<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

         [X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2002

         [  ]     TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                   For the transition period from to__________

                         Commission file number: 0-49912

                       MOUNTAIN NATIONAL BANCSHARES, INC.

  Tennessee                              75-3036312
  (State or Other Jurisdiction           (I.R.S. Employer Identification Number)
  of Incorporation or Organization)

                   300 East Main, Sevierville, Tennessee 37862
                    (Address of Principal Executive Offices)

                                 (865) 428-7990
                (Issuer's Telephone Number, Including Area Code)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                                1,200,000 shares
                          Common Stock, $1.00 par value



         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [   ]

<PAGE>

         Revenues  for the  Registrant's  fiscal year ended  December  31, 2002,
totaled $12,400,000.  The aggregate market value of the Registrant's outstanding
Common Stock held by  nonaffiliates  of the  Registrant  on February 1, 2003 was
$14,660,670 (based on the Bank's last sale on January 30, 2003).

         There were 1,200,000 shares of Common Stock  outstanding as of February
1, 2003.

         Transitional Small Business Disclosure Format (check one): Yes__; No X
                                                                             --
DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the  registrant's  definitive  Proxy Statement for the 2003
Annual Meeting of  Shareholders  are  incorporated by reference into Part III of
this Report.








<PAGE>



                       MOUNTAIN NATIONAL BANCSHARES, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                -----------------
ITEM                                                                                         PAGE
NUMBER                                                                                      NUMBER
------                                                                                     -------

                                     PART I
<S>                                                                                            <C>
1.       Description of Business.................................................................3

2.       Description of Property................................................................18

3.       Legal Proceedings......................................................................19

4.       Submission of Matters to a Vote of Security Holders....................................19


                                                  PART II

5.       Market for Common Equity and Related Stockholder Matters...............................19

6.       Management's Discussion and Analysis or Plan of Operation..............................20

7.       Financial Statements...................................................................32

8.       Changes in and Disagreements with Accountants on Accounting and Financial
         Disclosure.............................................................................32

                                                 PART III

9.       Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act......................................32

10.      Executive Compensation.................................................................33

11.      Security Ownership of Certain Beneficial Owners and Management.........................33

12.      Certain Relationships and Related Transactions.........................................33

<PAGE>
13.      Exhibits and Reports on Form 8-K.......................................................33

14.      Controls and Procedures................................................................34

         Signatures.............................................................................35
</TABLE>




<PAGE>


                                     PART I
                                    --------

ITEM 1.  DESCRIPTION OF BUSINESS

THE COMPANY

         Mountain National Bancshares, Inc. (the "Company" or "Registrant") is a
bank holding company that engages in providing a full range of banking  services
through  its  banking  subsidiary  Mountain  National  Bank  (the  "Bank").  The
Company's main office is located at 300 East Main Street, Sevierville, Tennessee
37862.  The Company was  incorporated  as a business  corporation  in March 2002
under the laws of the State of Tennessee  for the purpose of  acquiring  100% of
the issued and outstanding  shares of common stock of the Bank. In June 2002 the
Company received approval from the Federal Reserve Bank of Atlanta (the "Federal
Reserve") to become a holding  company.  Effective July 1, 2002, the Company and
the Bank entered into a  reorganization  pursuant to which the Company  acquired
100% of the  outstanding  shares  of the Bank and the  shareholders  of the Bank
became the shareholders of the Company.

          At December 31, 2002, the assets of the Company consisted primarily of
its ownership of the capital stock of the Bank. Unless otherwise indicated,  the
information  presented  herein relating to the Company refers to the Company and
the Bank on a consolidated basis.

          The Company is authorized  to engage in any activity  permitted by law
to  a  corporation,   subject  to  applicable   federal  and  state   regulatory
restrictions on the activities of bank holding companies.  The Company's holding
company  structure  provides  it with  greater  flexibility  than the Bank would
otherwise have relative to expanding and  diversifying  its business  activities
through newly formed subsidiaries, or through acquisitions.  While management of
the Company  has no present  plans to engage in any other  business  activities,
management  may from  time to time  study the  feasibility  of  establishing  or
acquiring  subsidiaries  to engage in other  business  activities  to the extent
permitted by law.

THE BANK

          Mountain National Bank is organized as a national banking association.
The Bank made  application  to the  Office of the  Comptroller  of the  Currency
("OCC") and the Federal Deposit Insurance  Corporation  ("FDIC") on February 16,
1998. The Bank obtained  approval from the OCC to organize as a national banking
association on June 16, 1998,  and commenced  business on November 23, 1998. The
principal business of the Bank is to accept demand and savings deposits from the
general public and to invest such funds in residential mortgage,  commercial and
consumer loans.

          The Bank has no subsidiaries and is not otherwise  affiliated with any
other corporation.

                                        3
<PAGE>


BUSINESS OF THE BANK

          GENERAL.  Following the merger of First  National Bank of  Gatlinburg,
Gatlinburg,  Tennessee, into a bank domiciled in Knox County, Tennessee, a group
of  individuals  formed  the Bank in  Sevierville,  with  branch  offices  to be
established  in Gatlinburg and Pigeon Forge,  Tennessee as soon as possible.  On
February 16, 1998, the organizers made application to the OCC and simultaneously
with the FDIC for  permission  to organize the Bank.  On June 16, 1998,  the OCC
granted the Bank  permission to organize.  The Bank  conducts a general  banking
business under its Articles of Association approved by the OCC.

          The business of the Bank  consists  primarily  of taking  deposits and
originating  loans.  The Bank conducts its activities from a main office located
in  Sevierville,  Tennessee.  The Bank has opened two branches in Gatlinburg,  a
branch office in Pigeon Forge,  and a branch office in Seymour,  Tennessee.  The
Bank seeks savings and other time deposits and demand  deposits from  households
and businesses in its primary marketing area by offering a full range of deposit
accounts,  including savings accounts,  demand deposit accounts,  retirement and
professional  accounts,  including  individual  retirement  accounts  ("IRA's"),
checking accounts and time certificates. The Bank solicits mortgage, commercial,
and consumer loans,  as well as other  authorized  investments.  The Bank offers
additional  services  such  as  24-hour  automatic  teller  machines  and  other
financial services.

          The Bank's earnings depend on its "net interest  income," which is the
difference  between the interest  income it receives from its assets  (primarily
its loans and other  investments)  and the interest expense (or "cost of funds")
which it pays on its liabilities  (primarily its deposits).  Net interest income
is a  function  of (i) the  difference  between  rates  of  interest  earned  on
interest-earning   assets  and  rates  of  interest  paid  on   interest-bearing
liabilities  (the "interest rate spread" or "net interest  spread") and (ii) the
relative   amounts  of  its   interest-earning   assets   and   interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-bearing
liabilities,  any  positive  interest  rate spread will  generate  net  interest
income. The Bank adheres to an asset and liability  management strategy which is
intended to control the impact of interest rate  fluctuations  upon its earnings
and to make  the  yields  on its  loan  portfolio  and  other  investments  more
responsive to its cost of funds, in part by more closely matching the maturities
of its interest-earning assets and its interest-bearing liabilities, while still
maximizing net interest income.  Nevertheless,  the Bank is and will continue to
be affected by changes in the levels of interest  rates and other factors beyond
its control.

          The banking industry is significantly  affected by prevailing economic
conditions,  as well as government  policies and regulations  concerning,  among
other things,  monetary and fiscal affairs, the housing industry,  and financial
institutions.  Deposits  at  commercial  banks  are  influenced  by a number  of
economic factors, including interest rates and competing investment instruments,
levels of personal income and savings, among others. Lending activities are also
influenced by a number of economic  factors,  including demand for and supply of
housing;  conditions in the construction  industry;  local economic and seasonal
factors,  and  availability  of funds.  Primary  sources of funding  for lending
activities includes savings and demand deposits;  income from investments;  loan
principal payments; and borrowings.

                                        4
<PAGE>

          MARKET  AREAS.  The  Bank's  primary  market  area is  Sevier  County,
Tennessee.  The Bank intends to serve the primary market area, but no assurances
can be made that service will be extended only to the primary market area.  Some
business may come from areas contiguous to the primary market area.

LENDING ACTIVITIES

          GENERAL.  The Bank  concentrates its loan  originations in its primary
market  area.  The Bank,  like most other  commercial  banks,  concentrates  its
lending  activity and develops a portfolio  consisting of first  mortgage  loans
secured by  residential  properties  and by  commercial  properties,  commercial
loans,  and  consumer  loans.  The Bank is limited in the amount of loans it may
extend to one borrower.

          REAL ESTATE LENDING.  The Bank originates  permanent and  construction
loans on  residential  real estate  comprised  of  single-family  dwellings  and
multi-family dwellings of up to four units with terms up to 30 years. Such loans
consist  of  conventional   loans  (which  are  neither  insured  nor  partially
guaranteed  by  government  agencies).   The  Bank  has  developed  a  portfolio
consisting of adjustable rate mortgage loans ("ARM loans"), with repricing terms
from one to five years, and originates  traditional fixed-rate mortgage loans in
appropriate  circumstances.  ARM loans are  indexed  to  various  indices,  with
adjustments  ranging up to 2% per repricing period and up to 6% over the life of
the loans.

          Loan-to-value  ratios for mortgage  loans are determined in accordance
with  guidelines  established  by the Board of Directors  pursuant to applicable
law.

      The Bank  emphasizes  the  origination  of ARM  loans  which  are more
sensitive to changes in market rates than fixed-rate loans.  There are, however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising  interest  rates,  the risk of default of ARM loans may  increase as a
result of repricing with increased  costs to the borrower.  Furthermore,  if the
Bank,  as a marketing  incentive,  originates  ARM loans with  initial  rates of
interest  below the rates which would apply were the  adjustment  index used for
pricing  initially  (discounting),  such loans are subject to increased risks of
default or delinquency.  Another  consideration is that although ARM loans allow
the Bank to  increase  the  sensitivity  of its  asset  base to  changes  in the
interest rates,  the extent of this interest  sensitivity will be limited by any
periodic  and  lifetime  interest  rate  adjustment  limits.  Because  of  these
considerations,  the Bank has no  assurance  that  yields on ARM  loans  will be
sufficient to offset increases in its cost of funds.

          The  Bank  may  originate  some  permanent  conventional   residential
mortgage  loans for sale to  private  institutional  investors  such as  savings
institutions,  banks, life insurance companies and pension funds. Such loans are
made on similar terms and  conditions as those for sale to the Federal Home Loan
Mortgage  Corporation  ("FHLMC") and the Federal National  Mortgage  Association
("FNMA"), except for possible higher dollar limits on the maximum loan amount.

                                        5
<PAGE>

          CONSUMER  LENDING.  The Bank makes  consumer loans that are secured by
junior liens on real estate,  including home  improvement  and home equity loans
(such  loans  have an  average  maturity  of about ten years and  generally  are
limited  to 85% of  appraised  value),  or loans that are  secured  by  personal
property such as automobiles, recreational vehicles or boats (generally 36 to 60
month loans),  as well as loans to depositors of the institution on the security
of their time  deposit  accounts or  certificates  of  deposit.  The Bank offers
unsecured  personal loans and personal  lines of credit in conjunction  with its
demand deposit accounts and otherwise.  In addition, the Bank offers credit card
programs.

          Consumer loans entail greater risk than  residential  mortgage  loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly depreciating assets such as automobiles.  In such cases, any repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further  substantial   collection  efforts  against  the  borrower's  continuing
financial  stability,  and thus are more likely to be adversely  affected by job
loss, divorce, illness or personal bankruptcy.  Furthermore,  the application of
various  federal  and  state  laws,   including  federal  bankruptcy  and  state
insolvency laws, may limit the amount that can be recovered on such loans.  Such
loans may also give rise to claims  and  defenses  by a consumer  loan  borrower
against an assignee of such loans such as the Bank,  and a borrower  may be able
to assert  against such  assignee  claims and  defenses  that it has against the
seller of the underlying collateral.

          CONSTRUCTION  LENDING.  The  Bank  offers  single  family  residential
construction   loans  to  borrowers  for  construction  of  one-to-four   family
residences in the Bank's  primary  market area.  Typically,  the Bank limits its
construction  lending to  construction-permanent  loans to individuals  building
their primary residences and, to a lesser extent, construction loans to selected
local  builders  to build  single-family  dwellings.  These  loans have fixed or
adjustable  interest  rates and are  underwritten  in  accordance  with the same
standards as the Bank's permanent  mortgage loans,  except these loans generally
provide for  disbursement  in stages  during a  construction  period of up to 12
months, during which period the borrower is required to make monthly payments of
accrued interest on the outstanding loan balance.  Construction  loans generally
have a maximum loan-to-value ratio of 80%. Individual borrowers must satisfy all
credit  requirements  which would apply to the Bank's  permanent  mortgage  loan
financing  for the  subject  property.  While the Bank's  construction-permanent
construction loans generally convert to permanent loans following  construction,
the Bank's  construction  loans to builders  generally require repayment in full
upon the completion of construction, or may be assumed by the borrower.

          Construction  lending  affords  the Bank the  opportunity  to  achieve
higher  interest  rates and fees with  shorter  terms to maturity  than does its
single-family  permanent mortgage lending.  Construction  lending,  however,  is
generally  considered  to  involve a higher  degree  of risk than  single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's  value at completion  of the project and the estimated  cost of the
project.  The  nature  of these  loans is such  that  they  are  generally  more
difficult to evaluate and monitor.  If the estimate of construction  cost proves
to be  inaccurate,  the Bank may be required to advance  funds beyond the amount
originally  committed to permit  completion  of the project.  If the estimate of
value upon completion proves inaccurate, the Bank may be confronted at, or prior
to, the  maturity of the loan,  with a project  whose value is  insufficient  to
assure full repayment. Projects may also be jeopardized by disagreements between
borrowers  and  builders  and by the failure of builders to pay  subcontractors.
Loans to builders to construct  homes for which no purchaser has been identified
carry more risk because the payoff for the loan is  dependent  on the  builder's
ability to sell the  property  prior to the time that the  construction  loan is
due. The Bank addresses these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices.

                                        6
<PAGE>
          COMMERCIAL  LENDING.  The Bank makes secured and  unsecured  loans for
commercial,  corporate,  business,  and  agricultural  purposes  and  engages in
commercial real estate and commercial leasing  activities.  Initially,  the Bank
has concentrated on loans to small businesses for purposes of providing  working
capital,  capital improvements,  construction and leasehold  improvements.  Such
loans  typically  have one-year  maturities  for unsecured  loans and an average
maturity  of  seven  years  for  loans  secured  by real  estate.  The  Bank may
participate in the Small Business  Administration's  guaranteed  commercial loan
program.

          Commercial  lending,  while  generally  considered to involve a higher
degree of credit  risk  than  long-term  financing  of  residential  properties,
generally  provides  higher yields and greater  interest rate  sensitivity  than
residential  mortgage loans.  Commercial  loans are subject to certain risks not
inherent in residential mortgage loans, such as delays in leasing the collateral
and  excessive  collateral  dependency,  vacancy,  delays or inability to obtain
permanent financing and difficulties in exerting influence over or acquiring the
properties when such loans become delinquent. Moreover, commercial lending often
involves larger loan balances to single borrowers or groups of related borrowers
than does  residential  real estate  lending.  With respect to  commercial  real
estate  lending,  the payment  experience on loans  secured by  income-producing
properties  is typically  dependent on the  successful  operation of the related
real  estate  project  and thus may be  subject  to a greater  extent to adverse
conditions  in the real  estate  market or in the  economy  generally.  The Bank
attempts to mitigate  these risks by, among other things,  lending on collateral
and to persons located in its primary market area.

          CREDITWORTHINESS  AND  COLLATERAL.   Detailed  loan  applications  are
required to determine  the  creditworthiness  of potential  borrowers.  All loan
applications  are  reviewed  and  approved or  disapproved  in  accordance  with
guidelines  established  by  the  Bank's  Board  of  Directors.   Appraisals  of
collateral by independent appraisers approved by the Board of Directors are also
required,  and borrowers are required to maintain fire and casualty insurance on
collateral in accordance with guidelines  established by the Board of Directors.
Title  insurance is required for all real property  collateral.  So long as such
insurance  is  available  and  economically  feasible,  conventional  loans with
loan-to-value  ratios in excess of 80% may be required to have private  mortgage
insurance  covering  that portion of the loan in excess of 80% of the  appraised
value.

          LOAN  ORIGINATIONS.  The  Bank  originates  loans  primarily  for  its
portfolio  and,  subject to market  conditions,  may sell them in the  secondary
market. Initially, most residential mortgage loans are originated from referrals
and walk-in customers. Local advertising is used to stimulate originations.

                                        7
<PAGE>
          SECONDARY MARKET  ACTIVITIES.  The Bank engages in secondary  mortgage
market  activities  subject  to market  conditions.  Secondary  mortgage  market
activities  permit the Bank to generate fee income and sale income to supplement
a  traditional  source of  income,  the  interest  margin  between  the yield on
mortgage  portfolios and the interest paid on savings  deposits and time deposit
certificates.

          INCOME FROM LENDING ACTIVITIES. The Bank's lending activities generate
interest and loan  origination fee income.  Loan origination fees are calculated
as a percentage of the principal  amount of the mortgage loan and are charged to
the borrower by the Bank for  originating  the loan. The Bank also receives loan
fees and charges  related to existing  loans,  which  include  late  charges and
assumption fees.

          LOAN  DELINQUENCIES  AND  DEFAULTS.  When a  borrower  fails to make a
required  loan  payment  to the  Bank for 30 days,  the  loan is  classified  as
delinquent.  If the  delinquency  exceeds 90 days and is not cured  through  the
Bank's normal collection procedures,  the Bank institutes measures to remedy the
default.  If a foreclosure action is initiated,  and the loan is not reinstated,
paid in full or  refinanced,  the property is sold at a judicial or trustee sale
at which, in some instances,  the Bank acquires the property.  Thereafter,  such
acquired property is recorded in the Bank's records as "other real estate owned"
until the property is resold. In some cases, such resales may be financed by the
Bank which may involve "loans to facilitate," which involve a lower down payment
or a longer term.

          ALLOWANCE  FOR POSSIBLE  LOAN LOSSES.  The allowance for possible loan
and lease losses is a valuation allowance which represents the cumulative effect
of provisions for possible  losses  charged to income,  less  charge-offs,  plus
recoveries  of  previously  charged-off  loans.  The Bank  maintains an adequate
allowance for loan and lease losses, based on regulatory guidelines.

INVESTMENT ACTIVITIES

          The Bank's  investment  portfolio  is an  integral  part of the Bank's
total assets and liabilities  management strategy. The Bank uses its investments
to  further  the  objective  of  reducing  the   institution's   sensitivity  to
interest-rate  fluctuation risks. The Bank's goal is to achieve a high degree of
maturity and rate matching between assets and  liabilities.  In order to achieve
this goal,  the Bank  concentrates  its  investments  (approximately  17% of its
assets at December 31, 2002) in U.S.  government  securities or other securities
of similar low risk. Such U.S. government and other investment-grade  securities
have maturities average ranging from 30 days to ten years.

SOURCES OF FUNDS

          GENERAL.  Deposit  accounts are a primary  source of funds for lending
and other  general  business  purposes.  Other  sources  of funds  include  loan
repayments,   loan  sales  and   borrowings.   Although   deposit   activity  is
significantly  influenced by  fluctuations  in interest  rates and general money
market  conditions,  loan  repayments  are a relatively  stable source of funds.
Short-term borrowings are used to compensate for reductions in normal sources of
funds,  such as deposit inflows that are insufficient to fund loan  commitments.
Long-term  borrowings are used to support extended  activities and to extend the
term of the Bank's liabilities.

                                        8
<PAGE>
          DEPOSITS.  The Bank has a number of  different  programs  designed  to
attract both short-term and long-term  deposits from the general  public.  These
programs include savings accounts, NOW accounts,  demand deposit accounts, money
market deposit accounts,  fixed-rate and variable-rate  certificate  accounts of
varying maturities,  and jumbo certificates,  as well as certain other accounts.
Particular  attention is focused on  obtaining  long-term  accounts  such as IRA
accounts.

          BORROWINGS.  The Bank became a member of the Federal Home Loan Bank of
Cincinnati  ("FHLB of  Cincinnati")  in December  2001.  The FHLB of  Cincinnati
functions  as  a  central   reserve  bank  which  provides   credit  for  member
institutions.  The Bank, as a member of the FHLB of  Cincinnati,  is required to
own capital stock in the FHLB of Cincinnati.  Provided certain standards related
to creditworthiness  have been met, the Bank is authorized to apply for advances
on the security of such stock and on certain of its  residential  mortgage loans
and  other  assets  (principally,   securities  which  are  obligations  of,  or
guaranteed by, the United States). FHLB of Cincinnati advances are made pursuant
to several  different credit programs.  Each credit program has its own interest
rate and range of  maturities.  Interest rates on advances are adjusted as often
as necessary to reflect actual  conditions  existing in the credit markets.  The
FHLB of Cincinnati prescribes the acceptable uses to which the advances pursuant
to each  program  may be made as well as  limitations  on the size of  advances.
Acceptable uses prescribed by the FHLB of Cincinnati have included  expansion of
residential mortgage lending and funding short-term  liquidity needs.  Depending
on the  particular  credit  program,  limitations  on the amount of advances are
generally  based  on the  FHLB  of  Cincinnati's  assessment  of  the  borrowing
institution's creditworthiness. The FHLB of Cincinnati is required to review its
credit limitations and standards at least once every six months.

          FINANCING.  In August of 1998 the Bank completed an offering of common
stock which yielded proceeds of $12,000,000.

          RETAIL  SERVICES.  The Bank provides its  customers  with a variety of
retail  banking  services.  The  Bank is a  member  of a number  of  systems  of
automated  teller  machines  and  point of sale  terminals  which  provide  Bank
customers with access to those systems' services  throughout the world. The Bank
currently  maintains 9 full service ATMs  throughout  its market area.  The Bank
also provides (in addition to the lending and deposit services  described above)
a variety of checking  accounts,  savings programs,  night depository  services,
safe deposit facilities and credit card plans.

COMPETITION

          The Bank  encounters  vigorous  competition in the primary market area
from a number of  sources,  including  five  commercial  banks  and one  savings
institution.  As of June 30, 2002,  there were 40  commercial  bank branches and
three savings institutions branches located in Sevier County.  Citizens National
Bank, Sevier County Bank, and Tennessee State Bank are community banks which are
domiciled in Sevier County.  Regional bank holding companies operating in Sevier
County include  SunTrust Bank which operates  three offices.  In addition,  Home
Federal Bank FSB, domiciled in Knoxville,  Tennessee,  has a total of 4 branches
in Sevier  County.  BB&T,  domiciled in  Winston-Salem,  North  Carolina,  has 6
branches.

                                        9
<PAGE>
          The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of
1994 and  other  recent  federal  and  state  laws have  resulted  in  increased
competition  from both  conventional  banking  institutions and other businesses
offering  financial  services and  products.  Mortgage  banking  firms,  finance
companies,   real  estate  investment  trusts,   insurance  companies,   leasing
companies,   factors,   and  certain  government   agencies  provide  additional
competition for loans and for certain financial services. The Bank also competes
for deposit accounts with a number of other financial intermediaries,  including
securities brokerage firms, money market mutual funds,  government and corporate
securities,  and credit unions. The primary areas in which institutions  compete
for deposits and loans are interest rates,  loan  origination  fees and range of
services offered.

          Most competing institutions have been in existence for a longer period
of time than the Bank,  are better  established  than the Bank,  have  financial
resources  substantially  greater than those of the Bank and have more extensive
facilities than those of the Bank. Because of the size and established  presence
of the  existing  financial  institutions  in the  primary  market  area,  these
competing  institutions  were previously able to offer a wider range of services
than the Bank  presently  offers.  The Bank  competes  for  deposits  with these
larger,  established  institutions  as well as the money market mutual funds and
other  non-traditional  financial  intermediaries.  The Bank has to attract  its
customer base from existing financial institutions and growth in the community.

          As  evidenced  by the strong  growth of the Bank's  loans and deposits
(see management's discussion and analysis and the audited financial statements),
the Bank has been able to compete with those established  institutions in Sevier
County  since it opened for  business.  The Bank has found,  as  expected,  that
banking  customers  want a good level of service and products from their banking
institution.  The Bank has been able to hire a local bank-experienced staff that
is  aware  of this  desire  for a high  level of  service.  As to bank  products
offered,  due to its continued  growth,  the Bank currently  offers all of those
products  offered  by  most  local  competitors   including   internet  banking,
investment  services,  and sweep  accounts.  The Bank  presently has opened five
full-service banking facilities and six stand-alone ATM facilities.

EMPLOYEES

          The Bank has 91  full-time  equivalent  ("FTE")  employees at its main
office, including three executive officers. In addition to a President and Chief
Executive  Officer,  the Bank employs an  Executive  Vice  President  and Senior
Credit Officer,  and an Executive  Vice-President  of Operations/  Cashier.  The
remaining  employees  provide  staff support in the teller,  new accounts,  loan
processing,  accounting and secretarial functions. The Bank has 12 FTE employees
at its two Gatlinburg  branches,  nine FTE employees at its Pigeon Forge branch,
and eight FTE employees at its Seymour branch.  These employees are teller,  new
account, and lending personnel.

                                       10
<PAGE>
SUPERVISION AND REGULATION

          The Company and the Bank are subject to state and federal banking laws
and regulations  which impose specific  requirements or restrictions and provide
for  general  regulatory  oversight  with  respect to  virtually  all aspects of
operations.  These  laws and  regulations  are  generally  intended  to  protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions.  Any change in applicable
laws or regulations  may have a material effect on the business and prospects of
the Company.  Beginning with the enactment of the Financial Institutions Reform,
Recovery and  Enforcement  Act of 1989 ("FIRREA") and following with the Federal
Deposit  Insurance  Corporation  Improvement  Act of 1991  ("FDICIA"),  numerous
additional  regulatory  requirements have been placed on the banking industry in
the past ten years, and additional changes have been proposed.  For example, the
banking  industry  has changed  significantly  as a result of the passage of the
Riegle-Neal  Interstate  Banking and  Branching  Efficiency  Act of 1994 and the
Financial Services  Modernization Act of 1999. The operations of the Company and
the Bank may be affected  by  legislative  changes  and the  policies of various
regulatory  authorities  and the  Company is unable to predict the nature or the
extent of the  effect on its  business  and  earnings  that  fiscal or  monetary
policies,  economic control or new federal or state  legislation may have in the
future.

          THE COMPANY.  The Company is a bank holding company within the meaning
of the federal Bank Holding Company Act of 1956, as amended (the "BHC Act"), and
is registered  with and subject to the  regulation of the Federal  Reserve under
the BHC Act. As a bank holding company, the Company is required to file with the
Federal  Reserve annual reports and such other reports and information as may be
required under the BHC Act. The Federal Reserve may conduct  examinations of the
Company and the Banks to determine  whether such  institutions are in compliance
with the regulations promulgated under the BHC Act.

          The BHC Act requires a bank holding  company to obtain prior  approval
of the  Federal  Reserve (i) before it may acquire  directly or  indirectly  the
ownership  or control  of more than 5% of any class of voting  stock of any bank
not already  controlled  by it, (ii) before it or any  subsidiary  (other than a
bank) may acquire all or  substantially  all of the assets of a bank,  and (iii)
before it may merge or  consolidate  with any other bank  holding  company.  The
Riegle-Neal  Interstate  Banking  and  Branching  Efficiency  Act of  1994  (the
"Interstate Banking Act") facilitates branching and permits the establishment of
agency  relationships  across state lines and permits bank holding  companies to
acquire  banks in any  state  without  regard  to  whether  the  transaction  is
prohibited  under the laws of such state,  subject to certain state  provisions,
including  minimum  age  requirements  of  banks  that  are  the  target  of the
acquisition. The minimum age of local banks subject to interstate acquisition is
limited to a maximum of five years. See "--Other Applicable Regulation Changes."

          Bank holding companies are also generally prohibited under the BHC Act
from engaging in non-banking  activities or acquiring direct or indirect control
of any company engaged in non-banking  activities.  However, the Federal Reserve
may permit bank holding  companies to engage in certain  non-banking  activities
found by the Federal  Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Such activities determined
by the Federal Reserve to fall under this category include,  but are not limited
                                       11
<PAGE>

to,  making or  servicing  loans and  certain  leases,  providing  certain  data
processing  services,  acting as a fiduciary or investment or financial advisor,
providing discount brokerage  services,  underwriting bank eligible  securities,
and making investments designed to promote community welfare.

          Federal law imposes  certain  limitations  on extensions of credit and
other  transactions by and between banks that are members of the Federal Reserve
System and other  affiliates  (which  includes any holding company of which such
bank is a subsidiary and any other non-bank subsidiary of such holding company).
Banks that are not members of the  Federal  Reserve  System are also  subject to
these limitations. Further, federal law prohibits a bank holding company and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit,  lease or sale of property,  or the furnishing of services.
For  example,  the Banks may not  generally  require a customer to obtain  other
services from it or its company, and may not require that a customer promise not
to obtain other  services  from a  competitor  as a condition to an extension of
credit to its customer.

          Under Federal  Reserve  policy,  a bank holding company is expected to
act as a source of  financial  strength to its bank  subsidiaries  and to commit
resources  to support such  subsidiaries.  This support may be required at times
when,  absent such policy,  the bank holding company might not otherwise provide
such support. Under these provisions,  a bank holding company may be required to
loan  money  to its  subsidiary  banks  in the  form of  capital  notes or other
instruments,  which qualify for capital under regulatory rules. Any loans by the
bank holding  company to such  subsidiary  banks are likely to be unsecured  and
subordinate to such bank's  depositors  and possibly to other  creditors of such
bank.

          The  Gramm-Leach-Bliley  Act of 1999, known as the Financial  Services
Modernization  Act of 1999 ("GLBA"),  became law on November 12, 1999 and became
effective  March 11, 2000.  The GLBA  enables bank holding  companies to acquire
insurance companies and securities firms and effectively repeals  depression-era
laws that prohibited the affiliation of banks and these other financial services
entities under a single holding company. Bank holding companies, and other types
of financial services entities,  may elect to become financial holding companies
under  the new  law,  which  will  enable  them to offer  virtually  any type of
financial  service,  or  services  incident  to  financial  services,  including
banking,   securities   underwriting,   merchant  banking  and  insurance  (both
underwriting and agency services).  The new financial services authorized by the
GLBA also may be engaged in by a "financial  subsidiary"  of a national or state
bank, with the exception of insurance or annuity underwriting, insurance company
portfolio  investments,  real estate  investment and  development,  and merchant
banking, all of which must be conducted under the financial holding company.

          To become a financial  holding  company,  a bank holding  company must
provide notice to the Federal  Reserve Board of its desire to become a financial
holding company,  and certify to the Federal Reserve Board that each of its bank
subsidiaries  is   "well-capitalized,"   "well-managed"   and  has  at  least  a
"satisfactory" rating under the CRA.

          The GLBA  establishes a system of functional  regulation,  under which
the Federal  Reserve  Board will  regulate the banking  activities  of financial
holding  companies and other federal  banking  regulators  will regulate  banks'
financial subsidiaries. The SEC will regulate securities activities of financial
holding  companies and state insurance  regulators will regulate their insurance
activities.  The GLBA also provides new protections against the transfer and use
by financial institutions of consumers' non-public, personal information.
                                       12
<PAGE>
          The implementation of the act will only serve to increase  competition
in the financial services sector by allowing many different entities,  including
banks and bank  holding  companies,  to  affiliate  and/or to merge  with  other
financial  services entities and cross-sell their financial products in order to
better serve their current and prospective customers.  At this time, the company
does not intend to seek qualifications to enter into these additional  financial
services areas.

          THE BANK.

          GENERAL.  As a national banking  association,  the Bank is supervised,
regulated  and  regularly  examined by the OCC. The Bank is also a member of the
FDIC and, as such, deposits in the Bank are insured by the FDIC up to applicable
limits.  The  operation  of the Bank is  subject to state and  federal  statutes
applicable to national banks and the  regulations of the OCC and the FDIC.  Such
statutes  and  regulations  relate to  required  reserves,  investments,  loans,
mergers and  consolidations,  issuances  of  securities,  payment of  dividends,
establishment of branches and other aspects of the Bank's operations.

          The  Bank  is  also  subject  to  the   provisions  of  the  Community
Reinvestment Act of 1977, which requires the OCC, in connection with its regular
examination of the Bank, to assess the Bank's record in meeting the credit needs
of the  communities  served  by the  Bank,  including  low and  moderate  income
neighborhoods.

          CAPITAL  REQUIREMENTS.  The OCC's minimum capital standards applicable
to national banks require the most  highly-rated  institutions  to meet a Tier 1
leverage  capital  ratio of at  least  3.0% of total  assets.  Tier 1 (or  "core
capital")  consists  of common  stockholders'  equity,  noncumulative  perpetual
preferred stock and minority  interests in consolidated  subsidiaries  minus all
intangible  assets other than limited  amounts of purchased  mortgage  servicing
rights and certain  other  accounting  adjustments.  All other banks must have a
Tier 1 leverage ratio of at least 100-200 basis points above the 3% minimum. The
OCC capital  regulations  establish a minimum leverage ratio of not less than 4%
for  banks  that  are not  highly  rated  or are  anticipating  or  experiencing
significant growth.

          OCC capital  regulations require higher capital levels for banks which
exhibit  more than a moderate  degree of risk or exhibit  other  characteristics
which necessitate that higher than minimum levels of capital be maintained.  Any
insured  bank with a Tier 1  capital  to total  assets  ratio of less than 2% is
deemed to be  operating in an unsafe and unsound  condition  pursuant to Section
8(a) of the FDIA unless the insured  bank  enters into a written  agreement,  to
which the FDIC is a party,  to correct its  capital  deficiency.  Insured  banks
operating with Tier 1 capital levels below 2% (and which have not entered into a
written  agreement) are subject to an insurance  removal  action.  Insured banks
operating with lower than the prescribed  minimum capital levels  generally will
not receive approval of applications  submitted to the FDIC. Also,  inadequately
capitalized national banks will be subject to such administrative  action as the
FDIC and OCC deem necessary.


                                       13
<PAGE>

          Federal  regulations also require that banks meet a risk-based capital
standard.  The risk-based  capital  standard  requires the  maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted  assets of 4%.
In determining the amount of risk-weighted  assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the federal  regulators believe are inherent in the type of asset or item.
The components of Tier 1 capital are equivalent to those  discussed  above under
the 3% leverage  requirement.  The  components  of Tier 2 capital are  mandatory
convertible  securities,  term subordinated  debt,  intermediate-term  preferred
stock and allowance  for possible loan and lease losses.  Allowance for possible
loan and lease  losses  includable  in  supplementary  capital  is  limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward  supplementary  capital  cannot  exceed  100% of Tier 1 capital.  The OCC
includes  in its  evaluation  of a bank's  capital  adequacy  an  assessment  of
risk-based  capital focusing  principally on broad categories of credit risk. No
measurement  framework for  assessing  the level of a bank's  interest rate risk
exposure has been codified but, effective board and senior management  oversight
of the bank's tolerance for interest rate risk is required.

          The Bank is subject to the Federal Financial Institutions  Examination
Council's  recommendation  regarding  the  adoption of  Statement  of  Financial
Accounting  Standard No. 115,  "Accounting  for Certain  Investments in Debt and
Equity  Securities."  Specifically,  the agencies determined that net unrealized
holding gains or losses on available-for-sale  debt and equity securities should
not be included when calculating core and risk-based capital ratios.

          OCC capital  requirements  are  designated  as the minimum  acceptable
standards for banks whose overall  financial  condition is fundamentally  sound,
which are well-managed and have no material or significant  financial  weakness.
The OCC  capital  regulations  state  that,  where the OCC  determines  that the
financial history or condition,  including  off-balance  sheet risk,  managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified as substandard, doubtful or
loss or otherwise  criticized,  the OCC may determine that the minimum  adequate
amount  of  capital  for  that  bank  is  greater  than  the  minimum  standards
established in the regulation.

          The Bank, following its initial stock offering, has, under the current
regulations,  sufficient  capital  to meet  its  minimum  capital  requirements.
However,  events  beyond  the  control of the Bank,  such as a  downturn  in the
economy in areas where the Bank has most of its loans,  could  adversely  affect
future earnings and,  consequently,  the ability of the Bank to meet its capital
requirements.

          PROMPT CORRECTIVE  ACTION.  The Federal Deposit Insurance  Corporation
Improvement Act of 1991 (the "FDICIA") imposes a regulatory matrix that requires
the  Federal  banking  agencies to take  prompt  corrective  action to deal with
depository  institutions that fail to meet their minimum capital requirements or
are otherwise in a troubled  condition.  The prompt corrective action provisions
require  undercapitalized  institutions  to become  subject  to an  increasingly
stringent array of restrictions, requirements and prohibitions, as their capital
levels  deteriorate and  supervisory  problems  mount.  Should these  corrective
measures prove unsuccessful in recapitalizing the institution and correcting its
problems, the FDICIA mandates that the institution be placed in receivership.

                                       14
<PAGE>
          Pursuant to regulations  promulgated under the FDICIA,  the corrective
actions that the banking  agencies either must or may take are tied primarily to
an institution's capital levels. In accordance with the framework adopted by the
FDICIA, the banking agencies have developed a classification system, pursuant to
which all banks and thrifts are placed into one of five  categories as indicated
below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                TOTAL
                                                RISK-BASED             TIER 1 RISK-
CAPITAL CATEGORY         TIER 1 CAPITAL         CAPITAL                BASED CAPITAL                OTHER
--------------------------------------------------------------------------------------------------------------------
<S>                      <C>                    <C>                    <C>                   <C>
Well-Capitalized         5% or more             10% or more            6% or more             Not subject to a
                                                                                              capital directive
--------------------------------------------------------------------------------------------------------------------

Adequately Capitalized   4% or more             8% or more             4% or more                      ___
--------------------------------------------------------------------------------------------------------------------

Under-capitalized        less than 4%           less than 8%           less than 4%                    ___
--------------------------------------------------------------------------------------------------------------------

Significantly            less than 3%           less than 6%           less than 3%                    ___
Under-capitalized
--------------------------------------------------------------------------------------------------------------------

Critically               2% or less                     ____                   ____                    ___
Under-capitalized        tangible equity
--------------------------------------------------------------------------------------------------------------------
</TABLE>
          The  undercapitalized,  significantly  undercapitalized and critically
undercapitalized  categories overlap;  therefore, a critically  undercapitalized
institution  would also be an  undercapitalized  institution and a significantly
undercapitalized  institution.  This  overlap  ensures  that  the  remedies  and
restrictions   prescribed  for  undercapitalized   institutions  also  apply  to
institutions in the lowest two categories.


         The  downgrading  of an  institution's  category  is  automatic  in two
situations: (a) whenever an otherwise well-capitalized institution is subject to
any  written  capital  order or  directive;  and (b)  where an  undercapitalized
institution  fails to submit or implement a capital  restoration plan or has its
plan  disapproved.  The federal banking  agencies may treat  institutions in the
well-capitalized,  adequately capitalized and undercapitalized  categories as if
they  were in the next  lower  capital  level  based  on  safety  and  soundness
considerations relating to factors other than capital levels.

          All insured  institutions  regardless of their level of capitalization
are  prohibited  by the FDICIA from paying any dividend or making any other kind
of capital  distribution or paying any management fee to any controlling  person
if,   following  the  payment  or   distribution,   the  institution   would  be
undercapitalized.

          FDIC  INSURANCE  ASSESSMENTS.  The  Bank is  subject  to FDIC  deposit
insurance  assessments  for the Bank Insurance  Fund. The FDIC has implemented a
                                       15
<PAGE>

risk-based  assessment  system  whereby  banks are  assessed on a sliding  scale
depending on their  placement in nine  separate  supervisory  categories.  As of
January, 1996, the highest-ranked  institutions pay the statutory annual minimum
of $2,000 for FDIC insurance. Rates for all other institutions have been reduced
by four cents per $100, as well,  leaving a premium range of 3 cents to 27 cents
per $100.

          COMMUNITY  REINVESTMENT  ACT.  On April 19,  1995,  the  Federal  bank
regulatory agencies adopted revisions to the regulations promulgated pursuant to
the Community  Reinvestment Act (the "CRA"),  which are intended to set distinct
assessment standards for financial institutions. The revised regulation contains
three  evaluation  tests:  (a) a Lending Test which  compares the  institution's
market  share of loans in low and  moderate  income areas to its market share of
loans in its entire  service  area and the  percentage  of a bank's  outstanding
loans to low-and moderate-income areas or individuals; (b) a Services Test which
evaluates the provision of services that promote the  availability  of credit to
low-and  moderate-income  areas;  and (c) an Investment Test, which evaluates an
institution's  record  of  investments  in  organizations   designed  to  foster
community development,  such as investments that benefit low and moderate income
areas or persons such as  affordable  housing and  investments  in revenue bonds
specifically aimed at low and moderate income areas and persons.  The regulation
is designed to reduce the paperwork  requirements of the current regulations and
provide regulators,  institutions and community groups with a more objective and
predictable  manner  with which to evaluate  the CRA  performance  of  financial
institutions. The rule became effective on January 1, 1996.

          FAIR LENDING.  Congress and various federal  agencies  (including,  in
addition to the bank  regulatory  agencies,  the Department of Housing and Urban
Development,  the  Federal  Trade  Commission  and the  Department  of  Justice)
(collectively the "Federal Agencies")  responsible for implementing the nation's
fair lending laws have been increasingly  concerned that prospective home buyers
and other borrowers are experiencing  discrimination  in their efforts to obtain
loans.  In recent  years,  the  Department  of Justice  has filed  suit  against
financial institutions which it determined had discriminated,  seeking fines and
restitution for borrowers who allegedly suffered from discriminatory  practices.
Most, if not all, of these suits have been settled (some for  substantial  sums)
without a full adjudication on the merits.

          On March 8, 1994, the Federal  Agencies,  in an effort to clarify what
constitutes lending  discrimination and to specify the factors the agencies will
consider in  determining  if lending  discrimination  exists,  announced a joint
policy statement detailing specific  discriminatory  practices  prohibited under
the  Equal  Credit  Opportunity  Act and the Fair  Housing  Act.  In the  policy
statement,  three methods of proving lending discrimination were identified: (a)
overt evidence of  discrimination,  when a lender  blatantly  discriminates on a
prohibited  basis;  (b) evidence of disparate  treatment,  when a lender  treats
applicants  differently  based on a  prohibited  factor  even where  there is no
showing that the treatment  was motivated by prejudice or a conscious  intention
to discriminate  against a person; and (c) evidence of disparate impact,  when a
lender applies a practice  uniformly to all  applicants,  but the practice has a
discriminatory  effect,  even where such practices are neutral on their face and
are  applied  equally,  unless the  practice  can be  justified  on the basis of
business necessity.

          FUTURE COMPLIANCE.  Statutes and regulations are regularly  introduced
                                       16
<PAGE>

which contain  wide-ranging  proposals for altering the structures,  regulations
and competitive relationships of the nation's financial institutions.  It cannot
be predicted  whether or what form any proposed  statute or  regulation  will be
adopted or the extent to which the  business of the Bank may be affected by such
statute or regulation.

          MONETARY POLICY. The earnings of the Bank are affected by domestic and
foreign economic conditions, particularly by the monetary and fiscal policies of
the United States government and its agencies.  The Federal Reserve has had, and
will  continue  to  have,  an  important  impact  on the  operating  results  of
commercial  banks  through its power to implement  national  monetary  policy in
order, among other things, to mitigate  recessionary and inflationary  pressures
by regulating  the national  money supply.  The  techniques  used by the Federal
Reserve   include   setting  the  reserve   requirements  of  member  banks  and
establishing  the discount rate on member bank  borrowings.  The Federal Reserve
also conducts open market transactions in United States government securities.

          LOANS-TO-ONE-BORROWER.  The aggregate amount of loans that the Bank is
permitted to make under  applicable  regulations to any one borrower,  including
related  entities,  is the greater of 15% of  unimpaired  capital and surplus or
$500,000.  Based on the Bank's current  capitalization of $20,535,746 the Bank's
loans-to-one  borrower  limit would be  approximately  $3,080,362.  A new "pilot
lending  program" was approved by the OCC in November 2001. The aggregate amount
of loans the Bank is permitted  to make under this program to any one  borrower,
including related entities,  is generally 25% of unimpaired capital and surplus.
These loans  consist of two  categories  which are (1) loans  secured by nonfarm
nonresidential  properties,  and (2) certain  commercial and  industrial  loans.
Based  on  the  Bank's  current   capitalization  of  $20,535,746,   the  Bank's
loan-to-one  borrower limit would be approximately  $5,133,937.  This is a three
year test program that expires September 2004. The purpose of this program is to
allow national banks to match the loan limits of state chartered institutions.

          INTERSTATE  BANKING.  On September 29, 1994, the Congress  enacted the
Riegle-Neal  Interstate Banking and Branching  Efficiency Act of 1994 (the "1994
Act"). The provisions of the 1994 Act became fully effective on June 1, 1995, at
which time eligible  bank holding  companies in any state were  permitted,  with
Federal Reserve Board approval,  to acquire banking  organizations  in any other
state. As such, all existing  regional  compacts and  substantially all existing
regional  limitations on interstate  acquisitions of banking  organizations have
been eliminated.

          The 1994 Act removed substantially all of the existing prohibitions on
interstate branching by banks subject to certain state law conditions.  In order
for an  out-of-state  bank or bank  holding  company  to  establish  a branch in
Tennessee, the bank or bank holding company must purchase an existing bank, bank
holding  company,  or branch of a bank in Tennessee  which has been in existence
for at least five years. DE NOVO interstate branching is not currently permitted
under  Tennessee  law. The Bank is ineligible to be acquired by any bank or bank
holding company, whether inter-or intrastate, until it becomes five years old.

          CHANGES IN CONTROL  RESTRICTIONS.  Federal law and regulation requires
the  consent of the OCC and the FDIC  prior to any  person or company  acquiring
"control" of a national bank. Upon acquiring  control,  a company will be deemed
to be a bank holding  company and must register with the Federal  Reserve Board.
Conclusive control is presumed to exist if, among other things, an individual or
company  acquires  more  than 25% of any  class  of  voting  stock of the  Bank.
                                       17
<PAGE>

Rebuttable  control  is  presumed  to exist if,  among  other  things,  a person
acquires more than 10% of any class of voting stock and the issuer's  securities
are  registered  under Section 12 of the Exchange Act or the person would be the
single largest shareholder.  Restrictions applicable to the operations of a bank
holding  company and conditions that may be imposed by the Federal Reserve Board
in  connection  with its approval of a company to become a bank holding  company
may deter companies from seeking to obtain control of the Bank.

          Tennessee law currently  prohibits a bank from being acquired until it
has been in  existence  for at least  five  years,  except  in  certain  limited
circumstances.

          The Bylaws of the Bank limit any  shareholder's  ownership  to no more
than  five  percent  (5%)  of  its  Common  Stock  except  in  certain   limited
circumstances  and in connection  with a sale,  merger,  consolidation  or other
corporate reorganization of the Bank.


ITEM 2.  DESCRIPTION OF PROPERTY

          The Bank  currently  operates  from its main  office  in  Sevierville,
Tennessee and four branch  offices  located in  Gatlinburg,  Pigeon  Forge,  and
Seymour,  Tennessee.  The main office is located at 300 East Main,  Sevierville,
Tennessee  37862 and contains  approximately  24,000 square feet and is owned by
the Bank.

          The first Gatlinburg branch was built in 1999 and is located at 960 E.
Parkway.  It contains  approximately 4,800 square feet. The Bank leases the land
at this location.  The second  Gatlinburg  branch is a walk-up branch located at
745 Parkway,  which lies in the heart of the tourist district.  The Pigeon Forge
branch contains  approximately  3,800 square feet and is located at 3104 Teaster
Lane, Pigeon Forge,  Tennessee.  The Seymour branch contains approximately 3,800
square feet and is located on Chapman Highway, Seymour, Tennessee.

          Construction  of the fifth  branch  office,  on land  purchased by the
Bank, was begun in late December 2002. This branch office will be located in the
Kodak  community of Sevierville on Highway 66 - Winfield Dunn Parkway,  which is
the main corridor  from  Interstate  40 into Sevier  County.  The branch will be
centrally  located  between  Interstate 40 and the downtown area of Sevierville,
and  is one of  the  fastest  growing  commercial  areas  in the  county.  It is
anticipated the construction will be completed in June 2003.

          Also,  approximately  eleven acres were  purchased in late December in
Sevierville,  and plans are currently  being  developed for an operation  center
that will be  approximately  24,000 square feet.  Construction is anticipated to
begin  during late spring or early  summer of 2003,  and should be  completed in
approximately twelve months.

          Management  believes  that the physical  facilities  maintained by the
Bank are suitable for its current operations.
                                       18
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

          The Company is not aware of any material pending legal  proceedings to
which the Company or the Bank is a party or to which any of their properties are
subject,  other  than  ordinary  routine  legal  proceedings  incidental  to the
business of the Bank.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          No matters  were  submitted to a vote of the  Company's  shareholders,
through the  solicitation of proxies or otherwise,  during the fourth quarter of
2002.

                                     PART II

ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          There is no public  market for the  Company's  shares  which have been
traded inactively in private transactions. Therefore, no reliable information is
available as to trades of common stock or as to the prices at which common stock
has traded.  Management has reviewed the limited information available as to the
ranges at which the Company's  common stock has been sold.  The following  table
sets forth the estimated  price range for sales of common stock for each quarter
of the last two years.  The following data regarding the Company's  common stock
is provided for information purposes only and should not be viewed as indicative
of the actual or market value of the common stock:

<TABLE>
<CAPTION>
                                                                          Estimated Price Range
                                                                                Per Share
                                                                   --------------------------------------
<S>                                                                     <C>                 <C>
2002:                                                                    HIGH                LOW
First Quarter.....................................................      $15.00              $15.00
Second Quarter....................................................       15.10               13.00
Third Quarter.....................................................       15.10               15.00
Fourth Quarter....................................................       15.00               14.00

2001:
First Quarter.....................................................      $15.00              $15.00
Second Quarter....................................................       15.00               15.00
Third Quarter.....................................................       15.00               15.00
Fourth Quarter....................................................       15.00               15.00
</TABLE>
          As of the date of this  filing,  the Company has  approximately  1,800
holders of record of its Common  Stock  (1,500  households).  The Company has no
other class of securities issued or outstanding.

         No  dividends  have been paid or proposed  to be paid on the  Company's
shares.  Federal Banking laws impose certain restrictions on the payment of cash
dividends by the Bank and the Company.  See "ITEM 1. BUSINESS - SUPERVISION  AND
REGULATION."
                                       19
<PAGE>
          The following table sets forth  information  relating to the Company's
equity compensation plans as of December 31, 2002:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                      EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------------------
                                                                                                           Number of
                                                                                                           securities
                                                                                                           remaining
                                                               Number of                               future issuance
                                                            securities to be                              under equity
                                                               issued upon        Weighted-average        compensation
                                                               exercise of       exercise price of      plans (excluding
                                                               outstanding          outstanding            securities
                                                           options, warrants    options, warrants        reflected in
                                                               and rights            and rights              column
                                                                 (a)                  (b)                     (a))
----------------------------------------------------------- ------------------- ---------------------- --------------------
<S>                                                                  <C>                  <C>                     <C>
Equity compensation plans approved by
  security holders . . . . . . . . . . . . . . . . . . . .            132,965                 $10.00               84,915
----------------------------------------------------------- ------------------- ---------------------- --------------------
Equity compensation plans not approved by
  security  holders . . . . . . . . . . . . . . . . . . .            9,600(1)                 $10.00                  -0-
----------------------------------------------------------- ------------------- ---------------------- --------------------

          Total  .  . . . . . . . . . . . . . . . . . . .             142,565              1,425,650               84,915
----------------------------------------------------------- ------------------- ---------------------- --------------------
</TABLE>
(1)      Represent  options  granted  to  Ken  Simonis,  the  former  CFO of the
         Company, pursuant to a severance agreement.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS

         The following is a discussion of the Company's  financial  condition at
December  31, 2002,  and 2001,  and the results of  operations  for the two-year
period ended  December 31, 2002.  The purpose of this  discussion is to focus on
information  about the Company's  financial  condition and results of operations
that  are  not  otherwise  apparent  from  the  audited  and  interim  financial
statements.  Reference  should  be made to  those  statements  and the  selected
financial data presented  elsewhere in this Report for an  understanding  of the
following discussion and analysis.  Since the Company conducts no activity other
than  holding  stock  in the  Bank,  the  discussion  focuses  on the  financial
condition and results of operation of the Bank.

FORWARD-LOOKING STATEMENTS

         The following  discussion contains certain  forward-looking  statements
that are based on certain assumptions and describe future plans, strategies, and
our expectations.  These forward-looking  statements are generally identified by

                                       20
<PAGE>
use  of the  words  "believe,"  "expect,"  "intend,"  "anticipate,"  "estimate,"
"project," or similar expressions.  Our ability to predict results or the actual
effect of future plans or  strategies  is  inherently  uncertain.  Factors which
could have a material  adverse  effect on our  operations  include,  but are not
limited to, changes in interest rates, general economic conditions,  legislation
and regulation,  monetary and fiscal policies of the U.S. Government,  including
policies of the U.S.  Treasury  and the Federal  Reserve  Board,  the quality or
composition  of our loan or  investment  portfolios,  demand for loan  products,
deposit flows,  competition,  demand for financial  services in our market area,
and accounting  principles and  guidelines.  You should consider these risks and
uncertainties  in  evaluating  forward-looking  statements  and should not place
undue reliance on such  statements.  We will not publicly  release the result of
any  revisions  that may be made to any  forward-looking  statements  to reflect
events or  circumstances  after the date of such  statements  or to reflect  the
occurrence of anticipated or unanticipated events.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, AND 2000

NET INCOME

         2002 COMPARED TO 2001.  For the year ended  December 31, 2002, the Bank
recorded net income of $1,408,982. The increase in net income compared with 2001
was  $263,413,  or  approximately  23%.  The  increase  in net income in 2002 as
compared with 2001 was primarily because of increases in interest-earning assets
and  liabilities  which  resulted  in an  increase  in net  interest  income  of
$1,946,000,  or approximately 39%. This net increase of $1,946,000 was offset by
$1,683,000  increases in other  expenses,  netted with  increases in noninterest
income.

NET INTEREST INCOME

TABLE 1:  AVERAGE BALANCES, INTEREST INCOME, AND INTEREST EXPENSE

         The following table contains  condensed  average balance sheets for the
years  indicated.  In  addition,  the amount of the Bank's  interest  income and
interest   expense   for  each   category   of   interest-earning   assets   and
interest-bearing  liabilities  and  the  related  average  interest  rates,  net
interest spread and net yield on average interest earning assets are included.
<TABLE>
<CAPTION>
TABLE 1                                         ANALYSIS OF NET INTEREST INCOME
                                               FOR THE YEARS ENDED DECEMBER 31,

                                                              2002                                 2001
                                                 --------------------------------    ---------------------------------
                                                 Average      Income/     Yield/     Average      Income/      Yield/
                                                 Balance      Expense      Rate      Balance      Expense       Rate
                                                 --------     --------    -------    ---------    ---------    -------
                                                                        (DOLLARS IN THOUSANDS)
Assets:
<S>                                             <C>            <C>       <C>         <C>               <C>       <C>
Investment securities(1)   ..................   $  25,466  $   1,231     4.83%       20,028        1,223     6.11%
Unrealized gains on available for sale ......         281       --       --             270         --       --
securities
Federal funds sold ..........................       3,451         51     1.48%        7,187          259     3.60%
Loans (2) ...................................     122,177      9,231     7.56%       88,638        7,892     8.90%
Allowance for loan losses ...................      (1,234)      --       --            (741)        --       --
Cash and due from banks .....................       3,729       --       --           3,652         --       --
Other assets ................................      12,413       --       --           7,703         --       --
   Total ....................................     166,283       --       --         126,737         --       --
Total interest-earning assets ...............     151,375     10,513     6.95%      116,123        9,374     8.07%
Liabilities:
Noninterest-bearing demand deposits .........      21,046       --       --          15,720         --       --
Interest bearing demand  and savings deposits      57,465      1,066     1.86%       44,237        1,357     3.07%
Time deposits ...............................      69,432      2,392     3.45%       53,705        2,998     5.58%
   Total deposits ...........................     147,943       --       --         113,662         --       --
Other borrowings ............................       5,297        156     2.95%        1,466           53     3.62%
Other liabilities ...........................         780       --       --             569         --       --
Shareholders' equity ........................      12,263       --       --          11,040         --       --
   Total ....................................     166,283       --       --         126,737         --       --
Total interest-bearing liabilities ..........     132,194      3,614     2.73%       99,408        4,408     4.43%
Net interest income .........................        --        6,899     --            --          4,966     --
Net interest spread (3) .....................        --         --       4.22%         --           --       3.64%
Net interest margin (4) .....................        --         --       4.56%         --           --       4.28%
</TABLE>
_____________________
                                       21
<PAGE>

(1)  Income from  investment  securities has been reduced by $40,000 and $27,000
     at December 31, 2002,  and December 31, 2001,  respectively.  These amounts
     relate to the dividend  income from  Federal  Reserve Bank and Federal Home
     Loan Bank stock.  Due to regulatory  accounting  principles,  this stock is
     included in the other assets category of the average balances.
(2)  Interest  income  from loans  includes  total fee  income of  approximately
     $989,000  and  $788,000  for the years  ended  December  31, 2002 and 2001,
     respectively.
(3)  Interest  rate spread is the  weighted  average  yield on  interest-earning
     assets minus the average rate on interest-bearing liabilities.
(4)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.

TABLE 2 - RATE AND VOLUME ANALYSIS

         The following  table  describes the extent to which changes in interest
rates and  changes in volume of  interest-earning  assets  and  interest-bearing
liabilities  have  affected the Bank's  interest  income and expense  during the
years   indicated.   For  each   category   of   interest-earning   assets   and
interest-bearing liabilities, information is provided on changes attributable to
(1) change in volume  (change in volume  multiplied by previous year rate);  (2)
change in rate  (change  in rate  multiplied  by  current  year  volume);  and a
combination  of change in rate and change in  volume.  The  changes in  interest
income  and  interest  expense  attributable  to both  volume and rate have been
allocated  proportionately  to the  change  due to volume  and the change due to
rate.

                   ANALYSIS OF CHANGES IN NET INTEREST INCOME
                        FOR THE YEARS ENDED DECEMBER 31,
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                      2002 COMPARED TO 2001
                                                       INCREASE (DECREASE)
                                                        DUE TO CHANGE IN
                                            --------------------------------------
                                                RATE         VOLUME         TOTAL
                                            ----------    ----------    ----------
Income from interest-earning assets:
<S>                                              <C>            <C>            <C>
  Interest and fees on loans .............       $(1,637)       $ 2,976        $ 1,339
  Interest on securities    ..............          (325)           333              8
  Interest on Federal funds sold .........           (74)          (134)          (208)
          Total interest income ..........        (2,036)         3,175          1,139

Expense from interest-bearing liabilities:
  Interest on interest-bearing deposits ..          (695)           404           (291)
  Interest on time deposits ..............        (1,484)           878           (606)
          Interest on other borrowings ...           (35)           138            103
          Total interest expense .........        (2,214)         1,420           (794)
          Net interest income ............           178          1,755          1,933
</TABLE>
     2002  COMPARED  TO  2001.  Net  interest  income increased by approximately
$1,933,000  for  the  year  ended December 31, 2002, or 39%. The increase in net
interest  income  is  due  to  an  increase  of  $35.3  million  in  average
interest-earning  assets,  an  increase  of
                                       22
<PAGE>

30%.  During  the  same  period,  the  increase  in  average  interest-bearing
liabilities  was  $32.8  million,  an  increase  of 33%. The net interest margin
increased  during the year from 4.28% to 4.56%. The increase in the net interest
margin  reflects  the  volume of interest-earning assets that were originated in
years  prior  to  2002, therefore, during 2002, the net interest margin reflects
past  interest  rate  environments,  as  well  as  the current rate environment.
Additionally,  competition for loans and deposits has a direct effect on the net
interest  margin.  The overall yield on interest-earning assets decreased by 112
basis points to 6.95% in 2002, and the rate paid on interest-bearing liabilities
decreased 170 basis points to 2.73%, resulting in a net increase in the interest
rate  spread  of  58  basis  points  to  4.22%.

         The most  significant  increases  in  average  interest-earning  assets
consisted  of  increases  of $33  million  and $5  million  in total  loans  and
investment securities,  respectively,  for the year ended December 31, 2002. The
average rates paid on interest-earning  assets has decreased moderately in 2002,
as  discussed  previously.  The most  significant  change was a 134 basis  point
decrease in the yield on loans in 2002.

         Average  interest-bearing  demand and savings deposits grew $13 million
and average time  deposits  grew by $16 million for the year ended  December 31,
2002. The average rate paid on these deposits in 2002 was 1.86% and 3.45%,  down
from 3.07% and 5.58%, respectively in 2001.

         The growth in average  balances  accounted  for  $1,761,000  of the net
$1,946,000 increase in net interest income for the year ended December 31, 2002.
The  changes in yields and rates  accounted  for an  increase of $185,000 in net
interest income.

PROVISION FOR LOAN LOSSES

         For the year ended  December 31, 2002,  the  provision  for loan losses
increased by $314,000 to $780,000,  compared to $466,000 for the prior year. The
increase in 2002 was based on management's  evaluation of the overall  allowance
for loan losses which included a decrease in net charge-offs of $158,000. Due to
a lack of historical  charge off  experience,  and an increase in total loans in
the amount of $44 million,  management  has  continued to fund the allowance for
loan losses with the intention of reaching a level comparable to peer banks.

         The  provision for loan losses is based on  management's  evaluation of
economic  conditions,   volume  and  composition  of  the  loan  portfolio,  the
historical charge off experience, the level of nonperforming and past due loans,
and other  indicators  derived from  reviewing  the loan  portfolio.  Management
performs such reviews  quarterly and adjusts the level of the allowance for loan
losses.  At December 31, 2002,  the allowance for loan losses was believed to be
adequate to provide for potential losses in the loan portfolio.

         The allowance for loan losses represents management's assessment of the
risk associated  with extending  credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the  allowance  for loan  losses and the  appropriate  provision  required to
maintain a level  considered  adequate to absorb  anticipated  loan  losses.  In
assessing the adequacy of the allowance,  management  reviews the size,  quality
and risk of loans in the  portfolio.  Management  also considers such factors as
the Bank's loan loss experience, the amount of past due and nonperforming loans,
specific known risk, the status and amount of nonperforming  assets,  underlying
collateral values securing loans,  current and anticipated  economic  conditions
                                       23
<PAGE>

and other factors which affect the allowance  for potential  credit  losses.  An
analysis of the credit  quality of the loan  portfolio  and the  adequacy of the
allowance  for loan  losses  is  prepared  by the  Bank's  loan  committee  on a
quarterly basis.

         The Bank's  allowance  for loan  losses is also  subject to  regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the  methodology  used to calculate the allowance for loan losses and
the size of the allowance for loan losses in comparison to a group of peer banks
identified  by the  regulators.  During  their  routine  examinations  of banks,
regulatory  agencies  may require a bank to make  additional  provisions  to its
allowance  for loan  losses  when,  in the  opinion  of the  regulators,  credit
evaluations and allowance for loan loss methodology differ materially from those
of management.

         While it is the Bank's policy to charge off in the current period loans
for which a loss is considered  probable,  there are additional  risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes  of  loans.  Because  these  risks  include  the  state of the  economy,
management's  judgment  as to the  adequacy  of  the  allowance  is  necessarily
approximate and imprecise.

         Asset quality was somewhat static for the year ended December 31, 2002.
Nonaccrual  loans as a  percentage  of total  loans  increased  from 0% to 0.11%
during 2002.  The ratio of  nonperforming  assets to total loans increased from
0.02% to 0.17% for the same period. At December 31, 2002, the allowance for loan
losses as a  percentage  of total loans was 1.09%  compared to 0.83% at December
31,  2001.  The  increase  in the  allowance  for loan  losses to total loans is
reflective of the continued funding of the allowance for loan losses in order to
achieve peer bank average levels.

         The  allowance  for  loan  losses  at  December 31, 2002, was
approximately $1,595,000, a net increase of approximately $748,000 for the year.
The  net  charge-offs  decreased  from  approximately  $190,000  in  2001  to
approximately  $32,000  in  2002,  representing  a net charge-off ratio of 0.03%
compared  to  0.21%  in  2001.  The  allowance to nonaccruing loans was 1003% at
December  31,  2002.  There  were  no  nonaccruing  loans  at December 31, 2001.

         The  following  table  presents at the dates  indicated  the  aggregate
nonperforming loans for the following categories:
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                               -----------------------------
                                                                                   2002             2001
                                                                               -------------     -----------
                                                                                     (DOLLARS IN THOUSANDS)

<S>                                                                                    <C>          <C>
Loans accounted for on a nonaccrual basis ......................................       $  159       $    0

Loans contractually past due ninety days or more as
   to interest or principal payments and still accruing ........................           46           35

Loans,  the terms of which have been  renegotiated  to  provide a  reduction  or
   deferral of interest or principal because of deterioration in the financial
   position of the borrower ....................................................            0            0
                                       24
<PAGE>
Loans now current about which there are serious
   doubts as to the ability of the borrower to comply
   with present loan repayment terms ...........................................        2,424          968

         The reduction in interest income associated with nonaccrual loans as of
December 31, 2002 is as follows:

Interest income that would have been recorded on
   nonaccrual loans under original terms .......................................       $5,964
Interest income that was recorded
   on nonaccrual loans .........................................................       $3,311
        Reduction in interest income ...........................................       $2,653
</TABLE>
COMMITMENTS AND LINES OF CREDIT

         In the ordinary course of business, the Bank has granted commitments to
extend credit and standby  letters of credit to approved  customers.  Generally,
these  commitments  to extend credit have been granted on a temporary  basis for
seasonal or inventory requirements and have been approved by the loan committee.
These  commitments are recorded in the financial  statements as they are funded.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the  commitment  amounts expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash requirements.

         Following is a summary of the  commitments  outstanding at December 31,
2002 and 2001.

                                     2002          2001
                                   ---------     --------
Commitments to extend credit       $26,535       $28,547
Standby letters of credit ..         1,694         1,579
    TOTALS .................       $28,229       $30,126

         Commitments to extend credit include  unused  commitments  for open-end
lines secured by 1-4 family  residential  properties,  commitments to fund loans
secured by commercial real estate,  construction  loans, land development loans,
and other  unused  commitments.  Commitments  to fund  commercial  real  estate,
construction,  and land development loans decreased by $1.05 million at December
31, 2002 compared to 2001. This decrease is due to the Bank's customers  drawing
down the balance of their unused commitments,  and a stabilization in the amount
of these types of loans being issued.

                                       25
<PAGE>
         The following  table  summarizes the allowance for loan losses for each
year.
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                           ----------------------------------
                                                                 2002             2001
                                                           ---------------- -----------------
                                                                 (DOLLARS IN THOUSANDS)

<S>                                                             <C>             <C>
Average balance of loans outstanding ....................       $122,177        $ 88,638
Balance of allowance for loan losses at beginning of year            847             571
Charge-offs:
   Real estate - mortgage ...............................             26              35
   Consumer .............................................             19              10
   Commercial ...........................................              0             146

Recoveries:
   Real estate - mortgage ...............................              0               0
   Consumer .............................................             13               1
   Commercial ...........................................              0               0

Net charge-offs .........................................             32             190
Additions to allowance charged to operations ............            780             466
Balance of allowance charged to operations ..............          1,595             847
Ratio of net loan charge-offs during the year to
   average loans outstanding during the year ............           1.31%           0.96%
         The following table summarizes the allocation of the allowance for loan
losses to types of loans as of the indicated dates.


                                             YEAR ENDED DECEMBER 31,
                 --------------------------------------------------------------------------
                                  2002                                  2001
                 ------------------------------------ -------------------------------------
                                        PERCENT OF                              PERCENT OF
                                       LOANS IN EACH                           LOANS IN EACH
                                        CATEGORY TO                             CATEGORY TO
                        AMOUNT          TOTAL LOANS             AMOUNT          TOTAL LOANS
                 --------------- -------------------- ---------------- --------------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                    <C>                    <C>              <C>                    <C>
Commercial             $  7,587               5.18%            $  8,403               8.20%
Real estate             132,792              90.73%              89,047              86.94%
Consumer ..               5,989               4.09%               4,980               4.86%
                       $146,368             100.00%            $102,430             100.00%
</TABLE>

OTHER INCOME

     2002  COMPARED TO 2001. Other income increased by approximately $607,000 in
2002,  or  48%, compared to 2001. Deposit and service charge income increased by
approximately  $177,000  for  the year ended December 31, 2002. This increase is
due  primarily  to  an  increase  of approximately $112,000 in NSF and overdraft
fees.

                                       26
<PAGE>
OTHER EXPENSES

     2002  COMPARED  TO  2001.  Other  expenses  increased  during  2002  by
approximately  $1,409,000  compared  to  the  same  period in 2001. Salaries and
employee benefits increased by approximately $798,000 for the year. The increase
in  salaries  and employee benefits includes normal increases in salaries, group
insurance,  payroll  taxes,  profit  sharing  and employee incentives along with
increases  directly  related  to an increased number of employees. The number of
full-time  equivalent  employees  increased by 20 to 91 as of December 31, 2002.
Equipment and occupancy expenses combined increased by $322,000. The increase in
equipment  and  occupancy  expenses is related to the new branch which opened in
Seymour,  Tennessee,  in  Sevier  County. Also, the addition of twenty employees
added  to  the  increase  in  expenses  related  to  equipment.

BALANCE SHEET REVIEW

         2002 COMPARED TO 2001.  Total average assets increased in 2002 by $37.5
million,  or  29%. The most significant increase in assets came in the growth of
the  loan  portfolio,  which  grew  $33.5  million,  or  38%.  Total  average
interest-earning  assets  increased by $35.3 million, or 30% in 2002 as compared
to 2001. Other average assets increased by $1.3 million in 2002 to $2.2 million.
The  increase  in other assets consists primarily of the Bank's purchase of life
insurance  on  key  employees  and directors which had a cash surrender value of
$2,928,000  at  December  31,  2002.

         Total average deposits  increased by $34.3 million,  or 30%, which, for
the most part,  funded the asset  growth.  Average  non-interest-bearing  demand
deposits increased by $5.3 million, or 34%, average  interest-bearing demand and
savings increased by $13.2 million,  or 30%, and average time deposits increased
by $15.7 million, or 29%.

         Stockholders' equity increased by $1.5 million. This increase reflected
net  earnings of $1.4 million. Accumulated other comprehensive income represents
the net unrealized gains on securities available-for-sale which increased during
2002  by  $82,000  to  $158,000,  net  of  taxes.

SECURITIES PORTFOLIO

         The  carrying   amounts  of  securities  at  the  dates  indicated  are
summarized as follows:

                                              DECEMBER 31,
                          -----------------------------------------------------
                                           2002              2001
                          -------------------------  --------------------------
                                          (DOLLARS IN THOUSANDS)
U.S. Treasury and government
    agencies and corporations            $ 2,064            $19,072
Mortgage-backed securities ..            $22,560            $15,766


         The carrying  amounts of securities in each category as of December 31,
2002, are shown in the following table according to maturity classifications.

                                       27
<PAGE>
                                               U.S. TREASURY AND
                                              GOVERNMENT AGENCIES
                                          AND CORPORATIONS, INCLUDING
                                          MORTGAGE-BACKED SECURITIES
                                         ------------------------------
                                                  CARRYING
                                                   AMOUNT
                                         ------------------------------
                                             (DOLLARS IN THOUSANDS)
One year or less .................               $    --

After one year through five years                    532
After five years through ten years                 1,532
After ten years ..................                22,560
                                                 $24,624

LOAN PORTFOLIO

         TYPES OF LOANS

         The amount of loans outstanding at the indicated dates are shown in the
following table according to the type of loan.
<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31,
                                                 -----------------------------------------
                                                               2002                2001
                                                 ----------------------------------------
                                                       (DOLLARS IN THOUSANDS)

<S>                                                          <C>                 <C>
Commercial, financial, agricultural .............            $  7,542            $  8,403
Real estate - construction, development, vacation            $ 39,183            $ 24,060
Real estate - mortgage ..........................            $ 93,609            $ 64,987
Consumer and other ..............................            $  6,034            $  4,980

Less allowance for loan losses ..................            $  1,595            $    847
Loans, net ......................................            $144,773            $101,583
</TABLE>
         MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES

         Total loans as of December 31, 2002,  are shown in the following  table
according to maturity  classifications  (1) one year or less, (2) after one year
through five years, and (3) after five years.

                                            (DOLLARS IN
MATURITY:                                    THOUSANDS)
                                          --------------
One year or less ................            $48,868
After one year through five years            $88,124
After five years ................            $11,218


DEPOSITS

         The  average  amount  of  deposits  and  average  rates  paid  thereon,
classified as to noninterest-bearing  demand deposits,  interest-bearing  demand
and savings deposits and time deposits,  for the periods indicated are presented
below.

                                       28
<PAGE>
<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                     --------------------------
                                                                  2002                     2001
                                                    --------------------------------------------------------
                                                        AMOUNT         RATE          AMOUNT         RATE
                                                    ---------------------------- --------------- -----------
                                                                    (DOLLARS IN THOUSANDS)

<S>                                                     <C>                        <C>
Noninterest-bearing demand deposits ........            $ 21,046     0%            $ 15,720         0%
Interest-bearing demand and savings deposits            $ 57,465   1.86%           $ 44,237      3.07%
Time deposits ..............................            $ 69,432   3.45%           $ 53,705      5.58%
                                                        --------                   --------
                                                        $147,943                   $113,662
                                                        ========                   ========
</TABLE>
         The  amounts  of time  certificates  of  deposit  issued in  amounts of
$100,000 or more as of December 31, 2002, are shown below by category,  which is
based on time  remaining  until  maturity of (1) three months or less,  (2) over
three  through  six  months,  (3) over six  through 12  months,  and (4) over 12
months.

                                               (DOLLARS IN
                                                THOUSANDS)

Three months or less ...............            $ 9,964
Over three months through six months            $16,629
Over six months through 12 months ..            $12,820
Over 12 months .....................            $ 6,308


LIQUIDITY

         Liquidity  represents  the  ability to meet the needs of  customers  to
withdraw funds from deposit  accounts,  to borrow funds and to meet their credit
needs.  The Bank  manages  its  liquidity  needs in such a way that the needs of
depositors and borrowers are met on a timely basis so that the operations of the
Bank are not  interrupted.  Sources of  liquidity  available to meet these needs
include  cash  on  deposit,   federal  funds,  securities  available  for  sale,
maturities of securities,  and principal payments on loans. Growth in the Bank's
deposit  base  provides an  additional  source as does  access to funds  through
relationships with correspondent banks.  Liquidity needs at the Bank can also be
met through loan participations sold to other financial institutions.

         At December 31, 2002, the liquidity position of the Bank was considered
adequate and within guidelines set forth in the Bank's liquidity policy.

REGULATORY CAPITAL REQUIREMENTS

         The Bank is  subject  to  minimum  capital  standards  as set  forth by
federal bank regulatory agencies.

         The Bank's  capital for  regulatory  purposes  differs  from the Bank's
equity as determined under generally accepted accounting principles.  Generally,
"Tier 1" regulatory  capital will equal capital as  determined  under  generally
accepted accounting principles less any unrealized gains or losses on securities
available for sale while "Tier 2" capital includes the allowance for loan losses
up to certain  limitations.  Total  risk based  capital is the sum of Tier 1 and
Tier 2 capital.  The Bank's capital ratios and required minimums at December 31,
2002, are shown below:
                                       29
<PAGE>
<TABLE>
<CAPTION>
                                                             MINIMUM
                                                           REGULATORY
                                                           REQUIREMENT           ACTUAL
                                                    ----------------------------------------------

<S>                                                           <C>               <C>
Tier 1 capital to risk adjusted assets ............            4.00%             9.75%
Total capital to risk adjusted assets .............            8.00%            11.98%
Tier 1 leverage ratio (to average quarterly assets)            4.00%            13.00%
</TABLE>

Total  capital  at the Bank also has an  important  effect on the amount of FDIC
insurance  premiums paid.  Institutions  not  considered  well  capitalized  are
subject to higher rates for FDIC insurance.

ASSET/LIABILITY MANAGEMENT

         It is the Bank's  objective to manage assets and liabilities to provide
a  satisfactory,  consistent  level of  profitability  within the  framework  of
established cash, loan,  investment,  borrowing,  and capital policies.  Certain
officers  within the Bank are charged  with the  responsibility  for  monitoring
policies and procedures  that are designed to ensure  acceptable  composition of
the asset/liability mix.

         The Bank's  asset/liability  mix is monitored on a regular basis with a
report reflecting the interest rate sensitive assets and interest rate sensitive
liabilities  being  prepared  and  presented  to  the  Board  of  Directors  and
management's asset/liability committee on a quarterly basis. The objective is to
monitor  interest rate  sensitive  assets and  liabilities so as to minimize the
impact of  substantial  movements  in interest  rates on  earnings.  An asset or
liability  is  considered  to be interest  rate-sensitive  if it will reprice or
mature within the time period  analyzed,  usually one year or less. The interest
rate-sensitivity gap is the difference between the  interest-earning  assets and
interest-bearing  liabilities  scheduled  to mature or reprice  within such time
period. A gap is considered positive when the amount of interest  rate-sensitive
assets  exceeds  the amount of  interest  rate-sensitive  liabilities.  A gap is
considered  negative  when the  amount of  interest  rate-sensitive  liabilities
exceeds the interest  rate-sensitive  assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income,  while
a  positive  gap would tend to result in an  increase  in net  interest  income.
Conversely, during a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income, while a positive gap would tend
to adversely  affect net interest  income.  If the Bank's assets and liabilities
were  equally  flexible  and moved  concurrently,  the impact of any increase or
decrease in interest rates on net interest income would be minimal.

         A simple  interest rate "gap" analysis by itself may not be an accurate
indicator  of how net  interest  income  will be affected by changes in interest
rates.  Accordingly,  the Bank also  evaluates  how the  repayment of particular
assets  and  liabilities  is  impacted  by  changes in  interest  rates.  Income
associated   with   interest-earning    assets   and   costs   associated   with
interest-bearing  liabilities  may  not be  affected  uniformly  by  changes  in
interest rates.  In addition,  the magnitude and duration of changes in interest
rates  may have a  significant  impact  on net  interest  income.  For  example,
although  certain assets and liabilities may have similar  maturities or periods
of repricing,  they may react in different degrees to changes in market interest
rates.  Interest rates on certain types of assets and  liabilities  fluctuate in
advance of changes in general market rates,  while interest rates on other types
may lag behind changes in general  market rates.  In addition,  certain  assets,
                                       30
<PAGE>

such as adjustable rate mortgage loans, have features  (generally referred to as
"interest  rate caps"),  which limit changes in interest  rates.  Prepayment and
early withdrawal levels also could deviate  significantly  from those assumed in
calculating  the  interest  rate gap.  The ability of many  borrowers to service
their debts also may decrease in the event of an interest rate increase.
<TABLE>
<CAPTION>
                        ANALYSIS OF INTEREST SENSITIVITY
                             AS OF DECEMBER 31, 2002
                             (DOLLARS IN THOUSANDS)

                                                 0 - 3          3 - 12           1 - 2            OVER 2
                                                MONTHS          MONTHS           YEARS             YEARS            TOTAL
                                             --------------  -------------- ----------------   --------------    -------------

<S>                                               <C>                    <C>              <C>              <C>       <C>
Federal funds sold ........................       $ 10,225               $-               $-               $-        $ 10,225
Securities ................................          3,044            1,318             --             20,262          24,624
Loans (1) .................................         71,598           27,000           15,444           30,284         144,326
                                                  --------         --------         --------         --------        --------
              Total interest-earning assets       $ 84,867         $ 28,318         $ 15,444         $ 50,546        $179,175
                                                  --------         --------         --------         --------        --------
Interest-bearing liabilities:
     Interest-bearing demand deposits .....       $ 61,139               $-               $-               $-        $ 61,139
     Savings ..............................          3,262             --               --               --             3,262
     Time deposits ........................         20,297           51,594           10,693            3,930          86,514
     Other borrowings .....................          6,000             --               --               --             6,000
                                                  --------         --------         --------         --------        --------
              Total interest-bearing ......         90,698           51,594           10,693            3,930         156,915
                  liabilities
                                                  --------         --------         --------         --------        --------

Interest rate sensitivity gap .............       $ (5,836)        $(73,776)        $  4,751         $ 46,616        $ 22,260
                                                  ========         ========         ========         ========        ========

Cumulative interest rate sensitivity gap ..       $ (5,836)        $(29,112)        $(24,361)        $ 22,255
                                                                   ========         ========         ========

Interest rate sensitivity gap ratio .......          (6.88%)         (82.20%)          30.76%           92.22%
                                                                   ========         ========         ========

Cumulative interest rate sensitivity gap ..          (6.88%)         (25.72%)         (18.94%)          12.42%
ratio
</TABLE>
__________________
(1) Includes nonaccrual loans.

         The above table  summarizes  interest-sensitive  assets and liabilities
for the Bank as of December 31, 2002.  Adjustable rate loans are included in the
period in which their interest  rates are scheduled to adjust.  Fixed rate loans
are included in the periods in which they are  anticipated to be repaid based on
scheduled  maturities and  anticipated  prepayments.  Investment  securities are
included in their  period of  maturity  while  mortgage  backed  securities  are
included according to expected repayment.  Certificates of deposit are presented
according to contractual maturity.

         At December 31, 2002,  the Bank's  cumulative  one-year  interest  rate
sensitivity  gap ratio was (14.27%).  This indicates  that the  interest-earning
assets   will   reprice   during   this   period  at  a  rate  slower  than  the
interest-bearing  liabilities.  The  Bank's  experience  has  been  that not all
liabilities  shown as being  subject  to  repricing  will in fact  reprice  with
changes in market  rates.  The Bank has a base of core  deposits  consisting  of
interest bearing  checking  accounts and passbook savings accounts whose average
balances and rates paid thereon will not fluctuate with changes in the levels of
market interest rates.
                                       31
<PAGE>
EFFECTS OF INFLATION

         The Bank's consolidated financial statements and related data presented
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles  which  require the measure of  financial  position  and  operational
results  in  terms of  historic  dollars,  without  considering  changes  in the
relative purchasing power of money over time due to inflation.

         Inflation   generally  increases  the  costs  of  funds  and  operating
overhead, and to the extent loans and other assets bear viable rates, the yields
on such assets.  Unlike most industrial  companies,  virtually all of the assets
and liabilities of a financial  institution are monetary in nature. As a result,
interest rates generally have a more significant  effect on the performance of a
financial  institution  than the  effects of  general  levels of  inflation.  In
addition,  inflation affects financial  institutions' cost of goods and services
purchased,  the cost of salaries and benefits,  occupancy  expense,  and similar
items.  Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely  affect  liquidity,
earnings, and stockholders' equity.  Mortgage originations and refinancings tend
to slow as interest rates increase,  and likely will reduce the Bank's volume of
such  activities and the income from the sale of  residential  mortgage loans in
the secondary market.


ITEM 7.  FINANCIAL STATEMENTS

          The consolidated financial statements of the Company,  including notes
thereto,  and the report of  independent  auditors  are  included in this Report
beginning at page F-1 and are incorporated herein by reference.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

          The Company  has not had any change in  accountants  or  disagreements
with  accountants  on accounting  and financial  disclosure  during the two most
recent fiscal years.


                                    PART III

ITEM 9.  DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND CONTROL  PERSONS;
         COMPLIANCE  WITH SECTION  16(A) OF THE EXCHANGE ACT

          The information  appearing  under the heading  "Election of Directors'
and the subheadings "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting  Compliance"  in the Proxy  Statement  (the  "2003  Proxy  Statement")
relating to the annual meeting of shareholders  of the Company,  scheduled to be
held on May 6, 2003, is incorporated herein by reference.

                                       32
<PAGE>
ITEM 10.  EXECUTIVE COMPENSATION

          The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 2003 Proxy  Statement is  incorporated  herein by
reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The  information  appearing  under  the  heading  "Outstanding  Voting
Securities  of the  Company  and  Principal  Holders  Thereof" in the 2003 Proxy
Statement is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information appearing under the caption "Certain Relationships and
Transactions" in the 2003 Proxy Statement is incorporated herein by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) The following  exhibits are filed as a part of or  incorporated  by
reference in this report:

       EXHIBIT NO.        DESCRIPTION OF EXHIBIT

         2.1      Plan of  Reorganization  dated March 28, 2002,  by and between
                  the Registrant and Mountain National Bank (included as Exhibit
                  2.1 to the  Report on Form  8-K12G3 of the  Registrant,  dated
                  July 12, 2002 (File No. 000-49912),  previously filed with the
                  Commission and incorporated herein by reference).

         2.2      Amendment  to  Plan  of  Reorganization  dated  July  1,  2002
                  (included  as Exhibit 2.2 to the Report on Form 8-K12G3 of the
                  Registrant,   dated  July  12,  2002  (File  No.   000-49912),
                  previously filed with the Commission and  incorporated  herein
                  by reference).

         3.1      Charter  of  Incorporation  of  the  Registrant  (included  as
                  Exhibit 3.1 to the Report on Form  8-K12G3 of the  Registrant,
                  dated July 12,  2002 (File No.  000-49912),  previously  filed
                  with the Commission and incorporated herein by reference).

         3.2      Bylaws  of the  Registrant  (included  as  Exhibit  3.2 to the
                  Report on Form 8-K12G3 of the Registrant,  dated July 12, 2002
                  (File No. 000-49912), previously filed with the Commission and
                  incorporated herein by reference).

         10.1     Stock Option Plan of the Registrant*

                                       33
<PAGE>
         10.2     Employment Agreement of Dwight B. Grizzell*

         10.3     Stock  Option  Agreement  of Dwight B.  Grizzell  (assumed  by
                  Registrant)*

         21       Subsidiaries of the Registrant

         99.1     Certificate   of  CEO   pursuant   to   Section   906  of  the
                  Sarbanes-Oxley Act of 2002

         99.2     Certificate   of  CFO   pursuant   to   Section   906  of  the
                  Sarbanes-Oxley Act of 2002.

         * Denotes management contract or compensatory plan or arrangement.

         (b) There were no reports on Form 8-K filed by the  Company  during the
fourth quarter of 2002.

ITEM 14.  CONTROLS AND PROCEDURES

         (a)      Evaluation of disclosure controls and procedures

         The  Company's  Chief  Executive  Officer and Chief  Financial  Officer
         believe  that the  Company's  disclosure  controls and  procedures,  as
         defined in Securities  Exchange Act Rules 13a-14(c) and 15d-14(c),  are
         effective.  This  conclusion  was reached  after an evaluation of these
         controls and procedures within 90 days of the filing of this Report.

         (b)      Changes in internal controls

         We are not aware of any significant  changes in the Company's  internal
         controls,  including any corrective  actions with regard to significant
         deficiencies  and material  weaknesses,  or in other factors that could
         significantly affect these controls after December 31, 2002.


                                       34
<PAGE>


                                   SIGNATURES


         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                   MOUNTAIN  NATIONAL  BANCSHARES,  INC.
                                        (Registrant)


                                   By:  /S/  DWIGHT  B.  GRIZZELL
                                         ---------------------------
                                        Dwight  B.  Grizzell
                                        President  and  Chief
                                        Executive  Officer
                                        Date:  March  28,  2003

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  Registrant and in the capacities and
on the dates indicated.


       /S/ DWIGHT B. GRIZZELL                      Date:  March 28, 2003
---------------------------------------
Dwight B. Grizzell, President,
Chief Executive Officer and Director
[Principal Executive Officer]


       /S/ RICK HUBBS                              Date:  March 28, 2003
---------------------------------------
Rick Hubbs, Vice President and
Controller
[Principal Financial Officer and
Principal Accounting Officer]


       /S/ JAMES F. BOOKSTAFF                      Date:  March 28, 2003
----------------------------------------
James E. Bookstaff, Director


       /S/ GARY A. HELTON                          Date:  March 28, 2003
----------------------------------------
Gary A. Helton, Director


       /S/ BRUCE M. JOHNSON                        Date:  March 28, 2003
----------------------------------------
Bruce M. Johnson, Director


                                       35
<PAGE>
       /S/ CHARLIE R. JOHNSON                      Date:  March 28, 2003
----------------------------------------
Charlie R. Johnson, Director


       /S/ SAM L. LARGE                            Date:  March 28, 2003
----------------------------------------
Sam L. Large, Director


       /S/ JEFFREY J. MONSON                       Date:  March 28, 2003
----------------------------------------
Jeffrey J. Monson, Director


       /S/ LINDA N. OGLE                           Date:  March 28, 2003
----------------------------------------
Linda N. Ogle, Director


       /S/ MICHAEL C. OWNBY                        Date:  March 28, 2003
----------------------------------------
Michael C. Ownby, Director


       /S/ JOHN R. PARKER                          Date:  March 28, 2003
----------------------------------------
John R. Parker, Director


       /S/ RUTH REAMS                              Date:  March 28, 2003
----------------------------------------
Ruth Reams, Director


       /S/ BARBARA S. STEVENS                      Date:  March 28, 2003
----------------------------------------
Barbara S. Stevens, Director





                                       36
<PAGE>




                                  CERTIFICATION

I, Dwight B. Grizzell, certify that:

         1. I have  reviewed  this  annual  report on Form  10-KSB  of  Mountain
National Bancshares, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designated  such  disclosure  controls and procedures to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's  disclosure controls
and  procedures  as of a date  within 90 days prior to the  filing  date of this
annual report (the "Evaluation Date"); and

         c)  Presented  in  this  annual  report  our   conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

         a) All significant  deficiencies in the design or operation of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud,  whether or not  material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and
<PAGE>
         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  March 28, 2003

                                                          /S/ DWIGHT B. GRIZZELL
                                                     Dwight B. Grizzell
                                                     Principal Executive Officer


<PAGE>


                                  CERTIFICATION

I, Rick Hubbs, certify that:

         1. I have  reviewed  this  annual  report on Form  10-KSB  of  Mountain
National Bancshares, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designated  such  disclosure  controls and procedures to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's  disclosure controls
and  procedures  as of a date  within 90 days prior to the  filing  date of this
annual report (the "Evaluation Date"); and

         c)  Presented  in  this  annual  report  our   conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

         a) All significant  deficiencies in the design or operation of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud,  whether or not  material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  March 28, 2003

                                                          /S/ RICK HUBBS
                                                     Rick Hubbs
                                                     Principal Financial Officer




<PAGE>
















                       MOUNTAIN NATIONAL BANCSHARES, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 2002


<PAGE>


                                 C O N T E N T S






                                                                           PAGE

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         F-1

FINANCIAL STATEMENTS

    Consolidated balance sheets                                            F-2
    Consolidated statements of income                                      F-3
    Consolidated statements of changes in stockholders' equity             F-4
    Consolidated statements of cash flows                                  F-5
    Notes to consolidated financial statements                             F-6




<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





To the Stockholders and Board of Directors
Mountain National Bancshares, Inc.
Sevierville, Tennessee

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Mountain  National  Bancshares,  Inc. and subsidiary as of December 31, 2002 and
2001,   and  the  related   consolidated   statements  of  income,   changes  in
stockholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly,  in all material  respects,  the financial  position of Mountain
National  Bancshares,  Inc. and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.




Chattanooga, Tennessee
January 24, 2003


                                      F-1
<PAGE>

<TABLE>
<CAPTION>

                                             MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                                                        CONSOLIDATED BALANCE SHEETS
                                                         December 31, 2002 and 2001


-----------------------------------------------------------------------------------------------------------------------------------
                                                                                  2002                        2001
                                                                        ------------------------ --------------------

                      ASSETS

<S>                                                                           <C>                      <C>
Cash and due from banks                                                       $   4,944,524            $   4,464,946
Federal funds sold                                                               10,225,000                4,575,000
Securities available for sale                                                    24,624,148               34,837,673
Federal Home Loan Bank and
        Federal Reserve Bank stock, at cost                                         963,300                  712,462
Loans, net of allowance for loan losses                                         144,773,151              101,582,687
Premises and equipment                                                           10,409,935                8,169,217
Accrued interest receivable                                                         839,857                1,026,867
Cash surrender value of life insurance                                            2,928,248                     --
Other assets                                                                        375,681                  392,662
                                                                                    -------                  -------

               Total assets                                                   $ 200,083,844            $ 155,761,514
                                                                              =============            =============

               LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
        Noninterest-bearing demand deposits                                   $  24,973,285            $  19,364,225
        NOW accounts                                                              9,468,946                9,267,150
        Money market accounts                                                    51,670,265               52,875,051
        Savings accounts                                                          3,262,205                2,164,227
        Time deposits                                                            86,513,602               58,860,998
                                                                                 ----------               ----------

               Total deposits                                                   175,888,303              142,531,651

Securities sold under agreements to repurchase                                    1,999,637                1,293,203
Accrued interest payable                                                            316,715                  290,140
Note payable                                                                      6,000,000                     --
Federal Home Loan Bank advances                                                   2,000,000                     --
Other liabilities                                                                   866,436                  125,066
                                                                                    -------                  -------

               Total liabilities                                                187,071,091              144,240,060
                                                                                -----------              -----------

Stockholders' equity:
        Common stock, $1.00 par value; 2,400,000 shares
               authorized; 1,200,000 shares issued and outstanding                1,200,000                6,000,000
        Additional paid-in capital                                               10,800,000                6,000,000
        Retained earnings (deficit)                                                 854,345                 (554,637)
        Accumulated other comprehensive income                                      158,408                   76,091

               Total stockholders' equity                                        13,012,753               11,521,454
                                                                                 ----------               ----------

               Total liabilities and stockholders' equity                     $ 200,083,844            $ 155,761,514
                                                                              =============            =============
</TABLE>
The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                      F-2

<PAGE>

<TABLE>
<CAPTION>
                                       MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                                               CONSOLIDATED STATEMENTS OF INCOME
                                             Years Ended December 31, 2002 and 2001

--------------------------------------------------------------------------------------------------------------------------

                                                                           2002                   2001
                                                                   ---------------------------------------------

INTEREST INCOME
<S>                                                                    <C>                    <C>
        Loans                                                          $ 9,231,073            $ 7,891,854
        Securities                                                       1,271,049              1,250,296
        Federal funds sold and deposits in other banks                      51,039                258,907
                                                                            ------                -------

                                                                        10,553,161              9,401,057

INTEREST EXPENSE                                                         3,614,476              4,408,103
                                                                         ---------              ---------

        Net interest income                                              6,938,685              4,992,954

Provision for loan losses                                                  779,945                465,608
                                                                           -------                -------

        Net interest income after provision for loan losses              6,158,740              4,527,346
                                                                         ---------              ---------

NONINTEREST INCOME
        Service charges, fees, and commissions                             830,036                652,780
        Other                                                            1,044,457                615,197
                                                                         ---------                -------

                                                                         1,874,493              1,267,977
                                                                         ---------              ---------

NONINTEREST EXPENSES
        Salaries and employee benefits                                   3,224,256              2,426,658
        Occupancy expenses                                                 454,420                402,818
        Other operating expenses                                         2,379,871              1,820,278
                                                                         ---------              ---------

                                                                         6,058,547              4,649,754
                                                                         ---------              ---------

        Income before income taxes                                       1,974,686              1,145,569

Income taxes                                                               565,704                   --
                                                                           -------

        Net income                                                     $ 1,408,982            $ 1,145,569
                                                                       ===========            ===========
</TABLE>
The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                      F-3

<PAGE>

<TABLE>
<CAPTION>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     Years Ended December 31, 2002 and 2001
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Accumulated
                                                                   Total                     Additional      Retained     Other
                                                 Comprehensive  Stockholders'     Common      Paid-in        Earnings Comprehensive
                                                    Income         Equity          Stock      Capital        (Deficit)     Income
                                                 ----------------------------------------------------------------------------------

<S>                                              <C>           <C>            <C>           <C>            <C>
BALANCE, December 31, 2000 ....................                $ 10,363,674  $ 6,000,000   $  6,000,000  $ ( 1,700,206)  $   63,880

 Comprehensive income:

  Net income ..................................  $  1,145,569     1,145,569           --            --        1,145,569          --

 Other comprehensive income, net of tax:
     Unrealized holding gains on
       securities available for sale, net of
       reclassification adjustment ............        12,211        12,211           --            --             --       12,211
                                                       ------        ------        ------         ------        -------       ------

    Total comprehensive income ................  $  1,157,780
                                                 ============


BALANCE, December 31, 2001 ....................                  11,521,454     6,000,000      6,000,000      (554,637)    76,091

 Conversion of Mountain National Bank common
    stock to Mountain National Bancshares, Inc.
    common stock ..............................                          --    (4,800,000)     4,800,000          --             --

 Comprehensive income:

   Net income .................................  $  1,408,982     1,408,982           --            --        1,408,982          --

 Other comprehensive income, net of tax:
    Unrealized holding gains on
      securities available for sale, net of
      reclassification adjustment .............        82,317        82,317           --            --             --       82,317
                                                       ------        ------        ------         ------        -------       -----

    Total comprehensive income ................  $  1,491,299
                                                 ============


BALANCE, December 31, 2002 ....................                $ 13,012,753   $  1,200,000  $ 10,800,000    $   854,345  $  158,408
                                                               ============   ============  ============    ===========  ==========
</TABLE>
The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                      F-4

<PAGE>


<TABLE>
<CAPTION>
                                               MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     Years Ended December 31, 2002 and 2001

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                         2002            2001
                                                                                                    -------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                                <C>             <C>
           Net income ..........................................................................   $  1,408,982    $  1,145,569
           Adjustments to reconcile net income to net cash
                     provided by operating activities:
                              Depreciation .....................................................        548,473         422,047
                              Net realized (gains) losses on securities ........................       (294,924)       (131,335)
                              Net amortization (accretion) on securities .......................        285,659          65,737
                              Provision for loan losses ........................................        779,945         465,608
                              Change in operating assets and liabilities:
                                          Accrued interest receivable ..........................        187,010        (259,956)
                                          Accrued interest payable .............................         26,575           2,061
                                          Other assets and liabilities .........................        682,241         (42,649)
                                                                                                        -------         -------

                                                       Net cash provided by operating activities      3,623,961       1,667,082
                                                                                                      ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES
           Purchases of securities available for sale ..........................................    (25,864,319)    (36,015,624)
           Purchases of Federal Home Loan Bank stock ...........................................       (250,838)       (358,462)
           Proceeds from sales, maturities, and calls
                     of securities available for sale ..........................................     36,219,877      16,315,079
           Net increase in loans ...............................................................    (43,970,410)    (31,774,556)
           Purchase of premises and equipment ..................................................     (2,794,379)     (1,002,536)

           Proceeds from sales of premises and equipment .......................................          2,600           1,150

           Purchase of bank-owned life insurance ...............................................     (2,900,000)           --
                                                                                                     ----------      -----------

                                                       Net cash used in investing activities ...    (39,557,469)    (52,834,949)
                                                                                                    -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
           Net increase in deposits ............................................................     33,356,652      49,411,634

           Proceeds from issuance of note payable ..............................................      6,000,000            --

           Proceeds from Federal Home Loan Bank advances .......................................      2,000,000            --
           Net increase in securities sold under
             agreements to repurchase ..........................................................        706,434         197,573
                                                                                                        -------         -------

                                                       Net cash provided by financing activities     42,063,086      49,609,207
                                                                                                     ----------      ----------

NET INCREASE (DECREASE) IN CASH AND
           CASH EQUIVALENTS ....................................................................      6,129,578      (1,558,660)

CASH AND CASH EQUIVALENTS, beginning of year ...................................................      9,039,946      10,598,606
                                                                                                      ---------      ----------

CASH AND CASH EQUIVALENTS, end of year .........................................................   $ 15,169,524    $  9,039,946
                                                                                                   ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
           Cash paid during the year for interest ..............................................   $  2,924,663    $  3,829,884
           Cash paid during the year for taxes .................................................         48,134          45,852
                                                                                                         ======          ======
</TABLE>
The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.


                                      F-5
<PAGE>


                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
 ______________________________________________________________________________


Note 1.    Summary of Significant Accounting Policies

           On July 1, 2002,  Mountain  National Bank  reorganized into a holding
           company  structure  with  Mountain  National  Bancshares,  Inc.  (the
           Company)  acquiring all of the  outstanding  common stock of Mountain
           National Bank (the Bank).

           The  accounting  and  reporting  policies of the Company and the Bank
           conform with generally accepted  accounting  principles and practices
           within the banking  industry.  The policies  that  materially  affect
           financial  position  and  results of  operations  are  summarized  as
           follows:

           Nature of operations:

           Mountain  National Bank  provides a variety of financial  services to
           individual  and  commercial  customers  through its branch offices in
           Sevier County,  Tennessee.  The Bank's primary  deposit  products are
           demand deposits,  savings accounts,  and certificates of deposit. Its
           primary lending products are commercial  business loans,  real estate
           loans, and installment loans.

           Principles of consolidation:

           The  consolidated  financial  statements  include the accounts of the
           Company and its wholly-owned subsidiary,  Mountain National Bank. All
           material intercompany accounts have been eliminated in consolidation.

           Use of estimates:

           The preparation of financial  statements in conformity with generally
           accepted accounting  principles requires management to make estimates
           and  assumptions  that  affect  the  reported  amounts  of assets and
           liabilities  and disclosure of contingent  assets and  liabilities at
           the date of the  financial  statements  and the  reported  amounts of
           revenues and expenses  during the reporting  period.  Actual  results
           could differ from those estimates.

           The determination of the adequacy of the allowance for loan losses is
           based on estimates that are  particularly  susceptible to significant
           changes  in  the  economic  environment  and  market  conditions.  In
           connection with the  determination  of the estimated losses on loans,
           management obtains independent appraisals for significant collateral.

           The  Bank's  loans  are  generally   secured  by  specific  items  of
           collateral  including real property,  consumer  assets,  and business
           assets.  Although  the  Bank  has a  diversified  loan  portfolio,  a
           substantial  portion of its debtors' ability to honor their contracts
           is dependent on local  economic  conditions.  While  management  uses
           available   information  to  recognize   losses  on  loans,   further
           reductions in the carrying amounts of loans may be necessary based on
           changes in local economic conditions.


                                      F-6
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

           Use of estimates: (continued)

           In  addition,  regulatory  agencies,  as an  integral  part of  their
           examination  process,  periodically  review the  estimated  losses on
           loans.  Such  agencies may require the Bank to  recognize  additional
           losses based on their judgments about  information  available to them
           at the time of their  examination.  Because of these  factors,  it is
           reasonably  possible  that the  estimated  losses on loans may change
           materially in the near term.  However,  the amount of the change that
           is reasonably possible cannot be estimated.

           Securities:

           Debt  securities are classified as held to maturity when the Bank has
           the positive  intent and ability to hold the  securities to maturity.
           Securities  held to  maturity  are  carried at  amortized  cost.  The
           amortization of premiums and accretion of discounts are recognized in
           interest income using methods  approximating the interest method over
           the period to maturity.

           Debt  securities not classified as held to maturity are classified as
           available  for sale.  Securities  available  for sale are  carried at
           market  value  with  unrealized  gains and losses  reported  in other
           comprehensive income. Realized gains (losses) on securities available
           for sale are included in other income (expense) and, when applicable,
           are reported as a reclassification  adjustment,  net of tax, in other
           comprehensive  income.  Gains and losses on sales of  securities  are
           determined on the specific-identification method.

           Declines  in the market  value of  individual  held to  maturity  and
           available  for sale  securities  below their cost that are other than
           temporary result in write-downs of the individual securities to their
           market  value.  The related  write-downs  are included in earnings as
           realized losses.

           Loans:

           Loans are stated at unpaid principal  balances less the allowance for
           loan losses.  Interest income generally is not recognized on specific
           impaired  loans  unless the  likelihood  of  further  loss is remote.
           Interest  payments  received on such loans are applied as a reduction
           of the loan  principal  balance.  Interest  income on other  impaired
           loans is recognized only to the extent of interest payments received.

           The  accrual  of  interest  on real  estate and  commercial  loans is
           discontinued  at the time the loan is 90 days  delinquent  unless the
           credit is well-secured  and in process of collection.  Consumer loans
           are  typically  charged  off no later than 180 days past due.  In all
           cases  loans are placed on  nonaccrual  or charged  off at an earlier
           date if collection of principal or interest is considered doubtful.

                                      F-7

<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------


Note 1.    Summary of Significant Accounting Policies (continued)

           Allowance for loan losses:

           The  allowance  for loan losses is  maintained  at a level which,  in
           management's  judgment,  is adequate to absorb credit losses inherent
           in the  loan  portfolio.  The  amount  of the  allowance  is based on
           management's  evaluation of the collectibility of the loan portfolio,
           including the nature of the portfolio, credit concentrations,  trends
           in historical loss  experience,  specific  impaired  loans,  economic
           conditions, and other risks inherent in the portfolio. Allowances for
           impaired loans are generally determined based on collateral values or
           the present value of estimated cash flows.  Although  management uses
           available  information  to  recognize  losses  on loans,  because  of
           uncertainties  associated with local economic conditions,  collateral
           values,  and future cash flows on impaired  loans,  it is  reasonably
           possible that a material change could occur in the allowance for loan
           losses in the near term.  However,  the amount of the change  that is
           reasonably  possible cannot be estimated.  The allowance is increased
           by a  provision  for loan  losses,  which is charged  to expense  and
           reduced by charge-offs,  net of recoveries.  Changes in the allowance
           relating to impaired  loans are charged or credited to the  provision
           for loan losses.

           Premises and equipment:

           Land is carried at cost.  Other premises and equipment are carried at
           cost net of accumulated depreciation.  Depreciation is computed using
           the straight-line and the declining balance methods based principally
           on the estimated useful lives of the assets.  Maintenance and repairs
           are expensed as incurred while major additions and  improvements  are
           capitalized. Gains and losses on dispositions are included in current
           operations.

           Other real estate owned:

           Real  estate   properties   acquired  through  or  in  lieu  of  loan
           foreclosure  are  initially  recorded  at the  lower  of  the  Bank's
           carrying amount or fair value less estimated selling cost at the date
           of foreclosure.  Any  write-downs  based on the asset's fair value at
           the date of acquisition are charged to the allowance for loan losses.
           After foreclosure, these assets are carried at the lower of their new
           cost  basis or fair  value  less cost to sell.  Costs of  significant
           property  improvements  are  capitalized,  whereas costs  relating to
           holding property are expensed. The portion of interest costs relating
           to  development  of  real  estate  is  capitalized.   Valuations  are
           periodically performed by management,  and any subsequent write-downs
           are recorded as a charge to operations,  if necessary,  to reduce the
           carrying  value of a property  to the lower of its cost or fair value
           less cost to sell.

                                      F-8
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------


Note 1.    Summary of Significant Accounting Policies (continued)

           Income taxes:

           Income  taxes are  provided  for the tax effects of the  transactions
           reported in the financial  statements and consist of taxes  currently
           due plus  deferred  income taxes  related  primarily  to  differences
           between the basis of the  allowance  for loan losses,  start up costs
           and accumulated depreciation. The deferred tax assets and liabilities
           represent the future tax return  consequences  of those  differences,
           which  will  either be  taxable  or  deductible  when the  assets and
           liabilities  are  recovered  or  settled.  Deferred  tax  assets  and
           liabilities  are  reflected  at  currently  enacted  income tax rates
           applicable  to the  period  in  which  the  deferred  tax  assets  or
           liabilities are expected to be realized or settled. As changes in tax
           laws or rates are enacted,  deferred tax assets and  liabilities  are
           adjusted through the provision for income taxes.

         Stock options:

          At December 31, 2002,  the Company has an incentive and  non-qualified
          stock  option  plan,  which is more  fully  described  in Note 14. The
          Company  applies  the   recognition  and  measurement   principles  of
          Accounting  Principles  Board (APB)  Opinion No. 25,  "Accounting  for
          Stock Issued to Employees," and related  interpretations in accounting
          for  the  plan.  No  stock-based  employee   compensation  expense  is
          reflected in net income as all options  granted under the plan, had an
          exercise  price  equal to the market  value of the  underlying  common
          stock at the date of grant. The following table illustrates the effect
          on net income as if the Company had applied the fair value recognition
          provisions of Statement of Financial  Accounting  Standards (SFAS) No.
          123,   "Accounting  for  Stock-Based   Compensation,"  to  stock-based
          employee compensation.

                                                     YEARS ENDED DECEMBER 31
                                                    -------------------------
                                                      2002             2001
                                                ------------      ------------


Net income, as reported ....................     $ 1,408,982      $ 1,145,569

Effect of stock-based employee compensation
  expense determined under fair value method
  for all awards, net of related tax effects         (30,283)         (45,520)
                                                ------------      ------------

Pro forma net income .......................     $ 1,378,699      $ 1,100,049
                                                ============      ============

                                      F-9
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

            Securities sold under agreements to repurchase:

            The  Bank  enters  into  sales of  securities  under  agreements  to
            repurchase   identical  securities  the  next  day.  The  securities
            underlying the agreements are book-entry securities.

            Statement of cash flows:

            The  Bank  considers  all  cash  and  amounts  due  from  depository
            institutions,  interest bearing deposits in other banks, and federal
            funds sold to be cash  equivalents for purposes of the statements of
            cash flows.

Note 2.    Securities

           Securities  have been  classified in the balance  sheet  according to
           management's  intent as securities  available for sale. The amortized
           cost and estimated market values of investment securities at December
           31, 2002 and 2001, are as follows:
<TABLE>
<CAPTION>
                                                             2002
                               -----------------------------------------------------------------
                                                    Gross              Gross
                                 Amortized        Unrealized         Unrealized         Market
                                    Cost             Gains              Losses          Value
                               ------------     ------------      ------------     -------------

<S>                                  <C>              <C>               <C>               <C>
U.S. Government securities     $    522,592     $      9,206      $       --        $    531,798

U.S. Government agencies .        1,520,314           12,341              --           1,532,655

Mortgage-backed securities       22,325,745          239,340            (5,390)       22,559,695
                               ------------     ------------      ------------     -------------

                               $ 24,368,651     $    260,887      $     (5,390)     $ 24,624,148
                               ============     ============      ============      ============

                                                             2001
                                ----------------------------------------------------------------
                                                     Gross             Gross
                                  Amortized       Unrealized         Unrealized         Market
                                     Cost            Gains              Losses           Value
                               ------------     ------------      ------------     -------------

U.S. Government agencies .     $ 18,971,752     $    147,864      $    (47,792)     $ 19,071,824

Mortgage-backed securities       15,743,191           88,212           (65,554)       15,765,849
                               ------------     ------------      ------------     -------------

                               $ 34,714,943     $    236,076      $   (113,346)     $ 34,837,673
                               ============     ============      ============      ============
</TABLE>

                                      F-10
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------

Note 2.    Securities (continued)

          The scheduled  maturities of securities available for sale at December
31, 2002, were as follows:

                                       Amortized          Market
                                         Cost             Value
                                      ----------      ----------

Due in one year or less ........     $      --       $      --
Due from one year to five years          522,592         531,798
Due from five years to ten years       1,520,314       1,532,655
Mortgage-backed securities .....      22,325,745      22,559,695
                                      ----------      ----------

                                     $24,368,651     $24,624,148
                                     ===========     ===========

          Proceeds  from sales of  securities  and  securities  called  prior to
          scheduled maturity were $30,798,046 for 2002 and $13,670,771 for 2001.
          Gross gains realized on those sales were $296,728 in 2002 and $131,335
          in 2001. Gross losses realized on those sales were $1,804 in 2002.

          Securities with a book value of  approximately  $1,515,000 at December
          31, 2002, were pledged to secure various  deposits and securities sold
          under agreements to repurchase.


Note 3.    Loans and Allowance for Loan Losses

           A summary of  transactions  in the  allowance for loan losses for the
           years ended December 31, 2002 and 2001, is as follows:

                                                  2002             2001
                                             -----------      ------------

Balance, beginning of year .............     $   846,699      $   571,000

  Provision charged to operating expense         779,945          465,608
  Loans charged-off ....................         (45,052)        (191,057)
  Recoveries of loans charged-off ......          13,364            1,148
                                             -----------      ------------

Balance, end of year ...................     $ 1,594,956      $   846,699
                                             ===========      ===========

                                      F-11
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------


Note 3.    Loans and Allowance for Loan Losses (continued)

           At  December  31,  2002 and 2001,  the  Bank's  loans  consist of the
following (in thousands):

                                                2002            2001
                                             ----------     ---------

Real estate loans                            $ 132,792      $  89,047
Commercial and industrial loans                  7,542          8,403
Loans to individuals for household,
  family and other consumer expenditures         5,989          4,980
Obligations of states and political
  subdivisions                                      45           --
                                             ----------     ---------

Total loans                                    146,368        102,430
Less:  Allowance for loan losses                (1,595)          (847)
                                             ----------     ---------

Net loans                                    $ 144,773      $ 101,583
                                             ==========      =========

           In the normal course of business,  the Bank makes loans at prevailing
           interest  rates and terms to directors and executive  officers of the
           Bank. At December 31, 2002,  loans to directors,  executive  officers
           and related entities totaled $4,505,923.

           The Bank's only  significant  concentration of credit at December 31,
           2002,  occurred in real estate  loans,  which  totaled  approximately
           $132,792,000.  While real estate  loans  accounted  for 91 percent of
           total loans, these loans were primarily  residential  mortgage loans,
           commercial loans secured by commercial properties and consumer loans.
           A  minor  portion  of  these  loans  were  for   construction,   land
           acquisition and development.  Substantially all real estate loans are
           secured by properties located in Tennessee.

Note 4.    Premises and Equipment

         A summary of premises  and  equipment as of December 31, 2002 and 2001,
is as follows:

                                             2002                 2001
                                           ----------          --------

Land ...............................     $  3,015,032      $  1,778,456
Buildings and leasehold improvements        5,879,156         4,903,808
Furniture, fixtures and equipment ..        2,593,168         2,147,336
Software ...........................          198,836           188,375
Transportation equipment ...........          130,053            21,097
                                              -------            ------

                                           11,816,245         9,039,072
Accumulated depreciation ...........       (1,406,310)         (869,855)
                                           ----------          --------

                                         $ 10,409,935      $  8,169,217
                                         ============      ============

                                      F-12
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------

Note 5.    Time Deposits

           The aggregate amount of time deposits in denominations of $100,000 or
           more at December 31, 2002, was approximately $45,720,000.

            At December 31, 2002, the scheduled  maturities of time deposits are
as follows:


                             2003               $72,015,901
                             2004                10,708,973
                             2005                 1,852,816
                             2006                   875,567
                             2007                 1,060,345
                                                -----------

                                                $86,513,602
                                                ===========

Note 6.    Federal Home Loan Bank Advances

           The Bank has an agreement with the Federal Home Loan Bank (FHLB) that
           can provide short-term and long-term funding to the Bank in an amount
           up to $7,843,500.  The Bank's portfolio of one to four  single-family
           mortgages has been pledged as collateral  for this advance based upon
           an agreement to maintain a collateral to loan ratio of 135%.

           At December 31, 2002, FHLB advances consisted of a short-term advance
           in the amount of  $2,000,000  bearing  interest at 1.4% and  maturing
           March 13, 2003.

Note 7.    Note Payable

           On August 30, 2002, the Company  obtained a loan of $6,000,000 from a
           correspondent  bank to be used to infuse new  capital  into  Mountain
           National Bank. Interest on the note is payable quarterly at the prime
           rate less .50% and the note matures on September 30, 2004. All of the
           Company's  common  stock in  Mountain  National  Bank is  pledged  as
           collateral on the loan. The note agreement contains various financial
           ratios and restrictive  covenants  including  restrictions on further
           borrowings,  classified assets, and payment of dividends. At December
           31, 2002, the Company was in compliance with all financial ratios and
           covenants.

Note 8.    Leases

            The Bank is  leasing  the land on which  its  Gatlinburg  branch  is
            located under a noncancelable  lease agreement that expires in 2013.
            This lease agreement  contains renewal options for twelve additional
            five-year terms.

                                      F-13
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------

Note 8.    Leases (continued)

           In addition, the Bank is leasing the building in which its Gatlinburg
           walk-up  facility  is  located  and  property  on which it has placed
           automated  teller  machines.  These  leases  expire at various  dates
           through 2010 and contain various renewal options.  The leases for the
           automated   teller   machines   require  base  rental  payments  plus
           contingent  rentals  based on usage.  Total rental  expense under all
           operating  leases  was  $113,816  (including  contingent  rentals  of
           $17,595)  in 2002  and  $107,551  (including  contingent  rentals  of
           $12,751) in 2001.

           The  following  is a  schedule  by years  of  future  minimum  rental
           payments  required  under  operating  leases  that  have  initial  or
           remaining  noncancelable  lease  terms  in  excess  of one year as of
           December 31, 2002.

                          2003               $ 95,535
                          2004                 90,817
                          2005                 94,838
                          2006                 99,978
                          2007                101,379
                       Thereafter             414,881
                                             --------
                                             $897,428
                                             ========


Note 9.    Employee Benefit Plan

           The Bank  maintains  a salary  reduction/profit  sharing  plan (Plan)
           under the provisions of Section 401(k) of the Internal  Revenue Code.
           All employees may participate in the Plan after having  completed six
           months  of  service  and  reaching  21  years of age.  Employees  who
           participate  may  contribute up to 15 percent of annual  compensation
           not to exceed the maximum  prescribed  by the Internal  Revenue Code.
           The Plan provides for discretionary  contributions by the Bank not to
           exceed 6 percent of the participant's annual compensation. The Bank's
           contribution  to the Plan was  $42,820 and $6,453 for the years ended
           December 31, 2002 and 2001, respectively.

Note 10.   Financial Instruments With Off-Balance-Sheet Risk

           The Bank is a party to financial  instruments with  off-balance-sheet
           risk in the normal course of business to meet the financing  needs of
           its  customers.   These   financial   instruments   include   various
           commitments  to extend  credit and standby  letters of credit.  These
           instruments expose the Bank to varying degrees of credit and interest
           rate risk in  excess of the  amount  recognized  in the  accompanying
           balance sheet. To manage this risk, the Bank uses the same management
           policies   and    procedures   for   financial    instruments    with
           off-balance-sheet  risk as it does for  financial  instruments  whose
           risk is reflected on the balance sheet.

                                      F-14
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------

Note 10.   Financial Instruments With Off-Balance-Sheet Risk (continued)

           The credit risk of all  financial  instruments  varies  based on many
           factors,  including the value of collateral  held and other  security
           arrangements.  To mitigate credit risk, the Bank generally determines
           the need for specific covenant, guarantee and collateral requirements
           on   a    case-by-case    basis,    depending   on   the   customer's
           creditworthiness.  The amount and type of  collateral  held to reduce
           credit risk vary, but may include real estate, machinery,  equipment,
           inventory,  and  accounts  receivable  as well  as  cash on  deposit,
           stocks,  bonds,  and other  marketable  securities that are generally
           held  in  the  Bank's  possession.  This  collateral  is  valued  and
           inspected  on a  regular  basis  to  ensure  both its  existence  and
           adequacy. The Bank requests additional collateral when appropriate.

           At December 31, 2002, commitments under standby letters of credit and
           undisbursed loan commitments  aggregated  approximately  $28,229,000.
           The  Bank's  credit  exposure  for  these  financial  instruments  is
           represented  by  their  contractual   amounts.   The  Bank  does  not
           anticipate any material losses as a result of the  commitments  under
           standby letters of credit and undisbursed loan commitments.

Note 11.   Income Taxes

           The  Company   files   consolidated   income  tax  returns  with  its
           subsidiary.  Under the terms of a tax-sharing  agreement,  the Bank's
           allocated portion of the consolidated tax liability is computed as if
           the Bank  were  reporting  its  income  and  expenses  to the  taxing
           authorities as a separate entity.

           The  provision  for income taxes in the  statements of income for the
           years ended December 31, 2002 and 2001, includes the following:

                                                    2002         2001
                                                 ----------   -----------

Current tax expense                              $ 734,400    $ 348,200

Tax benefit of tax operating loss carryforward
  realized (reduction in deferred tax asset
  valuation allowance)                             (194,800)    (440,400)

Deferred income taxes related to:
  Depreciation                                      122,100       72,100
  Allowance for loan losses                        (132,400)     (20,400)
  Amortization                                       52,800       52,300
  Other                                             (16,396)     (11,800)
                                                 ----------   -----------

Total tax expense                                 $ 565,704    $    --
                                                 ==========    ==========


                                      F-15
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------


Note 11.   Income Taxes (continued)

           The income tax expense is  different  from the  expected  tax expense
           computed  by  multiplying  income  before  income tax  expense by the
           statutory  federal income tax rates.  The reasons for this difference
           are as follows:

                                                      2002          2001
                                                 ----------   -----------


Expected tax at statutory rates                    $ 671,400    $ 389,500

Increase (decrease resulting from tax effect of:
  State income taxes, net or related federal
   income tax benefit                                 62,200       45,900

  Tax benefit of tax operating loss carryforward
   realized (reduction in deferred tax asset
   valuation allowance)                             (194,800)    (440,400)

  Other                                               26,904        5,000
                                                  ----------   -----------

Total tax expense                                  $ 565,704    $    --
                                                  ==========   ===========
           As  of  December  31,  2002,   deferred  tax  assets  recognized  for
           deductible temporary differences totaled  approximately  $273,900 and
           deferred tax liabilities for taxable  temporary  differences  totaled
           approximately $282,600.

Note 12.   Fair Value of Financial Instruments

            Fair value estimates are made at a specific point in time,  based on
            relevant market  information about the financial  instrument.  These
            estimates  do not reflect any premium or discount  that could result
            from offering for sale at one time the Company's  entire holdings of
            a particular  financial  instrument.  Because no market exists for a
            significant  portion of the Company's  financial  instruments,  fair
            value  estimates are based on judgments  regarding  future  expected
            loss experience,  current economic conditions,  risk characteristics
            of various financial instruments, and other factors. These estimates
            are  subjective  in nature;  involve  uncertainties  and  matters of
            judgment;  and,  therefore,  cannot be  determined  with  precision.
            Changes in assumptions could significantly affect the estimates.

           Fair value  estimates  are based on  existing  financial  instruments
           without  attempting  to  estimate  the  value of  anticipated  future
           business  and the  value  of  assets  and  liabilities  that  are not
           considered   financial   instruments.   The  following   methods  and
           assumptions  were used to  estimate  the fair  value of each class of
           financial instruments:


                                      F-16
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------

Note 12.   Fair Value of Financial Instruments (continued)

           Cash and cash equivalents:

           For cash and cash  equivalents,  the carrying  amount is a reasonable
           estimate of fair value.

           Securities:

            The fair  value  of  securities  is  estimated  based on bid  prices
           published in financial  newspapers  or bid  quotations  received from
           securities  dealers.  The carrying value of the Federal  Reserve Bank
           and Federal Home Loan Bank stock approximates fair value based on the
           redemption  provisions  of the Federal  Reserve Bank and Federal Home
           Loan Bank.

           Loans:

            The fair value of loans is calculated by discounting  scheduled cash
           flows through the estimated  maturity using estimated market discount
           rates,  adjusted for credit risk and servicing costs. The estimate of
           maturity is based on historical  experience  with repayments for each
           loan  classification,  modified,  as required,  by an estimate of the
           effect of current economic and lending conditions.

           Cash surrender value of life insurance:

           For cash surrender value of life insurance,  the carrying amount is a
           reasonable estimate of fair value.

           Deposits:

           The fair value of deposits with no stated  maturity,  such as demand
           deposits and NOW, money market, and savings accounts, is equal to the
           amount payable on demand. The fair value of time deposits is based on
           the discounted  value of contractual cash flows. The discount rate is
           estimated using the rates  currently  offered for deposits of similar
           remaining maturities.

           Securities sold under agreements to repurchase:

           For  securities  sold under  agreements to  repurchase,  the carrying
           amount is a reasonable estimate of fair value.

           Note payable:

           For the note  payable  to a  financial  institution  with a  floating
           interest  rate  tied  to the  prime  rate,  the  carrying  amount  is
           considered a reasonable estimate of fair value.


                                      F-17

<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------



Note 12. Fair Value of Financial Instruments (continued)

           Federal Home Loan Bank advances:

           For short-term  Federal Home Loan Bank advances,  the carrying amount
           is considered a reasonable estimate of fair value.

           The carrying amount and estimated fair value of the Bank's  financial
           instruments  at  December  31,  2002 and  2001,  are as  follows  (in
           thousands):
<TABLE>
<CAPTION>
                                                    2002                 2001
                                             --------------------- ----------------------
                                                         Estimated              Estimated
                                              Carrying     Fair    Carrying       Fair
                                               Amount      Value    Amount        Value
                                            ---------- ----------- ---------- ------------
Assets:
<S>                                          <C>        <C>        <C>        <C>
    Cash and cash equivalents ............   $ 15,170   $ 15,170   $  9,040   $  9,040
    Securities ...........................     24,624     24,624     34,838     34,838
    Federal Home Loan Bank and
      Federal Reserve Bank stock .........        963        963        712        712
    Net loans ............................    144,773    148,001    101,583    103,260
    Cash surrender value of life insurance      2,928      2,928       --         --

Liabilities:
    Noninterest-bearing demand deposits ..     24,973     24,973     19,364     19,364
    NOW accounts .........................      9,469      9,469      9,267      9,267
    Savings and money market accounts ....     54,932     54,932     55,039     55,039
    Time deposits ........................     86,514     87,434     58,861     59,488
    Note payable .........................      6,000      6,000       --         --
    Federal Home Loan Bank advances ......      2,000      2,000       --         --
    Securities sold under agreements
      to repurchase ......................      2,000      2,000      1,293      1,293
</TABLE>

Note 13.   Regulatory Matters

            The Bank is  subject  to  various  regulatory  capital  requirements
            administered  by the  federal  banking  agencies.  Failure  to  meet
            minimum capital  requirements  can initiate  certain  mandatory--and
            possibly  additional  discretionary--actions  by regulators that, if
            undertaken,  could  have a  direct  material  effect  on the  Bank's
            financial  statements.  Under capital  adequacy  guidelines  and the
            regulatory  framework for prompt  corrective  action,  the Bank must
            meet specific capital guidelines that involve quantitative  measures
            of the Bank's  assets,  liabilities,  and certain  off-balance-sheet
            items as  calculated  under  regulatory  accounting  practices.  The
            Bank's  capital  amounts  and  classification  are also  subject  to
            qualitative  judgments  by the  regulators  about  components,  risk
            weightings, and other factors.

                                      F-18

<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001
--------------------------------------------------------------------------------

Note 13.   Regulatory Matters (continued)

            Quantitative  measures  established  by regulation to ensure capital
            adequacy  require  the Bank to maintain  minimum  amounts and ratios
            (set  forth in the table  below)  of total  and Tier I  capital  (as
            defined in the  regulations) to  risk-weighted  assets (as defined),
            and of Tier I capital (as defined) to average  assets (as  defined).
            Management  believes,  as of December 31, 2002,  that the Bank meets
            all capital adequacy requirements to which it is subject.

           As of December 31, 2002, the most recent notification from the Office
           of the  Comptroller  of the  Currency  categorized  the  Bank as well
           capitalized  under the  regulatory  framework  for prompt  corrective
           action.  There are no  conditions  or events since that  notification
           that  management  believes  have  changed  the  institution's  prompt
           corrective action category.

            The Bank's actual  capital  amounts and ratios are also presented in
            the table below. Dollar amounts are presented in thousands.
<TABLE>
<CAPTION>
                                                                                                  For Capital
                                                                 Actual                       Adequacy Purposes
                                                             ---------------------        -------------------------
                                                              Amount       Ratio             Amount        Ratio
                                                             --------- -----------        ------------ ------------
<S>                                                              <C>        <C>             <C>           <C>

       As of December 31, 2002:
        Total capital
           (to risk-weighted assets)                           $20,377     13.00%             $12,392       8.00%
        Tier I capital
           (to risk-weighted assets)                            18,782     11.98%               6,196       4.00%
       Tier I capital
           (to average assets)                                  18,782      9.75%               7,704       4.00%

      As of December 31, 2001:
       Total capital
           (to risk-weighted assets)                            12,292     11.02%               8,923       8.00%
       Tier I capital
           (to risk-weighted assets)                            11,445      10.26%              4,461       4.00%
       Tier I capital
           (to average assets)                                  11,445      7.79%               5,875       4.00%

</TABLE>
Note 14.      Stock Options
              The Bank has a stock option plan that is administered by the Board
              of Directors  and provides for both  incentive  stock  options and
              nonqualified  stock options.  The purchase price shall not be less
              than 100 percent of the fair market  value of the common  stock on
              the date of grant.  The maximum  number of shares that can be sold
              or optioned under the Plan is 250,000.

                                      F-19
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001



Note 14.      Stock Options (continued)
              During 1999,  the Company  granted to key  officers and  employees
              incentive  stock options to purchase  150,000 shares of the Bank's
              common stock at $10.00 per share. Such option  agreements  provide
              that the Bank must meet  certain  performance  goals before any of
              the options are exercisable.  Once the performance goals have been
              met, the options will become  vested in equal amounts over periods
              of five to six years.  If not exercised,  such options will expire
              by December 2008.

              In addition, the Company has granted to non-employee organizers of
              the Bank non-qualified  stock options to purchase 53,485 shares of
              the  Bank's  common  stock  at  $10.00  per  share.   Such  option
              agreements  vest  equally  over three years  beginning  in 1999. A
              summary of activity  in the  Company's  stock  option plan for the
              years ended December 31, 2002 and 2001, is as follows:

<TABLE>
<CAPTION>
<S>           <C>                                              <C>              <C>              <C>            <C>
                                                              Outstanding Options               Exercisable Options
                                                          ---------------------------- --------------------------------
                                                             Weighted                        Weighted
                                                              Average          Number      Average Exercise  Number
                                                           Exercise Price   Of Shares          Price         of Shares
                                                           --------------- ----------- -------------------- -----------

                Shares outstanding, December 31, 2000         $10.00          203,485         $10.00          35,644

                  Stock options granted                          -             -                 -            -
                  Stock options vested during the year           -             -               10.00          45,841
                                                                            ----------                      -----------
                Shares outstanding, December 31, 2001          10.00          203,485          10.00          81,485

                  Stock options rescinded                      10.00          (38,400)           -            -
                  Stock options granted                          -             -                 -            -
                  Stock options vested during the year           -             -               10.00          18,400
                                                                            ----------                      -----------

                Shares outstanding, December 31, 2002          10.00          165,085          10.00          99,885
                                                                             ===========                     ==========

At  December  31, 2002, the exercise price of all options was $10. The remaining
contractual  life  of  outstanding options issued under this stock plan was 5.69
years.
</TABLE>

                                      F-20
<PAGE>
               MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

--------------------------------------------------------------------------------


Note 15.      Other Comprehensive Income
              Other comprehensive income consists of unrealized gains and losses
              on securities available for sale. A summary of other comprehensive
              income and the related  tax  effects for the years ended  December
              31, 2002 and 2001, is as follows:

<TABLE>
<CAPTION>

<S>            <C>                                                      <C>             <C>              <C>
                                                                    Before Tax            Tax            Net Of Tax
                                                                      Amount            Expense            Amount
                                                                -----------------    ---------------   ---------------

           Year ended December 31, 2002:
            Unrealized holding gains and losses
              arising during the period                              $427,693           $(162,523)          $265,170

            Less reclassification adjustment for
              gains realized in net income                            294,924            (112,071)           182,853
                                                                -----------------    ---------------   ---------------

                                                                     $132,769           $ (50,452)           $82,317
                                                                =================     ==============    ==============

           Year ended December 31, 2001:
             Unrealized holding gains and losses
              arising during the period                              $151,017          $  (57,326)         $  93,691
             Less reclassification adjustment for
              gains realized in net income                            131,335             (49,855)            81,480
                                                                -----------------    ---------------   ---------------

                                                                    $  19,682          $   (7,471)         $  12,211
                                                                =================     ==============    ==============

</TABLE>
Note 16.      Liquidity and Capital Resources

              The Company's  primary source of funds is the receipt of dividends
              from it's subsidiary bank.  Banking regulators limit the amount of
              dividends  that the Bank may pay  without  prior  approval  of the
              Bank's regulatory  agency. It is management's  intent to limit the
              amount of  dividends  paid in order to  maintain  compliance  with
              capital  guidelines and to maintain a strong  capital  position in
              the Bank.



                                      F-21