,419   |  
|Interest-bearing deposits                                                                         |  |                            | 4,325   |   |                        |   | 4,316   |  
|Federal funds sold                                                                                |  |                            | 14,100  |   |                        |   | 9,125   |  
|Investment securities available for sale, at fair value                                           |  |                            | 21,421  |   |                        |   | 21,771  |  
|Investment securities held to maturity (fair value, $19,316 $19,564 - December 31, 2003           |  |                            | 18,083  |   |                        |   | 18,560  |  
|Restricted equity securities                                                                      |  |                            | 603     |   |                        |   | 598     |  
|Total loans                                                                                       |  |                            | 118,979 |   |                        |   | 120,730 |  
|Allowance for loan losses                                                                         |  |                            | (1,842  | ) |                        |   | (1,697  | )
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Net loans                                                                                         |  |                            | 117,137 |   |                        |   | 119,033 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Bank premises and equipment, net                                                                  |  |                            | 2,502   |   |                        |   | 2,437   |  
|Accrued interest receivable                                                                       |  |                            | 913     |   |                        |   | 883     |  
|Foreclosed properties                                                                             |  |                            | 27      |   |                        |   | 385     |  
|Bank owned life insurance                                                                         |  |                            | 4,365   |   |                        |   | 4,327   |  
|Other assets                                                                                      |  |                            | 1,572   |   |                        |   | 1,558   |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Total assets                                                                                      |  | $                          | 188,269 |   |                        | $ | 186,412 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Liabilities and Stockholders Equity                                                              |  |                            |         |   |                        |   |         |  
|Noninterest-bearing deposits                                                                      |  | $                          | 27,196  |   |                        | $ | 22,959  |  
|Interest-bearing deposits                                                                         |  |                            | 132,984 |   |                        |   | 136,256 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Total deposits                                                                                    |  |                            | 160,180 |   |                        |   | 159,215 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Securities sold under agreements to repurchase                                                    |  |                            | 1,878   |   |                        |   | 1,826   |  
|Accrued interest payable                                                                          |  |                            | 141     |   |                        |   | 123     |  
|Other liabilities                                                                                 |  |                            | 1,025   |   |                        |   | 794     |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Total liabilities                                                                                 |  |                            | 163,224 |   |                        |   | 161,958 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Commitments and contingent liabilities                                                            |  |                            |        |   |                        |   |        |  
|                                                                                                  |  |                           
|Stockholders Equity                                                                              |  |                            |         |   |                        |   |         |  
|Common stock, $10 par value, 5,000,000 shares authorized, 1,535,733 shares issued and outstanding |  |                            | 15,357  |   |                        |   | 15,357  |  
|Additional paid-in capital                                                                        |  |                            | 2,925   |   |                        |   | 2,925   |  
|Retained earnings                                                                                 |  |                            | 6,462   |   |                        |   | 5,970   |  
|Accumulated other comprehensive income, net                                                       |  |                            | 301     |   |                        |   | 202     |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Total stockholders equity                                                                        |  |                            | 25,045  |   |                        |   | 24,454  |  
|                                                                                                  |  |                            |         |   |                        |   |         |  
|Total liabilities and stockholders equity                                                        |  | $                          | 188,269 |   |                        | $ | 186,412 |  
|                                                                                                  |  |                            |         |   |                        |   |         |  



See Notes to Consolidated Financial
Statements.



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Consolidated Statements of Income (Unaudited)

Cardinal Bankshares Corporation and Subsidiary



|                                                                       |  |                              |           |      |   |          
|---------------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                                       |  | Three months ended March 31,
|(In thousands, except share data)                                      |  | 2004                         |           | 2003
|Interest income                                                        |  |                              |           |      |   |          
|Loans and fees on loans                                                |  | $                            | 1,812     |      | $ | 1,993    
|Federal funds sold and securities purchased under agreements to resell |  |                              | 22        |      |   | 35       
|Investment securities:                                                 |  |                              |           |      |   |          
|Taxable                                                                |  |                              | 238       |      |   | 289      
|Exempt from federal income tax                                         |  |                              | 224       |      |   | 221      
|Deposits with banks                                                    |  |                              | 10        |      |   | 24       
|                                                                       |  |                              |           |      |   |          
|Total interest income                                                  |  |                              | 2,306     |      |   | 2,562    
|                                                                       |  |                              |           |      |   |          
|Interest expense                                                       |  |                              |           |      |   |          
|Deposits                                                               |  |                              | 792       |      |   | 1,043    
|Borrowings                                                             |  |                              | 9         |      |   |         
|                                                                       |  |                              |           |      |   |          
|Total interest expense                                                 |  |                              | 801       |      |   | 1,043    
|                                                                       |  |                              |           |      |   |          
|Net interest income                                                    |  |                              | 1,505     |      |   | 1,519    
|Provision for loan losses                                              |  |                              |          |      |   | 30       
|                                                                       |  |                              |           |      |   |          
|Net interest income after provision for loan losses                    |  |                              | 1,505     |      |   | 1,489    
|                                                                       |  |                              |           |      |   |          
|Noninterest income                                                     |  |                              |           |      |   |          
|Service charges on deposit accounts                                    |  |                              | 62        |      |   | 79       
|Other service charges and fees                                         |  |                              | 20        |      |   | 20       
|Net realized gains on sales of securities                              |  |                              | 4         |      |   |         
|Other operating income                                                 |  |                              | 75        |      |   | 86       
|                                                                       |  |                              |           |      |   |          
|Total noninterest income                                               |  |                              | 161       |      |   | 185      
|                                                                       |  |                              |           |      |   |          
|Noninterest expense                                                    |  |                              |           |      |   |          
|Salaries and employee benefits                                         |  |                              | 620       |      |   | 536      
|Occupancy and equipment                                                |  |                              | 139       |      |   | 147      
|Other operating expense                                                |  |                              | 285       |      |   | 502      
|                                                                       |  |                              |           |      |   |          
|Total noninterest expense                                              |  |                              | 1,044     |      |   | 1,185    
|                                                                       |  |                              |           |      |   |          
|Income before income taxes                                             |  |                              | 622       |      |   | 489      
|Income tax expense                                                     |  |                              | 129       |      |   | 86       
|                                                                       |  |                              |           |      |   |          
|Net Income                                                             |  | $                            | 493       |      | $ | 403      
|                                                                       |  |                              |           |      |   |          
|Basic earnings per share                                               |  | $                            | 0.32      |      | $ | 0.26     
|Diluted earnings per share                                             |  | $                            | 0.32      |      | $ | 0.26     
|Weighted average basic shares outstanding                              |  |                              | 1,535,733 |      |   | 1,535,733
|Weighted average diluted shares outstanding                            |  |                              | 1,535,733 |      |   | 1,535,733
|                                                                       |  |                              |           |      |   |          



See Notes to Consolidated Financial
Statements.



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Consolidated Statements of Cash Flows (Unaudited)

Cardinal Bankshares Corporation and Subsidiary



|                                                                                  |  |      |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(In thousands) Three Months Ended March 31,                                       |  | 2004 |        |   | 2003 |  
|Cash flows from operating activities                                              |  |      |        |   |      |   |        |  
|Net income                                                                        |  | $    | 493    |   |      | $ | 403    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |      | 64     |   |      |   | 66     |  
|Accretion of discount on investment securities                                    |  |      | (3     | ) |      |   | (9     | )
|Provision for loan losses                                                         |  |      |       |   |      |   | 30     |  
|Net realized (gains) losses on investment securities                              |  |      | (4     | ) |      |   |       |  
|Deferred compensation and pension expense                                         |  |      | 50     |   |      |   | 45     |  
|Changes in operating assets and liabilities:                                      |  |      |        |   |      |   |        |  
|(Increase) in accrued interest receivable                                         |  |      | (30    | ) |      |   | (164   | )
|Increase in accrued interest payable                                              |  |      | 18     |   |      |   | 22     |  
|Net change in other operating assets and liabilities                              |  |      | 76     |   |      |   | 81     |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |      | 664    |   |      |   | 474    |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash flows from investing activities                                              |  |      |        |   |      |   |        |  
|Net (increase) in interest-bearing deposits in banks                              |  |      | (9     | ) |      |   | (24    | )
|Net (increase) in federal funds sold                                              |  |      | (4,975 | ) |      |   | (2,300 | )
|Purchase of investment securities                                                 |  |      | (4,399 | ) |      |   | (5,938 | )
|Proceeds from sale of available for sale securities                               |  |      | 500    |   |      |   |       |  
|Purchase of restricted equity securities                                          |  |      | (5     | ) |      |   |        |  
|Proceeds from maturity and redemption of investment securities                    |  |      | 4,883  |   |      |   | 5,850  |  
|Net decrease in loans                                                             |  |      | 1,896  |   |      |   | 1,731  |  
|Sales of foreclosed properties                                                    |  |      | 358    |   |      |   | 31     |  
|Net purchases of bank premises and equipment                                      |  |      | (129   | ) |      |   | (4     | )
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash (used) by investing activities                                           |  |      | (1,880 | ) |      |   | (654   | )
|                                                                                  |  |      |        |   |      |   |        |  
|Financing Activities                                                              |  |      |        |   |      |   |        |  
|Net increase in noninterest-bearing deposits                                      |  |      | 4,238  |   |      |   | 51     |  
|Net (decrease) in interest-bearing deposits                                       |  |      | (3,272 | ) |      |   | (699   | )
|Net increase in other borrowings                                                  |  |      | 52     |   |      |   |       |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash provided (used) by financing activities                                  |  |      | 1,018  |   |      |   | (648   | )
|                                                                                  |  |      |        |   |      |   |        |  
|Net (decrease) in cash and cash equivalents                                       |  |      | (198   | ) |      |   | (828   | )
|Cash and cash equivalents at beginning of year                                    |  |      | 3,419  |   |      |   | 5,175  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash and cash equivalents at end of year                                          |  | $    | 3,221  |   |      | $ | 4,347  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Supplemental disclosures of cash flow information                                 |  |      |        |   |      |   |        |  
|Interest paid                                                                     |  | $    | 784    |   |      | $ | 1,021  |  
|Income taxes paid                                                                 |  | $    | 146    |   |      | $ | 194    |  
|                                                                                  |  |      |        |   |      |   |        |  



See Notes to Consolidated Financial
Statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1. Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not include all of
the disclosures and notes required by generally accepted accounting principles. In the opinion of management, all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results
for the interim period are not necessarily indicative of the results to be expected for the entire year or any other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements
included in the Companys Annual Report for the year ended December 31, 2003. Certain previously reported amounts have been reclassified to conform to current presentations.



Note 2. Allowance for Loan Losses



Changes in the allowance for loan losses are as follows:



|                                             |  |      |       |   |      |   |       |  
|-------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Three months ended March 31, (In thousands)  |  | 2004 |       |   | 2003 |  
|Balance, at January 1                        |  | $    | 1,697 |   |      | $ | 1,769 |  
|Provision charged to expense                 |  |      |      |   |      |   | 30    |  
|Recoveries of amounts previously charged off |  |      | 163   |   |      |   | 2     |  
|Loans charged off                            |  |      | (18   | ) |      |   | (31   | )
|                                             |  |      |       |   |      |   |       |  
|Balance, at March 31,                        |  | $    | 1,842 |   |      | $ | 1,770 |  
|                                             |  |      |       |   |      |   |       |  



Note
3. Commitments and Contingencies



The Companys exposure to credit loss
in the event of nonperformance by the other party for commitments to extend credit and stand-by letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and
conditional obligations as for on-balance sheet instruments. A summary of the Companys commitments at March 31 for the years indicated follows:



|                             |  |      |        |      |   |      
|---------------------------- |  | ---- | ------ | ---- | - | -----
|(In thousands)               |  | 2004 |        | 2003
|Commitments to extend credit |  | $    | 24,917 |      | $ | 7,990
|Standby letters of credit    |  |      | 697    |      |   | 673  
|                             |  |      |        |      |   |      
|Total                        |  | $    | 25,614 |      | $ | 8,663
|                             |  |      |        |      |   |      



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Cardinal Bankshares Corporation (the Company and Cardinal Bankshares), a Virginia corporation, is a bank holding company headquartered in Floyd,
Virginia. The Company serves the marketplace primarily through its wholly owned banking subsidiary, Bank of Floyd (the Bank), a Virginia chartered, Federal Reserve member commercial bank. The Banks deposits are insured by the
Federal Deposit Insurance Corporation (the FDIC) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation Commission of the
Commonwealth of Virginia (the SCC). At March 31, 2004, the Bank operated five branch facilities in the counties of Floyd, Montgomery, Roanoke and Carroll. The main office is in Floyd with a limited service office located in Willis. The
Roanoke office is in the Cave Spring area of Roanoke County. The Hillsville office is located in Carroll County. The Christiansburg office serves Montgomery County.



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Through Bank of Floyds network of banking facilities, Cardinal Bankshares provides a wide range of commercial
banking services to individuals, small to medium-sized businesses, institutions and governments located in Virginia. The Company conducts substantially all of the business operations of a typical independent commercial bank, including the acceptance
of checking and savings deposits, the making of commercial, real estate, personal, home improvement, automobile and other installment loans. The Company also offers other related services, such as travelers checks, safe deposit boxes,
depositor transfer, customer note payment, collection, notary public, escrow, drive-in and ATM facilities, and other customary banking services. Cardinal Bankshares does not offer trust services.



The following discussion provides information about the major components of the financial
condition, results of operations, asset quality, liquidity, and capital resources of Cardinal Bankshares. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.



FINANCIAL CONDITION



Total assets as of March 31, 2004 were $188.2 million, an increase of $1.8 from year-end 2003. Total loans declined 1.5% or $1.8 million
during the quarter to $119.0. From time to time, Cardinal and its subsidiary bank, Bank of Floyd, participate in loans originated by other banks. Participation loans make it possible for large borrowers to obtain financing when the amount involved
exceeds the legal lending limit of an individual bank. One of the banks with which the Bank had participated on several loans was acquired during 2003. The larger legal lending limit of the acquiring bank enabled it to repurchase approximately $2.9
million of these loans during the first quarter of 2004.



The investment
securities portfolio reflected a net decrease of $827 thousand due principally to two factors that are the result of the continued low interest rate environment. Issuer calls of U.S. Government Agency securities totaled approximately $3.0 million
during the first three months of 2004, and above normal speeds with which homeowners paid down their mortgages resulted in a decline of approximately $1.0 million in the mortgage-backed securities portfolio. Purchases of investment securities
totaling approximately $4.4 million partially offset the reduction in the overall portfolio brought about by these two factors combined with the effect of normal maturities of investment securities. Federal funds sold grew approximately $5.0 million
during the quarter as the Company temporarily invested the proceeds originating from the participation loan and investment activity mentioned earlier.



As of March 31, 2004, total deposits were $160.2 million, up approximately $1.0 million compared to year-end 2003. Non-interest-bearing core deposits increased 18.5% or
$4.2 million to $27.2 million, while interest-bearing deposits declined 2.4% or $3.3 million to $133.0 million. Due to the soft loan demand in the current economic environment, the Company has strategically remained less competitive on rate
sensitive deposits as reflected in the $6.4 million decline in large denomination deposits, those deposit accounts with balances greater than $100 thousand.



Stockholders equity was $25.0 million as of March 31, 2004 compared to $24.5 million as of December 31, 2003. Net income for the quarter of $493 thousand
principally accounted for the increase in stockholders equity.



RESULTS OF OPERATIONS



Net income for the three months ended
March 31, 2004 was $493 thousand, up 22.3% compared to $403 thousand for the three months ended March 31, 2003. Diluted earnings per share increased 23.1% to $.32 for the three months ended March 31, 2004. Diluted earnings per share for the same
period a year earlier was $.26.



Lower noninterest expense was the principal
contributing factor to improved profitability for the first quarter of 2004 compared to the first quarter of 2003. Quarter-to-quarter other operating expense was lower by $217 thousand or $143 thousand net of taxes. During the first quarter of 2003,
the Company recognized approximately $234 thousand, or $155 thousand net of taxes, in expenses related to the proposed merger with MountainBank Financial Corporation due to the Registrants shareholders failure to ratify and approve the
proposed merger. The other notable change in the quarter-to-quarter comparison was the increase in salaries and benefits costs, up $84 thousand from quarter-end 2003. The Company pays its employees on a



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bi-weekly basis, accordingly, as the calendar shifts form year-to-year the number of pay periods within comparable
periods is subject to change. The first quarter of 2004 is an example of this as it contained one additional pay-period when compared to the same period for 2003. This occurrence accounted for the major portion of the period-to-period increase in
salaries and benefits costs.



Total interest income for the three months ended
March 31, 2004 declined $256 thousand to $2.3 million, a decrease of 10.0% over the same prior year quarter. This resulted primarily from the effect of the overall lowering of interest rates on the variable or floating rate portion of the
companys loan portfolio, as it re-prices in the current declining rate environment. Noninterest income decreased 13.0% to $161 thousand, with lower residual income from leasing activities being the main source of the decrease. Total interest
expense decreased $242 thousand to $801 thousand, reflecting the effect of lower levels of interest-bearing deposits and interest rates paid thereon.



ASSET QUALITY



The allowance for loan losses represents managements estimate of an amount adequate to absorb potential future losses inherent in the loan portfolio. In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the lending process and the risk characteristics of the portfolio in the aggregate. Among other factors, management considers the Companys loan loss experience, the amount of past-due loans, current and
anticipated economic conditions, and the estimated current values of collateral securing loans in assessing the level of the allowance for loan losses.



The allowance for loan losses totaled $1.8 million at March 31, 2004. The allowance for loan losses to period end loans was 1.55% at March 31, 2004 compared to 1.41% and
1.56% at December 31, 2003 and March 31, 2003, respectively. The Company recovered balances on loans previously charged off in the amount of $163 thousand during the quarter, exceeding loans charged off of $18 thousand by $145 thousand. This
compares with net charge-offs for the three months ended March 31, 2003 of $29 thousand.



The allowance for loan losses represents managements estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. The adequacy of the loan loss reserve and the related provision
are based upon managements evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of
the loan portfolio, the relationship of the allowance to outstanding loans and delinquency trends.



While management uses all available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Various regulatory agencies, as an integral
part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the
time of their examination.



Nonperforming assets, which consist of nonaccrual
loans, loans 90 days or more past due, and other real estate owned, were $4.2 million as of March 31, 2004 compared to $3.2 million as of December 31, 2003. Approximately $2.8 million of the nonperforming asset total relates to one loan which has an
80% SBA guarantee and is well collateralized. Management does not expect to incur any material losses related to nonperforming assets.



LIQUIDITY



In determining the Companys liquidity requirements, both sides of the balance sheet are managed to ensure that adequate funding sources are available to support loan growth, deposit withdrawals or any
unanticipated need for funds.



Securities available for sale that mature within
one year, or securities that have a weighted average life of one year or less are sources of liquidity. Anticipated mortgage-backed securities pay downs and maturing loans also generate cashflows to meet liquidity requirements. Wholesale funding
sources are also used to supply liquidity such as federal funds purchased and large denomination certificates of deposit. The Company considers its sources of liquidity to be adequate to meet its anticipated needs.



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CAPITAL RESOURCES



Cardinal Bankshares capital position provides the necessary assurance required to support anticipated asset growth and to absorb potential losses.



The Companys Tier I capital position was $24.7 million at March 31, 2004, or 19.67% of
risk-weighted assets. Total risk-based capital was $26.3 million or 20.92% of risk-weighted assets.



Tier I capital consists primarily of common stockholders equity, while total risk-based capital includes the allowance for loan losses. Risk weighted assets are determined by assigning various levels of risk to
different categories of assets and off-balance sheet activities. Under current risk-based capital standards, all banks are required to have Tier I capital of at least 4% and total capital of 8%.



In addition to the risk-based capital guidelines, banking regulatory agencies have adopted
leverage capital ratio requirements. The leverage ratio  or core capital to assets ratio  works in tandem with the risk-capital guidelines. The minimum leverage ratios range from three to five percent. At March 31, 2004, the
Companys leverage capital ratio was 13.44%.



A WARNING ABOUT
FORWARD-LOOKING STATEMENTS



This Form 10-QSB contains forward-looking
statements. The Company may also make written forward-looking statements in periodic reports to the Securities and Exchange Commission, proxy statements, offering circulars and prospectuses, press releases and other written materials and oral
statements made by Cardinal Bankshares officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Companys beliefs and expectations, are forward-looking statements. These
statements are based on beliefs and assumptions of the Companys management, and on information currently available to such management. Forward-looking statements include statements preceded by, followed by or that include the words
believes, expects, estimates, anticipates, plans, or similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to
update publicly any of them in light of new information or future events.



Forward-looking statements involve inherent risks and uncertainties. Management cautions the readers that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement.
Such factors include, but are not limited to, the following: competitive pressures among depository and other financial institutions may increase significantly; changes in the interest rate environment may reduce margins; general economic or
business conditions may lead to a deterioration in credit quality or a reduced demand for credit; legislative or regulatory changes, including changes in accounting standards, may adversely affect the business in which Cardinal Bankshares is
engaged; changes may occur in the securities markets; and competitors of the Company may have greater financial resources and develop products that enable such competitors to compete more successfully than Cardinal Bankshares.



Other factors that may cause actual results to differ from the forward-looking statements
include the following: the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; changes in consumer spending and savings habits; the effects of competitors
pricing policies; the Companys success in managing the costs associated with the expansion of existing distribution channels and developing new ones, and in realizing increased revenues from such distribution channels, including cross-selling
initiatives; and mergers and acquisitions and their integration into the Company and managements ability to manage these other risks.



Management of Cardinal Bankshares believes these forward-looking statements are reasonable; however undue reliance should not be placed on such forward-looking
statements, which are based on current expectations.



Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of Cardinal Bankshares may differ materially from those expressed in forward-looking statements contained in
this report. Many of the factors that will determine these results and values are beyond the Companys ability to control or predict.



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##### Table of Contents

Item 3. CONTROLS AND PROCEDURES



As of the end of
the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, including internal controls and procedures for financial reporting. Our principal executive
officer and principal financial officer supervised this evaluation and have concluded that our disclosure controls and procedures are effective. Subsequent to this evaluation, (i) there have been no significant changes in our internal controls or in
other factors that could significantly affect our disclosure controls and procedures and (ii) we have not taken any corrective actions with regard to our disclosure controls and procedures to correct any significant deficiencies and weaknesses.



The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures
is dependent upon the employees responsible for executing it. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve
their objective.



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##### Table of Contents

Part II. OTHER INFORMATION



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item: 1 |  | Legal proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 
|        |  | On December 12, 2002 Cardinals former Chief Financial Officer Mr. David Welch filed a complaint against Cardinal with the United States Department of Labor under Section 806 of the
Sarbanes-Oxley Act. Welch alleges in his complaint that his termination in October, 2002 violated the Act and seeks reinstatement, back pay and damages. The Company maintains that the independent members of Cardinals Board of Directors
terminated Welch lawfully because he refused to comply with the directives of the Audit Committee attempting to look into certain matters raised by Mr. Welch. The Audit Committee, after full investigation, later concluded that the matters raised by
Mr. Welch had no merit. The Boards decision was upheld by the Department of Labor initially. Mr. Welch appealed that decision. The Department of Labor Administrative Law Judge reversed the earlier decision in Cardinals favor and entered
a decision in Welchs favor on January 28, 2004. The Administrative Review Board of the Department of Labor agreed to review the decision of the Administrative Law Judge on February 6, 2004. Their decision to review suspended the decision of
the Administrative Law Judge prior to any determination of damages by the Administrative Law Judge. The matter is presently before the Administrative Review Board. Cardinal intends to pursue its appeal rights vigorously and believes that the
Administrative Law Judges decision is erroneous, factually and legally.
|        | 
|2       |  | Changes in securities - None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 
|3       |  | Defaults upon senior securities - None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 
|4       |  | Results of votes of security holders - None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 
|5       |  | Other information - None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 
|6       |  | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 
|        |  | (a) Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 
|        |  | 31.1  Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|        |  | 31.2  Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|        |  | 32.1  Certification Pursuant To 18 U.S.C. 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|        |  | (b) Reports on Form 8-K - None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



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##### Table of Contents

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 thereto duly
authorized.





|                                                            
|------------------------------------------------------------
|CARDINAL BANKSHARES CORPORATION                             
|                                                            
|/s/ Ronald Leon Moore                                       
|Ronald Leon Moore                                           
|Chairman of the Board, President and Chief Executive Officer
|                                                            
|/s/ Ray A. Fleming                                          
|Ray A. Fleming                                              
|Executive Vice President and Chief Financial Officer        



Date:
May 14, 2004



12