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, 2003

     [ ]  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. [X]

<PAGE>

      Revenues for the Registrant's fiscal year ended December 31, 2003, totaled
$13,721,810.  The aggregate market value of the Registrant's  outstanding Common
Stock  held  by  nonaffiliates  of  the  Registrant  on  February  1,  2004  was
$20,956,892 (based on the Bank's last sale on February 19, 2004).

      There were 1,260,702 shares of Common Stock  outstanding as of February 1,
2004.

      Transitional Small Business Disclosure Format (check one): Yes   ; No X
                                                                    ---    ---

DOCUMENTS INCORPORATED BY REFERENCE

      Portions  of the  registrant's  definitive  Proxy  Statement  for the 2004
Annual Meeting of  Shareholders  are  incorporated by reference into Part III of
this Report.


<PAGE>

<TABLE>
<CAPTION>

                       MOUNTAIN NATIONAL BANCSHARES, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS
   ITEM                         -----------------                                                    PAGE
   NUMBER                                                                                            NUMBER
   -----                                               PART I                                        ------

     <S>       <C>                                                                                     <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...................................................................21

     7.         Financial Statements...................................................................35

     8.         Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure....................................................35

     8A.        Controls and Procedures................................................................35

                                                       PART III

     9.         Directors and Executive Officers of the Registrant.....................................35

    10.         Executive Compensation.................................................................35

    11.         Security Ownership of Certain Beneficial Owners
                and Management.........................................................................36

    12.         Certain Relationships and Related Transactions.........................................36

    13.         Exhibits, List and Reports on Form 8-K.................................................36

    14.         Principal Accountant Fees and Services.................................................37

                Signatures.............................................................................38
</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 2003
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 2003 the
Company received approval from the Federal Reserve Bank of Atlanta (the "Federal
Reserve") to become a bank holding company.  Effective July 1, 2003, 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, 2003, 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.  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, a branch office in Seymour,  and a
branch  office in Kodak,  Tennessee.  All of the Bank's  branches are located in
Sevier  County,  Tennessee.  The Bank  seeks  savings  and other time and demand
deposits  from  households  and  businesses  in its  primary  marketing  area by
offering a full range of deposit accounts,  including  savings,  demand deposit,
retirement,   and  professional,   including   individual   retirement  accounts
("IRA's"),   checking  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.

      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,  commercial properties,  commercial loans, and consumer
loans. The Bank is limited in the amount of loans it may extend to one borrower.


                                       4
<PAGE>

      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.

      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.


                                       5
<PAGE>

      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 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.

      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.


                                       7
<PAGE>

      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  10% of its assets at December
31, 2003) 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 thirty 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.  On November 7, 2003, the Company
completed the sale,  through its wholly owned  statutory trust  subsidiary,  MNB
Capital  Trust  I,  of  $5,500,000  of  trust  preferred   securities  ("Capital
Securities") with a maturity date of December 31, 2033, and a liquidation amount
of $50,000 per Capital  Security.  Interest on the Capital  Securities  is to be
paid quarterly on the last day of each March,  June,  September and December and
is reset  quarterly  based on the three month LIBOR plus 305 basis points at the
end of the  preceding  quarter.  The  Company  used  the net  proceeds  from the
offering to pay off an outstanding line of credit. These Capital Securities will
enable the Company and the Bank to remain well-capitalized.

      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  12 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.


                                       9
<PAGE>

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, 2003,  there were 42  commercial  bank  branches and four 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 8 branches.

      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 six
full-service banking facilities and six stand-alone ATM facilities.

EMPLOYEES

      The Bank has 67 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 15 FTE employees
at its two Gatlinburg  branches,  10 FTE employees at its Pigeon Forge branch, 6
FTE  employees at its Seymour  branch,  and 4 FTE employees at its Kodak 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."


                                       11
<PAGE>

      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
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.


                                       12
<PAGE>

      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.

      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.


                                       14
<PAGE>

      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.

      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>
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 Under-capitalized  2% or less                        ____            ____           ___
                              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.


                                       15
<PAGE>

      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 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.


                                       16
<PAGE>

      Future Compliance. Statutes and regulations are regularly introduced 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 $21,773,225 the Bank's
loans-to-one  borrower  limit would be  approximately  $3,266,000.  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  $21,773,225,   the  Bank's
loan-to-one  borrower limit would be approximately  $5,443,000.  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.


                                       17
<PAGE>

      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.
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.

      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 five branch offices located in Gatlinburg, Pigeon Forge, Seymour, and Kodak,
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 completed in July 2002. This branch office is 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 is centrally  located between
Interstate  40 and the downtown area of  Sevierville,  and is one of the fastest
growing commercial areas in the county.


                                       18
<PAGE>

      Construction of an operation center containing approximately 24,000 square
feet is expected  to be  completed  during July 2004.  The center will house the
accounting, data processing,  training, credit and deposit services departments.
It will free up much  needed  office  space at the  Bank's  main  office for the
expected future growth of the Bank.

      Management  believes that the physical  facilities  maintained by the Bank
are suitable for its current operations.

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 2003.

                                     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:

                                                          Estimated Price Range
                                                                Per Share
                                                          --------------------
2003:                                                      High           Low
----                                                       ----           ---
First Quarter..........................................   $15.00        $14.00
Second Quarter.........................................    14.00         14.00
Third Quarter..........................................    15.00         15.00
Fourth Quarter.........................................    15.00         15.00

2002:
First Quarter..........................................   $15.00        $15.00
Second Quarter.........................................    15.10         13.00
Third Quarter..........................................    15.10         15.00
Fourth Quarter.........................................    15.00         14.00


                                       19
<PAGE>

      As of the date of this filing, the Company has approximately 1,800 holders
of record of its Common  Stock.  The Company  has no other  class of  securities
issued or outstanding.

      No cash  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." The board of directors of the Company declared a five percent stock
dividend to  shareholders  of record as of December 31,  2003.  The dividend was
paid to shareholders on February 10, 2004. A cash payment of $7,245 was made for
fractional shares. The total number of shares issued was 59,702.

      The  following  table sets forth  information  relating  to the  Company's
equity compensation plans as of December 31, 2003:

<TABLE>
<CAPTION>

                                                     EQUITY COMPENSATION PLAN INFORMATION
-------------------------------------------------------------------------------------------------------------------
                                                                                               Number of securities
                                                                                               remaining available
                                                                                               for future issuance
                                                 Number of                                         under equity
                                              securities to be                                  compensation plans
                                                issued upon            Weighted-average       (excluding securities
                                                exercise of           exercise price of        reflected in column
                                                outstanding          outstanding options,              (a))
                                             options, warrants             warrants                    (c)
                                                 and rights               and rights
                                                    (a)                       (b)
-------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                          <C>                     <C>
Equity compensation plans approved by
  security holders . . . . . . . . . . . . .    170,101                      $9.77                   45,651
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by
  security holders . . . . . . . . . . . . .      9,600 (1)                 $10.00                      -0-
-------------------------------------------------------------------------------------------------------------------
           Total .  .  . . . . . . . . . . .    179,701                      $9.79                   45,651
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Represents  options granted to the former CFO of the Company pursuant to a
      severance agreement.


                                       20
<PAGE>

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, 2003,  and 2002,  and the results of  operations  for the two-year
period ended  December 31, 2003.  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 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.

CRITICAL ACCOUNTING POLICIES

      The Company's  accounting  and reporting  policies are in accordance  with
accounting  principles  generally  accepted  in the United  States of America as
defined by Public  Company  Accounting  Oversight  Board and  conform to general
practices within the banking industry.  Our significant  accounting policies are
described  in  the  notes  to the  consolidated  financial  statements.  Certain
accounting  policies  require  management  to  make  significant  estimates  and
assumptions,  which  have a  material  impact on the  carrying  value of certain
assets  and  liabilities,  and  we  consider  these  to be  critical  accounting
policies.  The estimates and assumptions used are based on historical experience
and  other  factors  that  management   believes  to  be  reasonable  under  the
circumstances.  Actual results could differ  significantly  from these estimates
and  assumptions,  which could have a material  impact on the carrying  value of
assets and  liabilities at the balance sheet dates and results of operations for
the reporting periods.


                                       21
<PAGE>

      The Company believes the following are critical  accounting  policies that
require the most  significant  estimates and assumptions  that are  particularly
susceptible  to a  significant  change  in  the  preparation  of  its  financial
statements.

      ALLOWANCE FOR LOAN LOSSES

      A provision for loan losses is based on management's  opinion of an amount
that is adequate to absorb losses inherent in the existing loan  portfolio.  The
allowance for loan losses is established through a provision for losses based on
management's  evaluation of current economic conditions,  volume and composition
of the loan  portfolio,  the fair market value or the estimated  net  realizable
value of underlying collateral,  historical charge off experience,  the level of
nonperforming  and past due loans, and other  indicators  derived from reviewing
the loan portfolio.  The evaluation includes a review of all loans on which full
collection may not be reasonably assumed. Should the factors that are considered
in  determining  the  allowance  for loan  losses  change  over time,  or should
management's  estimates prove incorrect,  a different amount may be reported for
the allowance and the  associated  provision  for loan losses.  For example,  if
economic  conditions in our market area  experience  an  unexpected  and adverse
change, we may need to increase our allowance for loan losses by taking a charge
against earnings in the form of an additional provision for loan loss.

      INVESTMENT SECURITIES

      Investment   securities  are  classified  into  three   categories.   Debt
securities  that we have the positive intent and ability to hold to maturity are
classified as "held-to-maturity securities" and reported at amortized cost. Debt
and equity  securities  that are bought and held  principally for the purpose of
selling in the near term are classified as "trading  securities" and reported as
fair  value,  with  unrealized  gains and  losses  included  in  earnings.  Debt
securities  not  classified  as either  held-to-maturity  securities  or trading
securities  and equity  securities  not  classified  as trading  securities  are
classified as  "available-for-sale  securities" and reported at fair value, with
unrealized  gains and losses  excluded  from earnings and reported as a separate
component of other comprehensive income. The Company did not have any securities
classified as trading securities as of December 31, 2002 or 2003.

      Premiums and  discounts  related to  securities  are amortized or accreted
over the life of the related  security as an  adjustment  to the yield using the
effective interest method and considering prepayment  assumptions.  Dividend and
interest income is recognized when earned.

      Gains and losses on sales or calls of  securities  are  recognized  on the
settlement date based on the adjusted cost basis of the specific  security.  The
financial  statement  impact of  settlement  date  accounting  versus trade date
accounting  is not  significant.  Declines in fair 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 fair
value.

      Management  conducts  regular  reviews to assess whether the values of our
investments  are  impaired and if any  impairment  is other than  temporary.  If
management determines that the value of any investment is other than temporarily
impaired,  we record a charge against  earnings in the amount of the impairment.
The  determination  of whether  other than  temporary  impairment  has  occurred
involves  significant  assumptions,   estimates  and  judgments  by  management.
Changing  economic  conditions - global,  regional or related to  industries  of
specific issuers - could adversely affect these values.  There was no impairment
for securities recorded in the years ending December 31, 2003 or 2002.


                                       22
<PAGE>

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, AND 2002

NET INCOME

           2003  Compared to 2002.  For the year ended  December 31,  2003,  the
Company  recorded net income of $1,663,276.  The increase in net income compared
with 2002 was $254,294, or approximately 18%. The increase in net income in 2003
as compared  with 2002 was  primarily  because of increases in  interest-earning
assets and  liabilities  which  resulted in an increase in net  interest  income
after provision for loan losses of $1,482,363,  or  approximately  24%. This net
increase of  $1,482,363  was offset by  $854,863  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 Company'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,
                                                               (DOLLARS IN THOUSANDS)

                                            2003                              2002                            2001
                              ------------------------------     -------------------------------   -----------------------------
                              AVERAGE     INCOME/    YIELD/       AVERAGE      INCOME/    YIELD/   AVERAGE     INCOME/    YIELD/
                              BALANCE     EXPENSE     RATE        BALANCE      EXPENSE     RATE    BALANCE     EXPENSE    RATE
                              -------     -------    ------       -------      -------    ------   -------     -------    ------
                                                                       (DOLLARS IN THOUSANDS)
Assets:
<S>                  <C>       <C>           <C>    <C>          <C>           <C>       <C>          <C>       <C>        <C>
Investment securities(1)....   $24,125       801     3.32%       $25,466       $1,231     4.83%       $20,028   $1,223     6.11%
Unrealized gains on                145         -       -             281            -        -            270        -         -
available for sale
securities..................
Federal funds sold..........       882        10     1.13%         3,451           51     1.48%         7,187      259     3.60%
Loans (2)...................   162,133    10,836     6.68%       122,177        9,231     7.56%        88,638    7,892     8.90%
Allowance for loan losses...    (1,954)        -        -         (1,234)           -        -           (741)       -         -
Cash and due from banks.....     5,010         -        -          3,729            -        -          3,652        -         -
Other assets................    16,642         -        -         12,413            -        -          7,703        -         -
   Total....................   206,983         -        -        166,283            -        -        126,737        -         -
Total interest-earning         187,285    11,647     6.22%       151,375       10,513     6.95%       116,123    9,374     8.07%
assets......................
Liabilities:
Noninterest-bearing demand      27,946         -        -         21,046            -        -         15,720        -         -
deposits....................
Interest bearing demand         67,378       753     1.12%        57,465        1,066     1.86%        44,237    1,357      3.07%
and savings deposits........
Time deposits...............    87,602     2,290     2.61%        69,432        2,392     3.45%        53,705    2,998      5.58%
   Total deposits...........   182,926         -        -        147,943            -        -        113,662        -         -
Other borrowings............    10,321       280     2.71%         5,297          156     2.95%         1,466       53      3.62%
Other liabilities...........       899         -        -            780            -        -            569        -         -
Shareholders' equity........    12,837         -        -         12,263            -        -         11,040        -         -
   Total....................   206,983         -        -        166,283            -        -        126,737        -         -
Total interest-bearing         165,301     3,323     2.01%       132,194        3,614     2.73%        99,408    4,408      4.43%
liabilities.................
Net interest income.........         -     8,324        -              -        6,899        -              -    4,966         -
Net interest spread (3).....         -         -     4.21%             -            -     4.22%             -        -      3.64%
Net interest margin (4).....         -         -     4.44%             -            -     4.56%             -        -      4.28%

</TABLE>


                                       23
<PAGE>

(1)   Income from investment  securities has been reduced by $52,446 and $40,325
      at December 31, 2003, and December 31, 2002,  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
      $1,373,000  and $989,000  for the years ended  December 31, 2003 and 2002,
      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.

<TABLE>
<CAPTION>
                   ANALYSIS OF CHANGES IN NET INTEREST INCOME
                        FOR THE YEARS ENDED DECEMBER 31,
                                 (IN THOUSANDS)

                                                                              2003 COMPARED TO 2002
                                                                               INCREASE (DECREASE)
                                                                                DUE TO CHANGE IN
                                                                   --------------------------------------------
                                                                      RATE           VOLUME           TOTAL

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

<S>                                                                   <C>               <C>              <C>
Income from interest-earning assets:
  Interest and fees on loans................................          (1,419)           3,036            1,617
  Interest on securities....................................            (365)            (65)            (430)
  Interest on Federal funds sold............................              (3)            (38)             (41)
                                                                   -----------     -----------     ------------
          Total interest income.............................          (1,787)           2,933            1,146

Expense from interest-bearing liabilities:
  Interest on interest-bearing deposits.....................            (498)             185            (313)
  Interest on time deposits.................................            (732)             630            (102)
          Interest on other borrowings......................             (24)             148              124
                                                                   -----------     -----------     ------------
          Total interest expense............................          (1,254)             963            (291)
                                                                   -----------     -----------     ------------
          Net interest income...............................            (533)           1,970            1,437

</TABLE>

      2003  Compared to 2002.  Net interest  income  increased by  approximately
$1,437,000  for the year ended  December 31,  2003,  or 21%. The increase in net
interest   income  is  due  to  an   increase   of  $35.9   million  in  average
interest-earning  assets,  an  increase  of 24%.  During  the same  period,  the
increase in average interest-bearing  liabilities was $33.1 million, an increase
of 25%. The net interest margin  decreased  during the year from 4.56% to 4.44%.
The  decrease  in the  net  interest  margin  reflects  the  volume  of  average
interest-earning  assets that were originated in years prior to 2003, therefore,
during 2003, 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 73 basis points to 6.22% in 2003, and the
rate paid on  interest-bearing  liabilities  decreased 72 basis points to 2.01%,
resulting  in a net  decrease in the  interest  rate spread of 1 basis points to
4.21%.


                                       24
<PAGE>

      The most significant increase in average interest-earning assets consisted
of an increase of $40 million in average  loans for the year ended  December 31,
2003. The average rates paid on interest-earning assets has decreased moderately
in 2003, as discussed  previously.  The most  significant  change was a 88 basis
point decrease in the yield on loans in 2003.

      Average  interest-bearing demand and savings deposits grew $10 million and
average time deposits grew by $18 million for the year ended  December 31, 2003.
The average rate paid on these  deposits in 2003 was 1.12% and 2.61%,  down from
1.86% and 3.45%, respectively in 2002.

      The increase in net interest income of  approximately  $1,437,000 from the
above  table is due  mainly  to the  increased  volume  of  loans.  There was an
increase in interest and fees on loans of  approximately  $3,036,000  due to the
above  mentioned  $40  million  increase in total  loans  during the year.  This
increase  in interest  and fees on loans more than  offset the  decrease in this
income due to the reduction of interest rates.

PROVISION FOR LOAN LOSSES

      For the year ended  December  31,  2003,  the  provision  for loan  losses
decreased by $44,945 to $735,000,  compared to $779,945 for the prior year.  The
decrease in 2003 was based on management's  evaluation of the overall  allowance
for loan  losses.  Due to a lack of  historical  charge off  experience,  and an
increase in total loans in the amount of $33 million,  management  has continued
to fund the  allowance  for loan losses with the  intention  of reaching a level
comparable to peer banks, although the rate of increase has been reduced.

      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, 2003,  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
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 review  officer 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.


                                       25
<PAGE>

      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, 2003.
Nonaccrual  loans as a percentage of total loans  increased  from 0.11% to 0.16%
during 2003.  The ratio of  nonperforming  assets to total loans  decreased from
0.97% to 0.17% for the same period. At December 31, 2003, the allowance for loan
losses as a  percentage  of total loans was 1.19%  compared to 1.09% at December
31,  2002.  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, 2003,  was  approximately
$2,142,000,  a net  increase of  approximately  $547,000  for the year.  The net
charge-offs  increased  from  approximately  $32,000  in 2002  to  approximately
$188,000 in 2003, representing a net charge-off ratio of 0.10% compared to 0.02%
in 2002. The allowance to  nonaccruing  loans was 741% at December 31, 2003, and
1003% at December 31, 2002.

      The  following  table  presents  at  the  dates  indicated  the  aggregate
nonperforming loans for the following categories:

<TABLE>
<CAPTION>

                                                                                                  DECEMBER 31,
                                                                                    -----------------------------------------
                                                                                       2003           2002           2001
                                                                                    -----------     ---------     -----------
                                                                                             (DOLLARS IN THOUSANDS)

<S>                                                                                      <C>          <C>               <C>
Loans accounted for on a nonaccrual basis..........................................      289          $159              $0

Loans contractually past due ninety days or more as
   to interest or principal payments and still accruing............................    1,460            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               0

Loans now current about which there are serious
   doubts as to the ability of the borrower to comply
   with present loan repayment terms...............................................      182         2,424             968

           The reduction in interest income  associated with nonaccrual loans as
of December 31, 2003 is as follows:

Interest income that would have been recorded on
   nonaccrual loans under original terms...........................................   $8,916
Interest income that was recorded
   on nonaccrual loans.............................................................   $4,761
        Reduction in interest income...............................................   $4,155

</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, 2003
and 2002.
                                                        (Dollars in thousands)
                                                          2003          2002
                                                          ----          ----
Commitments to extend credit..........................   $37,906      $26,535
Standby letters of credit.............................     5,640        1,694
                                                         ------       -------
    TOTALS                                               $43,546      $28,229

      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 increased by $9 million at December 31, 2003 compared
to 2002.  This  increase is due to the  increase in the number of these types of
loans and from present customers reducing their outstanding  balance on existing
loans.


                                       26
<PAGE>

      The  following  table  summarizes  the  allowance for loan losses for each
year.

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                          -----------------------------------------------------
                                                                              2003                 2002                    2001
                                                                              ----                 ----                    ----
                                                                                           (DOLLARS IN THOUSANDS)

<S>                                                                          <C>                <C>                    <C>
Average balance of loans outstanding                                         162,133            $122,177               $88,638
Balance of allowance for loan losses at beginning of year............          1,595                 847                   571
Charge-offs:
   Real estate - mortgage............................................             10                  26                    35
   Consumer..........................................................            188                  19                    10
   Commercial........................................................              0                   0                   146

Recoveries:
   Real estate - mortgage............................................              4                   0                     0
   Consumer..........................................................              6                  13                     1
   Commercial........................................................              0                   0                     0

Net charge-offs......................................................            188                  32                   190
Additions to allowance charged to operations.........................            735                 780                   466
Balance of allowance charged to operations...........................          2,142               1,595                   847
Ratio of net loan charge-offs during the year to
   average loans outstanding during the year.........................          0.12%               0.03%                 0.96%
</TABLE>

      The following  table  summarizes  the allocation of the allowance for loan
losses to types of loans as of the indicated dates.

<TABLE>
<CAPTION>

                                                                   YEAR ENDED DECEMBER 31,
                      ---------------------------------------------------------------------------------------------------
                                       2003                                 2002                             2001
                      ---------------------------------------------------------------------------------------------------
                                             PERCENT OF                   PERCENT OF                        PERCENT OF
                                           LOANS IN EACH                  LOANS IN EACH                     LOANS IN EACH
                                            CATEGORY TO                   CATEGORY TO                       CATEGORY TO
                           AMOUNT           TOTAL LOANS     AMOUNT        TOTAL LOANS          AMOUNT       TOTAL LOANS
--------------------------------------------------------------------------------------------------------------------------
                                                               (DOLLARS IN THOUSANDS)
<S>                        <C>                 <C>          <C>             <C>               <C>              <C>
Commercial............     $10,318             5.74%        $7,587          5.18%             $8,403           8.20%
Real estate...........     163,542            90.94%       132,792         90.73%             89,047          86.94%
Consumer..............       5,985             3.32%         5,989          4.09%              4,980           4.86%
                           -------           -------      --------        -------           --------         -------
                           179,845           100.00%      $146,368        100.00%           $102,430         100.00%
</TABLE>


OTHER INCOME

      2003 Compared to 2002. Other income increased by approximately $148,000 in
2003, or 8%,  compared to 2002.  Deposit and service charge income  increased by
approximately  $160,000 for the year ended  December 31, 2003.  This increase is
due  primarily  to an increase of  approximately  $139,000 in NSF and  overdraft
fees.

OTHER EXPENSES

      2003  Compared  to 2002.  Noninterest  expenses  increased  during 2003 by
approximately  $1,003,000  compared  to the same  period in 2002.  Salaries  and
employee benefits increased by approximately $790,000 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 91 to 102 as of December 31, 2003.
Equipment and occupancy expenses combined increased by $150,000. The increase in
equipment  and  occupancy  expenses is related to the new branch which opened in
Kodak, Tennessee, and the construction relating to the operation center.


                                       27
<PAGE>

BALANCE SHEET REVIEW

      2003  Compared to 2002.  Total  average  assets  increased  in 2003 by $41
million,  or 24%. The most  significant  increase in average  assets came in the
growth of the loan  portfolio,  which grew $40 million,  or 33%.  Total  average
interest-earning  assets increased by $35.9 million,  or 24% in 2003 as compared
to 2002. Other average assets increased by $4 million in 2003 to $17 million.

      Total average  deposits  increased by $35 million,  or 24%, which, for the
most part, funded the asset growth. Average non-interest-bearing demand deposits
increased by $7 million,  or 33%,  average  interest-bearing  demand and savings
increased by $10 million,  or 17%,  and average time  deposits  increased by $18
million, or 26%.

      Stockholders' equity increased by approximately $1,486,000.  This increase
reflected  net  earnings  of   approximately   $1,663,000.   Accumulated   other
comprehensive  income  represents  the  net  unrealized  gains  or  (losses)  on
securities  available-for-sale  which  decreased  during  2003  by  $180,094  to
($21,686), net related tax asset.

SECURITIES PORTFOLIO

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

                                                         DECEMBER 31,
                                                 ---------------------------
                                                   2003      2002     2001
                                                 --------  -------- --------
                                                    (DOLLARS IN THOUSANDS)

U.S. government securities and agencies ........    6,546   $2,064  $19,072
Mortgage-backed securities......................   15,710  $22,560  $15,766


      The carrying  amounts of  securities  in each  category as of December 31,
2003, are shown in the following table according to maturity classifications.


                                       28
<PAGE>

                                                     U.S. GOVERNMENT SECURITIES
                                                       AND AGENCIES, INCLUDING
                                                     MORTGAGE-BACKED SECURITIES
                                                     ---------------------------
                                                              CARRYING
                                                               AMOUNT
                                                     ---------------------------
                                                       (DOLLARS IN THOUSANDS)
One year or less..................................            $   250
                                                                  269
After one year through five years.................                269
After five years through ten years................              3,385
After ten years...................................             18,352


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,
                                                                ----------------------------
                                                                  2003      2002      2001
                                                                --------  --------  --------
                                                                   (DOLLARS IN THOUSANDS)

<S>                                                              <C>        <C>       <C>
Commercial, financial, agricultural.......................       10,489     $7,542    $8,403
Real estate - construction, development, vacation.........       44,086    $39,183   $24,060
Real estate - mortgage....................................      119,821    $93,609   $64,987
Consumer and other........................................        5,449     $6,034    $4,980

Less allowance for loan losses............................        2,142     $1,595      $847
Loans, net................................................      177,703   $144,773  $101,583

</TABLE>

      MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES

      Total loans as of December  31,  2003,  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.


                                       29
<PAGE>

                                                                 (DOLLARS IN
MATURITY:                                                        THOUSANDS)
---------                                                        ----------

One year or less                                                    63,602
After one year through five years..............................     97,107
After five years...............................................     19,136


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.

<TABLE>
<CAPTION>

                                                                              YEAR ENDED DECEMBER 31,
                                                                              -----------------------
                                                           2003                         2002                        2001
                                               -------------------------------------------------------------------------------------
                                                   AMOUNT          RATE         AMOUNT          RATE         AMOUNT         RATE
                                               --------------- --------------------------------------------------------- -----------
                                                                              (DOLLARS IN THOUSANDS)

<S>                                                  <C>              <C>         <C>           <C>            <C>           <C>
Noninterest-bearing demand deposits............       $27,946            0%         $21,046          0%          $15,720         0%
Interest-bearing demand and savings deposits...       $67,378         1.12%         $57,465       1.86%          $44,237      3.07%
Time deposits..................................       $87,602         2.61%         $69,432       3.45%          $53,705      5.58%
                                               ---------------              ----------------             ----------------
                                                     $182,926                      $147,943                     $113,662
                                               ===============              ================             ================
</TABLE>

      The amounts of time  certificates of deposit issued in amounts of $100,000
or more as of December 31, 2003, 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.........................................    $13,804
Over three months through six months.........................    $14,835
Over six months through 12 months............................     $9,056
Over 12 months...............................................    $11,654


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.


                                       30
<PAGE>

      At December 31, 2003,  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 Company's  capital ratios and required minimums at December
31, 2003, are shown below:

<TABLE>
<CAPTION>

                                                                    REGULATORY     MINIMUM
                                                                    REQUIREMENT    ACTUAL
                                                                    -----------    ----------

<S>                                                                    <C>           <C>
Tier 1 capital to risk adjusted assets.............................    4.00%         10.10%
Total capital to risk adjusted assets..............................    8.00%         11.64%
Tier 1 leverage ratio (to average quarterly assets)................    4.00%          8.87%

</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.


                                       31
<PAGE>

      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,
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, 2003
                             (DOLLARS IN THOUSANDS)

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

<S>                                                       <C>         <C>      <C>         <C>        <C>
Federal funds sold                                        0           0        0           0          0
Securities                                              605         767      269      20,615     22,256
Loans (1)                                           104,219      25,135   37,166      13,325    179,845
                                                   --------    -------- --------    --------   --------
        Total interest-earning assets
                                                   --------    -------- --------    --------   --------
Interest-bearing liabilities:
     Interest-bearing demand deposits                65,068           0        0           0     65,068
     Savings                                          5,758           0        0           0      5,758
     Time deposits                                   27,152      40,906   18,092       5,316     91,466
     Other borrowings                                 6,741       5,500        0           0     12,241
                                                   --------    -------- --------    --------   --------
        Total interest-bearing liabilities
                                                   --------    -------- --------    --------   --------

Interest rate sensitivity gap                           105    (20,504)   19,343      28,624     27,568
                                                   ========    ======== ========    ========   ========

Cumulative interest rate sensitivity gap                105    (20,399)  (1,056)      27,568
                                                   ========    ======== ========    ========

Interest rate sensitivity gap ratio                   0.10%    (79.16%)   51.67%      84.34%
                                                   ========    ======== ========    ========

Cumulative interest rate sensitivity gap ratio        0.10%    (78.75%)  (2.82%)      81.23%

</TABLE>

(1)   Includes nonaccrual loans.


                                       32
<PAGE>


      The above table summarizes  interest-sensitive  assets and liabilities for
the Bank as of December  31,  2003.  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,  2003,  the Bank's  cumulative  one-year  interest  rate
sensitivity  gap ratio was (78.75%).  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.

RETURN ON ASSETS AND EQUITY

      The following table  summarizes the return on average assets and return on
average equity for the years ended December 31, 2003, 2002 and 2001.

                                                         FOR THE YEARS ENDING
                                                              DECEMBER 31,
                                                       ------------------------
                                                        2003      2002    2001
                                                       ------    ------  ------

Return on Average Assets ............................   0.88%    0.90%    0.88%
Return on Average Equity.............................  13.73%   12.13%   10.50%
Average Equity as a Percentage of Average Assets.....   6.40%    7.38%    8.74%


OFF-BALANCE SHEET ARRANGEMENTS

      Our only material off-balance sheet arrangements consist of commitments to
extend  credit and standby  letters of credit  issued in the ordinary  course of
business.  For a  complete  description  of these  obligations  please  refer to
"Commitments and lines of credit."

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 variable 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.


                                       33
<PAGE>


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.


ITEM 8A.  CONTROLS AND PROCEDURES

      The Company's principal executive and principal financial officers believe
that the Company's disclosure controls and procedures,  as defined in Securities
Exchange Act Rules  13a-15(e) or 15d-15(e),  are effective.  This conclusion was
based on an  evaluation  of these  controls and  procedures as of the end of the
fourth quarter of 2003.


                                    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  "2004  Proxy  Statement")
relating to the annual meeting of shareholders  of the Company,  scheduled to be
held on May 11, 2004, is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

      The  information  appearing under the heading  "Compensation  of Executive
Officers and Directors" in the 2004 Proxy  Statement is  incorporated  herein by
reference.


                                       34
<PAGE>

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 2004 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 2004 Proxy Statement is incorporated herein by reference.

ITEM 13.  EXHIBITS, LIST 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, 2003,  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, 2003 (File No. 000-49912),  previously filed with the
                  Commission and incorporated herein by reference).

       2.2        Amendment  to  Plan  of  Reorganization  dated  July  1,  2003
                  (included  as Exhibit 2.2 to the Report on Form 8-K12G3 of the
                  Registrant,   dated  July  12,  2003  (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,  2003 (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, 2003
                  (File No. 000-49912), previously filed with the Commission and
                  incorporated herein by reference).

      10.1        Stock Option Plan of the Registrant  (included as Exhibit 10.1
                  to the  Registrant's  Form 10-KSB for the year ended  December
                  31, 2002 and incorporated herein by reference)*


                                       35
<PAGE>

      10.2        Employment  Agreement  of  Dwight  B.  Grizzell  (included  as
                  Exhibit  10.2 to the  Registrant's  Form  10-KSB  for the year
                  ended December 31, 2002 and incorporated herein by reference)*

      10.3        Stock  Option  Agreement  of Dwight B.  Grizzell  (assumed  by
                  Registrant) (included as Exhibit 10.3 to the Registrant's Form
                  10-KSB for the year ended  December 31, 2002 and  incorporated
                  herein by reference)*

        21        Subsidiaries of the Registrant

      31.1        Certificate   of  CEO   pursuant   to   Section   302  of  the
                  Sarbanes-Oxley Act of 2002

      31.2        Certificate   of  CFO   pursuant   to   Section   302  of  the
                  Sarbanes-Oxley Act of 2002

      32.1        Certificate   of  CEO   pursuant   to   Section   906  of  the
                  Sarbanes-Oxley Act of 2003

      32.2        Certificate   of  CFO   pursuant   to   Section   906  of  the
                  Sarbanes-Oxley Act of 2003.

         *        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 2003.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information  appearing under the caption  "Ratification of Independent
Public  Accountants"  in the 2004  Proxy  Statement  is  incorporated  herein by
reference.


                                       36
<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 30, 2004

      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 30, 2004
-----------------------------------------
Dwight B. Grizzell, President,
Chief Executive Officer and Director
[Principal Executive Officer]


       /s/ Rick Hubbs                                      Date:  March 30, 2004
-----------------------------------------
Rick Hubbs, Vice President and
Controller
[Principal Financial Officer and
Principal Accounting Officer]


       /s/ James F. Bookstaff                              Date:  March 30, 2004
-----------------------------------------
James E. Bookstaff, Director


       /s/ Gary A. Helton                                  Date:  March 30, 2004
-----------------------------------------
Gary A. Helton, Director


       /s/ Bruce M. Johnson                                Date:  March 30, 2004
-----------------------------------------
Bruce M. Johnson, Director



                                       37
<PAGE>

       /s/ Charlie R. Johnson                              Date:  March 30, 2004
-----------------------------------------
Charlie R. Johnson, Director


       /s/ Sam L. Large                                    Date:  March 30, 2004
-----------------------------------------
Sam L. Large, Director


       /s/ Jeffrey J. Monson                               Date:  March 30, 2004
-----------------------------------------
Jeffrey J. Monson, Director


       /s/ Linda N. Ogle                                   Date:  March 30, 2004
-----------------------------------------
Linda N. Ogle, Director


       /s/ Michael C. Ownby                                Date:  March 30, 2004
-----------------------------------------
Michael C. Ownby, Director


       /s/ John R. Parker                                  Date:  March 30, 2004
-----------------------------------------
John R. Parker, Director


       /s/ Ruth Reams                                      Date:  March 30, 2004
-----------------------------------------
Ruth Reams, Director


       /s/ Barbara S. Stevens                              Date:  March 30, 2004
-----------------------------------------
Barbara S. Stevens, Director


                                       38

<PAGE>


                       MOUNTAIN NATIONAL BANCSHARES, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 2003

<PAGE>

                                    CONTENTS

                                                                      Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                      1

FINANCIAL STATEMENTS

    Consolidated balance sheets                                         2
    Consolidated statements of income                                   3
    Consolidated statements of changes in stockholders' equity          4
    Consolidated statements of cash flows                               5
    Notes to consolidated financial statements                        6-30

<PAGE>

               Report of Independent Certified Public Accountants
               --------------------------------------------------

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

      We have audited the accompanying consolidated balance sheets of Mountain
National Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002, 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, 2003 and 2002, 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.


HAGLETT, LEWIS & BEITER, PLLC

Chattanooga, Tennessee
January 16, 2004


                                        F-1
<PAGE>

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

                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2003 and 2002

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

                                                                            2003                       2002
                                                                        ------------               ------------
          ASSETS

<S>                                                                      <C>                        <C>
Cash and due from banks                                                  $ 5,968,609                $ 4,944,524
Federal funds sold                                                                 -                 10,225,000
                                                                        ------------               ------------

          Total cash and cash equivalents                                  5,968,609                 15,169,524

Securities available for sale                                             22,255,902                 24,624,148
Restricted investments, at cost                                            1,245,105                    963,300
Loans, net of unearned interest and allowance for loan losses            177,703,487                144,773,151
Premises and equipment                                                    12,020,937                 10,409,935
Accrued interest receivable                                                  922,283                    839,857
Cash surrender value of life insurance                                     3,086,065                  2,928,248
Other assets                                                               1,266,287                    375,681
                                                                        ------------               ------------

          Total assets                                                  $224,468,675               $200,083,844
                                                                        ============               ============

          LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
    Noninterest-bearing demand deposits                                 $ 34,637,363               $ 24,973,285
    NOW accounts                                                          12,235,763                  9,468,946
    Money market accounts                                                 52,832,296                 51,670,265
    Savings accounts                                                       5,758,202                  3,262,205
    Time deposits                                                         91,466,434                 86,513,602
                                                                        ------------               ------------

          Total deposits                                                 196,930,058                175,888,303

Federal funds purchased                                                    4,400,000                           -
Securities sold under agreements to repurchase                             2,340,580                  1,999,637
Accrued interest payable                                                     222,671                    316,715
Notes payable                                                              5,671,000                  6,000,000
Federal Home Loan Bank advances                                                    -                  2,000,000
Other liabilities                                                            405,676                    866,436
                                                                        ------------               ------------

          Total liabilities                                              209,969,985                187,071,091
                                                                        ------------               ------------

Stockholders' equity:
    Common stock, $1.00 par value; 2,400,000 shares
       authorized; shares issued and outstanding
       1,260,702 in 2003 and 1,200,000 in 2002                             1,260,702                  1,200,000
    Additional paid-in capital                                            11,992,294                 10,800,000
    Retained earnings                                                      1,267,380                    854,345
    Accumulated other comprehensive income                                   (21,686)                   158,408
                                                                        ------------               ------------

          Total stockholders' equity                                     14,498,690                  13,012,753
                                                                        ------------               ------------

          Total liabilities and stockholders' equity                    $224,468,675               $200,083,844
                                                                        ============               ============


          The Notes to Consolidated Financial Statements are an integral part of these statements.

</TABLE>


                                       F-2
<PAGE>

<TABLE>
<CAPTION>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                     Years Ended December 31, 2003 and 2002
---------------------------------------------------------------------------------------------------------------
                                                                            2003                       2002
                                                                        ------------               ------------
INTEREST INCOME
<S>                                                                     <C>                        <C>
    Loans                                                               $ 10,836,297               $  9,231,073
    Securities                                                               852,567                  1,271,049
    Federal funds sold and deposits in other banks                             9,972                     51,039
                                                                        ------------               ------------

                                                                          11,698,836                 10,553,161

INTEREST EXPENSE                                                           3,322,733                  3,614,476
                                                                        ------------               ------------

       Net interest income                                                 8,376,103                  6,938,685

Provision for loan losses                                                    735,000                    779,945
                                                                        ------------               ------------

       Net interest income after provision for loan losses                 7,641,103                  6,158,740
                                                                        ------------               ------------
NONINTEREST INCOME
    Service charges on deposit accounts                                      991,571                    829,901
    Other fees and commissions                                               354,947                    289,081
    Gain on sale of mortgage loans                                           454,412                    371,249
    Gain on securities available for sale                                     85,272                    294,924
    Other noninterest income                                                 136,772                     89,338
                                                                        ------------               ------------

                                                                           2,022,974                  1,874,493
                                                                        ------------               ------------
NONINTEREST EXPENSES
    Salaries and employee benefits                                         4,014,432                  3,224,256
    Occupancy expenses                                                       518,104                    454,420
    Other operating expenses                                               2,529,355                  2,379,871
                                                                        ------------               ------------

                                                                           7,061,891                  6,058,547
                                                                        ------------               ------------

       Income before income taxes                                          2,602,186                  1,974,686

Income taxes                                                                 938,910                    565,704
                                                                        ------------               ------------

       Net income                                                        $ 1,663,276               $  1,408,982
                                                                        ============               ============

EARNINGS PER SHARE
    Basic                                                                     $ 1.32               $       1.12
    Diluted                                                                     1.24                       1.08
                                                                        ============               ============

            The Notes to  Consolidated  Financial  Statements  are an integral part of these statements.

</TABLE>


                                       F-3
<PAGE>

<TABLE>
<CAPTION>

                                        MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                                   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                            Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                      Total
                                                                        Comprehensive              Stockholders'          Common
                                                                           Income                     Equity               Stock
                                                                        ------------               ------------        ------------

<S>                                                                      <C>                      <C>                 <C>
BALANCE, December 31, 2001                                                                         $ 11,521,454        $ 6,000,000

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

    Comprehensive income:
       Net income                                                        $ 1,408,982                  1,408,982                  -

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

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

BALANCE, December 31, 2002                                                                           13,012,753          1,200,000

    Declaration of 5% stock dividend                                                                     (7,245)            59,702

    Exercise of stock options                                                                            10,000              1,000

    Comprehensive income:
       Net income                                                        $ 1,663,276                  1,663,276                  -

       Other comprehensive income, net of tax:
          Unrealized holding gains (losses) on
             securities available for sale, net of
             reclassification adjustment                                    (180,094)                  (180,094)                 -
                                                                        ------------               ------------       ------------

       Total comprehensive income                                        $ 1,483,182
                                                                        ============

BALANCE, December 31, 2003                                                                         $ 14,498,690        $ 1,260,702

                                                                                                   ============       ============


                                                                                                                       Accumulated
                                                                          Additional                 Retained             Other
                                                                           Paid-in                   Earnings          Comprehensi
                                                                           Capital                   (Deficit)           Income
                                                                        ------------               ------------        ------------

BALANCE, December 31, 2001                                               $ 6,000,000                $  (554,637)          $ 76,091

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

    Comprehensive income:
       Net income                                                                  -                  1,408,982                  -

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

       Total comprehensive income


BALANCE, December 31, 2002                                                10,800,000                    854,345            158,408

    Declaration of 5% stock dividend                                       1,183,294                 (1,250,241)                 -

    Exercise of stock options                                                  9,000                          -                  -

    Comprehensive income:
       Net income                                                                  -                  1,663,276                  -

       Other comprehensive income, net of tax:
          Unrealized holding gains (losses) on
             securities available for sale, net of
             reclassification adjustment                                           -                          -           (180,094)
                                                                        ------------               ------------        ------------

       Total comprehensive income

BALANCE, December 31, 2003                                              $ 11,992,294                $ 1,267,380          $ (21,686)
                                                                        ============               ============        ============

                        The Notes to  Consolidated  Financial  Statements  are an integral part of these statements.
</TABLE>


                                       F-4
<PAGE>

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

                                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     Years Ended December 31, 2003 and 2002
----------------------------------------------------------------------------------------------------------------------------------

                                                                                                       2003                2002
                                                                                                   ------------        -----------
CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                                                                 <C>                <C>
    Net income                                                                                      $ 1,663,276        $ 1,408,982
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation                                                                                  643,385            548,473
          Net realized (gains) losses on securities available for sale                                  (85,272)          (294,924)
          Net amortization on securities available for sale                                             504,226            285,659
          Provision for loan losses                                                                     735,000            779,945
          Gain on sale of other real estate                                                            (103,623)                 -
          Deferred income taxes                                                                         (74,190)          (168,696)
          Increase in cash surrender value of life insurance                                           (157,817)                 -
          Change in operating assets and liabilities:
            Accrued interest receivable                                                                 (82,426)           187,010
            Accrued interest payable                                                                    (94,044)             26,575
            Other assets and liabilities                                                               (469,194)           850,937
                                                                                                   ------------        -----------

               Net cash provided by operating activities                                              2,479,321          3,623,961
                                                                                                   ------------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of securities available for sale                                                      (19,728,511)       (25,864,319)
    Purchases of other investments                                                                     (452,805)          (250,838)
    Proceeds from sales, maturities, and calls
       of securities available for sale                                                              21,497,709         36,219,877
    Net increase in loans                                                                           (35,118,336)       (43,970,410)
    Purchase of premises and equipment                                                               (2,254,387)        (2,791,779)
    Purchase of life insurance                                                                                -         (2,900,000)
    Proceeds from sale of other real estate                                                             919,641                  -
                                                                                                   ------------        -----------

               Net cash used in investing activities                                                (35,136,689)       (39,557,469)
                                                                                                   ------------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase in deposits                                                                         21,041,755         33,356,652
    Payments on notes payable                                                                        (6,000,000)                 -
    Proceeds from notes payable                                                                       5,671,000          6,000,000
    Net (decrease) increase in Federal Home Loan Bank advances                                       (2,000,000)         2,000,000
    Proceeds from federal funds purchased                                                             4,400,000                  -
    Net increase in securities sold under
      agreements to repurchase                                                                          340,943            706,434
    Proceeds from sale of common stock                                                                   10,000                  -
    Redemption of fractional shares                                                                      (7,245)                 -
                                                                                                   ------------        -----------

               Net cash provided by financing activities                                             23,456,453         42,063,086
                                                                                                   ------------        -----------

NET (DECREASE) INCREASE IN CASH AND
    CASH EQUIVALENTS                                                                                 (9,200,915)         6,129,578

CASH AND CASH EQUIVALENTS, beginning of year                                                         15,169,524          9,039,946
                                                                                                   ------------        -----------

CASH AND CASH EQUIVALENTS, end of year                                                              $ 5,968,60        $ 15,169,524
                                                                                                   ===========        ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash paid during the year for interest                                                          $ 3,416,777       $  2,924,663
    Cash paid during the year for taxes                                                               1,453,355             48,134
                                                                                                   ============       ============

                        The Notes to  Consolidated  Financial  Statements  are an integral part of these statements.
</TABLE>



                                       F-5
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies

           The   accounting   and  reporting   policies  of  Mountain   National
           Bancshares,  Inc. and  subsidiary  (Company)  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 and geographic concentration:

           The  Company  is  a  bank-holding  company  which  owns  all  of  the
           outstanding  common stock of Mountain National Bank (Bank).  The Bank
           provides a variety of financial  services  through its branch offices
           located  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  loans,  real
           estate loans, and installment loans.

           Principles of consolidation:

           The  consolidated  financial  statements  include the accounts of the
           Company  and  the  Bank.  All  material   intercompany  accounts  and
           transactions 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
           revenue 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.


                                       F-6
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

           Use of estimates: (continued)

           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. 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 and net deferred loan fees.

           Loan  origination  and  commitment  fees,  as well as certain  direct
           origination  costs,  are deferred and amortized as a yield adjustment
           over the  lives of the  related  loans  using  the  interest  method.
           Amortization  of deferred  loan fees is  discontinued  when a loan is
           placed on nonaccrual status.


                                       F-7
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

           Loans: (continued)

           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.  Installment
           loans and other  personal  loans are  typically  charged off no later
           than 90 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.

           All interest  accrued but not  collected for loans that are placed on
           nonaccrual or charged off is reversed against  interest  income.  The
           interest  on  these  loans  is  accounted  for on the  cash-basis  or
           cost-recovery  method, until qualifying for return to accrual.  Loans
           are returned to accrual  status when all the  principal  and interest
           amounts contractually due are brought current and future payments are
           reasonably assured.

           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.


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

           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.

           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 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 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.

           Statements 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.

           Reclassifications:

           Certain amounts  reported in the 2002 financial  statements have been
           reclassified to conform to the 2003 presentation.

           Advertising costs:

           The Company expenses all advertising  costs as incurred.  Advertising
           expense was $190,412  and  $171,017 for the years ended  December 31,
           2003 and 2002, respectively.


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 1.    Summary of Significant Accounting Policies (continued)

           Stock-based compensation:

           At December  31,  2003,  the Company has a  stock-based  compensation
           plan,  which is described more fully in Note 14. The Company  applies
           the  recognition  and  measurement  principles of APB Opinion No. 25,
           "Accounting   for   Stock   Issued   to   Employees,"   and   related
           interpretations  in accounting for the plan. No stock-based  employee
           compensation  is reflected in net income as all options granted under
           this plan had an exercise price equal to or above the market value of
           the underlying  common stock on the date of the grant.  The following
           table  illustrates the effect on net income and earnings per share if
           the company had applied the fair value recognition provisions of FASB
           Statement No. 123,  "Accounting  for  Stock-Based  Compensation,"  to
           stock-based employee compensation.

<TABLE>
<CAPTION>

                                                                                         2003               2002
                                                                                       ----------        ----------

          <S>                                                                         <C>               <C>
           Net income, as reported                                                     $1,663,276        $1,408,982

           Effect of stock-based employee compensation
               expense determined under fair value method
               for all awards, net of the related tax effects                             (40,262)          (30,283)
                                                                                       ----------        ----------

           Pro forma net income                                                        $1,623,014        $1,378,699
                                                                                       ==========        ==========

            Earnings per share:
               Basic-as reported                                                            $1.32             $1.12
                                                                                       ==========        ==========
               Basic-pro forma                                                              $1.29             $1.09
                                                                                       ==========        ==========

               Diluted-as reported                                                          $1.24             $1.08
                                                                                       ==========        ==========
               Diluted-pro forma                                                            $1.21             $1.06
                                                                                       ==========        ==========

           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.
</TABLE>


                                       F-10
<PAGE>
                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

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  approximate  market  value  of  securities
           available for sale at December 31, 2003 and 2002, is as follows:

<TABLE>
<CAPTION>

                                                                                   2003
                                                       --------------------------------------------------------------
                                                                         Gross           Gross
                                                         Amortized      Unrealized      Unrealized         Market
                                                          Cost            Gains           Losses           Value
                                                       ------------     -----------    ------------    --------------

              <S>                                       <C>               <C>          <C>             <C>
              U.S. Government securities               $    514,607       $  4,222     $      (157)      $    518,672

              U.S. Government agencies                    6,051,237         25,781         (49,756)         6,027,262

              Mortgage-backed securities                 15,725,035         66,893         (81,960)        15,709,968
                                                       ------------      ---------      ----------       ------------

                                                        $22,290,879      $  96,896       $(131,873)       $22,255,902
                                                        ===========      =========       =========        ===========


                                                                                   2002
                                                       --------------------------------------------------------------
                                                                          Gross           Gross
                                                         Amortized      Unrealized      Unrealized          Market
                                                           Cost           Gains           Losses            Value
                                                       ------------     -----------    ------------      ------------

              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
                                                        ===========       ========      ==========        ===========
</TABLE>



                                       F-11
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 2.    Securities (continued)

           At December 31, 2003 and 2002,  securities  with a carrying  value of
           approximately $16,810,000 and $1,515,000,  respectively, were pledged
           to  secure  public  deposits  and  for  other  purposes  required  or
           permitted by law.

           At December  31, 2003 and 2002,  the  carrying  amount of  securities
           pledged to secure repurchase agreements was approximately  $3,761,548
           and $2,431,740, respectively.

           The  amortized  cost and  estimated  market  value of  securities  at
           December 31, 2003, by contractual maturity, are shown below. Expected
           maturities will differ from contractual  maturities because borrowers
           may have the right to call or prepay obligations with or without call
           or prepayment penalties.

                                                    Amortized          Market
                                                      Cost             Value
                                                  ------------      -----------
              Due in one year or less             $    250,157      $   250,000
              Due from one year to five years          264,450          268,672
              Due from five years to ten years       3,053,684        3,077,100
              Due after ten years                    2,997,553        2,950,162
                                                  ------------      -----------

                                                     6,565,844        6,545,934
              Mortgage-backed securities            15,725,035       15,709,968
                                                  ------------     ------------

                                                   $22,290,879      $22,255,902

           Proceeds  from  the  sale  of  securities  available  for  sale  were
           $4,980,692 for 2003 and $17,183,046 for 2002. Gross gains realized on
           those sales were $85,272 in 2003 and  $296,728 in 2002.  Gross losses
           on those sales were $1,804 in 2002.



                                      F-12
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------


Note 3.    Loans and Allowance for Loan Losses

      At December 31, 2003 and 2002, the Bank's loans consist of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                        2003              2002
                                                                     -----------       ----------
                Mortgage loans on real estate:
                 <S>                                                 <C>              <C>
                  Residential 1-4 family                              $  23,962        $   17,491
                  Residential multifamily                                 7,103             5,857
                  Commercial                                             75,819            59,710
                  Construction                                           44,086            39,183
                  Second mortgages                                        1,572               646
                  Equity lines of credit                                 11,365             9,950
                                                                     ----------        ----------

                                                                        163,907           132,837
                                                                     ----------        ----------

                Commercial loans                                         10,489             7,542
                                                                     ----------        ----------

                Consumer installment loans:
                  Personal                                                4,521             5,096
           Credit cards                                                     928               893
                                                                     ----------        ----------

                                                                          5,449             5,989
                                                                     ----------        ----------

                Total loans                                             179,845           146,368
                Less:  Allowance for loan losses                         (2,142)           (1,595)
                                                                     ----------        ----------
                Loans, net                                             $177,703          $144,773
                                                                     ==========        ==========
           A summary of  transactions  in the  allowance
            for loan losses for the years ended December 31,
            2003 and 2002, is as follows:
                                                                        2003              2002
                                                                     -----------       -----------

                Balance, beginning of year                           $1,594,956       $   846,699

                  Provision for loan losses                             735,000           779,945
                  Loans charged-off                                    (198,412)          (45,052)
                  Recoveries of loans previously charged-off             10,239            13,364
                                                                     -----------      ------------
                Balance, end of year                                 $2,141,783       $ 1,594,956
                                                                     ==========       ============

</TABLE>

                                       F-13
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

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

           The Bank's only  significant  concentration of credit at December 31,
           2003,  occurred in real  estate  loans  which  totaled  approximately
           $163,907,000.  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.

           In the normal  course of business,  the Bank makes loans to executive
           officers  and   directors  and  their   affiliates  of  the  Bank  on
           substantially   the  same  terms,   including   interest  rates  and
           collateral,   as   those   prevailing  at  the  time  for  comparable
           transactions  with  other  borrowers.  Loans to  executive  officers,
           principal   shareholders,  and  directors and their  affiliates  were
           approximately  $5,693,000  and  $4,506,000  at December 31, 2003  and
           2002, respectively.

           Impaired loans without a valuation  allowance were  insignificant  in
           relation to the Bank's loan portfolio at December 31, 2003 and 2002.

           Interest  income  recognized on impaired loans was  insignificant  to
           total interest  income on loans for each of the years ending December
           31, 2003 and 2002.


Note 4.    Bank Premises and Equipment

           A summary of bank  premises  and  equipment  at December 31, 2003 and
2002, is as follows:
<TABLE>
<CAPTION>

                                                                  2003                 2002
                                                             --------------       -------------
                  <S>                                        <C>                  <C>
                    Land                                      $   3,114,492       $   3,015,032
                    Buildings and improvements                    7,541,337           5,879,156
                    Furniture, fixtures and equipment             3,305,130           2,922,057
                                                             --------------       -------------

                                                                 13,960,959          11,816,245
                    Accumulated depreciation                     (1,940,022)         (1,406,310)
                                                             --------------       -------------
                                                                $12,020,937         $10,409,935
</TABLE>


           Depreciation  expense for the years ended December 31, 2003 and 2002,
           amounted to $643,385and $548,473, respectively.


                                       F-14
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 5.    Time Deposits

           The aggregate amount of time deposits in denominations of $100,000 or
           more at December 31, 2003, was approximately $49,348,000.

           At December 31, 2003,  the scheduled  maturities of time deposits are
as follows:

                                          2004              $68,248,568
                                          2005               11,737,908
                                          2006                6,188,379
                                          2007                1,557,773
                                          2008                3,733,806
                                                          -------------

                                          Total             $91,466,434
                                                            ===========


Note 6.    Income Taxes

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

           Income tax  expense in the  statements  of income for the years ended
           December 31, 2003 and 2002, consists of the following:

                                                           2003          2002
                                                       ----------    ----------

           Current tax expense                         $1,013,100    $  734,400
           Deferred tax expense (benefit) related to:
             Depreciation                                  87,200       122,100
             Provision for loan losses                   (158,000)     (132,400)
             Net operating loss carryforward                    -      (194,800)
             Amortization                                  48,400        52,800
             Other                                        (51,790)      (16,396)
                                                       ----------    ----------
           Income tax expense                          $  938,910    $  565,704
                                                       ==========    ==========


                                       F-15
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------


Note 6.    Income Taxes (continued)

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

                                                                             2003            2002
                                                                         -----------     -----------

      <S>                                                                  <C>            <C>
     Expected tax at statutory rates                                        $884,700      $  671,400

     Increase (decrease) resulting from tax effect of:
       State income taxes, net of federal tax benefit                        106,900          62,200

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

       Increase in cash surrender value of life insurance                    (55,900)        (24,400)

       Other                                                                   3,210          51,304
                                                                         -----------     -----------

       Income tax expense                                                   $938,910      $  565,704
                                                                         ===========     ===========

 Significant  components  of the  Company's  deferred
 tax  assets and liabilities at
December 31, 2003 and 2002, were as follows:
                                                                            2003              2002
                                                                         -----------     -----------

     Deferred tax assets:
       Provision for loan losses                                           $(383,464)      $(225,511)
       Deferred compensation                                                 (23,302)              -
       Other                                                                       -          (4,238)
                                                                         -----------     -----------

         Total deferred tax assets                                          (406,766)       (229,749)
                                                                         -----------     -----------

     Deferred tax liabilities:
       Accelerated depreciation                                              362,021         274,865
       Other                                                                  15,671               -
                                                                         -----------     -----------

         Total deferred tax liabilities                                      377,692         274,865
                                                                         -----------     -----------

         Net deferred tax (asset) liability                               $  (29,074)     $   45,116
                                                                         ===========     ===========

</TABLE>

                                       F-16

<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 7.    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 $13,000,000.  The Bank's portfolio of one to four single-family
           mortgages has been pledged as collateral  for any advances based upon
           an agreement to maintain a  collateral  to loan ratio of 125%.  There
           were no advances from FHLB at December 31, 2003.

Note 8.    Notes Payable

           During  November  2003,  the  Company  issued  floating  rate  junior
           subordinated debt securities totaling  $5,671,000.  Interest on these
           debt securities is payable  quarterly at the  three-month  LIBOR rate
           plus 305 basis points.  The entire principal  balance is due December
           31, 2003,  and  principal may be repaid  without  penalty at any time
           after December 31, 2008.

           At December 31, 2002, the Company had a note payable of $6,000,000 to
           a correspondent  bank.  Interest on the note was payable quarterly at
           the prime  rate less  0.50%.  All of the  Company's  common  stock in
           Mountain  National Bank was pledged as  collateral on the loan.  This
           loan was repaid during November 2003.

Note 9.    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.

           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.  Total  rental
           expense under all operating  leases was $118,574 in 2003 and $113,816
           in 2002.

           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:

                                          2004                   $  96,817
                                          2005                     100,838
                                          2006                      99,978
                                          2007                     101,379
                                          2008                      99,222
                                          Thereafter               265,784
                                                                 ---------

                                          Total                   $764,018
                                                                  ========

                                       F-17
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 10.   Employee Benefit Plan

           The  Bank   sponsors  a  401(k)   employee   benefit  plan   covering
           substantially all employees who have completed at least six months of
           service and met minimum age requirements.  The Bank's contribution to
           the plan is  discretionary  and was  $52,970 for 2003 and $42,820 for
           2002.


Note 11. Financial Instruments With Off-Balance-Sheet Risk

           In  the  normal  course  of  business,   the  Bank  has   outstanding
           commitments and contingent liabilities, such as commitments to extend
           credit and standby  letters of credit,  which are not included in the
           accompanying financial statements. The Bank's exposure to credit loss
           in the event of  nonperformance  by the other party to the  financial
           instruments  for  commitments to extend credit and standby letters of
           credit is represented by the  contractual or notional amount of those
           instruments.  The Bank uses the same  credit  policies in making such
           commitments  as it does  for  instruments  that are  included  in the
           balance  sheet.  At December  31,  2003,  commitments  under  standby
           letters of credit and  undisbursed  loan  commitments  aggregated  of
           approximately $43,546,000.

           Commitments  to extend credit are agreements to lend to a customer as
           long as there is no violation  of any  condition  established  in the
           contract.  Commitments generally have fixed expiration dates or other
           termination  clauses and may require  payment of a fee. Since many of
           the  commitments are expected to expire without being drawn upon, the
           total  commitment  amounts do not necessarily  represent  future cash
           requirements.  The Bank evaluates each customer's creditworthiness on
           a case-by-case  basis. The amount of collateral  obtained,  if deemed
           necessary  by  the  Bank  upon  extension  of  credit,  is  based  on
           management's  credit  evaluation.  Collateral  held  varies  but  may
           include accounts receivable,  inventory,  property and equipment, and
           income-producing commercial properties.

           Standby letters of credit are conditional  commitments  issued by the
           Bank to  guarantee  the  performance  of a customer to a third party.
           Standby letters of credit  generally have fixed  expiration  dates or
           other  termination  clauses  and may  require  payment of a fee.  The
           credit risk involved in issuing  letters of credit is essentially the
           same as that involved in extending loan facilities to customers.  The
           Bank's  policy  for  obtaining  collateral,  and the  nature  of such
           collateral,  is  essentially  the  same as that  involved  in  making
           commitments to extend credit.

           The Bank was not required to perform on any financial  guarantees and
           did not incur any losses on its commitments during 2003 or 2002.


                                       F-18
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

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:

           Cash and cash equivalents:

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

           Securities available for sale:

           The fair  value  of  securities  is  estimated  based  on bid  prices
           published in financial  newspapers  or bid  quotations  received from
           securities dealers.

           Restricted investments:

           Restricted  investments  consist of Federal  Home Loan Bank,  Federal
           Reserve  Bank,  and The Bankers  Bank stock and the  carrying  amount
           approximates  fair value based on the stock redemption  provisions of
           each of the entities.

           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.


                                       F-19
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 12. Fair Value of Financial Instruments (continued)

           Cash surrender of life insurance:

           The  estimated  value  of cash  surrender  value  of  life  insurance
           approximates its carrying value.

           Deposits:

           The fair value of deposits  with no stated  maturity,  such as demand
           deposits,  money market accounts,  and savings deposits,  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.

           Federal  funds  purchased  and  securities  sold under  agreements to
           repurchase:

           The estimated value of these  liabilities,  which are extremely short
           term, approximates their carrying value.

           Notes payable:

           For the notes  payable with a floating  interest  rate tied to LIBOR,
           the carrying  amounts are  considered  a reasonable  estimate of fair
           value.

           Federal Home Loan Bank advances:

           The  carrying  amounts of the FHLB  advances  approximate  their fair
           value.

           Commitments to extend credit, letters of credit and lines of credit:

           The fair value of commitments  is estimated  using the fees currently
           charged to enter into  similar  agreements,  taking into  account the
           remaining terms of the agreements and the present creditworthiness of
           the counterparties.  For fixed-rate loan commitments, fair value also
           considers the difference between current levels of interest rates and
           the committed rates.

<TABLE>
<CAPTION>
                                                      2003                       2002
                                             -----------------------    ------------------------
                                              Carrying    Estimated     Carrying      Estimated
                                              Amount     Fair Value      Amount       Fair Value
                                             ---------   ----------     ----------   -----------
 Assets:
<S>                                          <C>          <C>            <C>         <C>
   Cash and cash equivalents                 $   5,969    $   5,969      $  15,170   $   15,170
   Securities available for sale                22,256       22,256         24,624       24,624
   Restricted investments                        1,245        1,245            963          963
   Loans                                       177,703      177,673        144,773      148,001
   Cash surrender value of life insurance        3,086        3,086          2,928        2,928

</TABLE>


                                       F-20
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 12. Fair Value of Financial Instruments (continued)

<TABLE>
<CAPTION>
                                                         2003                        2002
                                               ----------------------      ------------------------
                                               Carrying    Estimated        Carrying    Estimated
                                               Amount     Fair Value        Amount      Fair Value
                                               --------   ----------       ---------  -------------
Liabilities:
<S>                                           <C>          <C>            <C>         <C>
  Noninterest-bearing demand deposits         $  34,638    $  34,638      $  24,973   $  24,973
  NOW accounts                                   12,236       12,236          9,469       9,469
  Savings and money market accounts              58,590       58,590         54,932      54,932
  Time deposits                                  91,466       92,022         86,514      87,434
  Notes payable                                   5,671        5,671          6,000       6,000
  Federal funds purchased and securities
    sold under agreements to repurchase           6,741        6,741          2,000       2,000
  Federal Home Loan Bank advances                     -            -          2,000       2,000

  Unrecognized financial instruments
     (net of contract amount):
      Commitments to extend credit                    -            -              -           -
      Letters of credit                               -            -              -           -
      Lines of credit                                 -            -              -           -

</TABLE>

Note 13.   Liquidity and Capital Resources

           The  Company's  primary  source of funds with which to pay its future
           obligations  is the receipt of dividends  from its  subsidiary  bank.
           Banking  regulations  provide  that the Bank  must  maintain  capital
           sufficient to enable it to operate as a viable  institution and, as a
           result,  may limit the amount of  dividends  the Bank may pay without
           prior approval.  It is management's  intention 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.

Note 14.   Stock Option Plans

           The Company 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  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 262,500.

           During  1998,  the  Company  granted to key  officers  and  employees
           incentive  stock  options to  purchase  144,635  shares of the Bank's
           common stock at $9.52 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.


                                       F-21
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 14.   Stock Option Plans (continued)

           During  2003,  the  Company  granted  certain  employees  of the Bank
           incentive  stock  options  to  purchase  33,500  shares of the Bank's
           common stock at $14.29 per share. These options vest in equal amounts
           over five years and, if not exercised, will expire in 2013.

           In addition,  the Company has granted to  non-employee  organizers of
           the Bank non-qualified stock options to purchase 56,114 shares of the
           Bank's common stock at $9.52 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, 2003 and 2002, is as follows:

<TABLE>
<CAPTION>

                                                        Outstanding Options                 Exercisable Options
                                                   --------------------------------    ------------------------------
                                                     Number       Weighted Average                 Weighted Average
                                                     of Shares     Exercise Price      Number       Exercise Price
                                                   -----------  -------------------    ------     -------------------

             <S>                                     <C>           <C>              <C>               <C>
              Outstanding, December 31, 2001          211,249          $ 9.63            85,040          $ 9.58
              Options granted                               -               -                 -               -
              Options rescinded                       (38,400)          10.00                 -               -
              Options which became exercisable              -               -            19,326            9.52
                                                     --------                          --------

              Outstanding, December 31, 2002          172,849            9.55           104,366            9.57
              Options granted                          33,500           14.29                 -               -
              Options which became exercisable              -               -            25,626            9.75
              Options exercised                        (1,000)          10.00            (1,000)          10.00
              Options rescinded                        (2,000)          14.29                 -               -
                                                     --------                          --------

              Outstanding, December 31, 2003          203,349           10.28           128,992            9.79
                                                      =======                           =======

</TABLE>
           The  stock  option   agreements   state  that  upon   termination  of
           employment,  employees  have 90 days to  exercise  any stock  options
           vested as of the termination date.

           The  weighted-average  fair value per share of options granted during
           the year was $3.57, for the year ended December 31, 2003. At December
           31, 2003, the range of exercise prices of outstanding  options issued
           was $9.52 - $14.29.  The weighted average remaining  contractual life
           of all options is 5.52 years.

           The fair value of each option grant is estimated on the date of grant
           using  the  Black-Scholes  option-pricing  model  with the  following
           weighted-average assumptions:

                                 Dividend yield                     0.00%
                                 Expected life                    6.5 years
                                 Expected volatility                 10%
                                 Risk-free interest rate            4.10%


                                       F-22
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 15. Regulatory Matters

           The  Company  (on a  consolidated  basis) and the Bank are 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 Company's and the Bank's  financial
           statements.  Under capital  adequacy  guidelines  and the  regulatory
           framework for prompt corrective action, the Company and the Bank must
           meet specific capital guidelines that involve  quantitative  measures
           of the  Company's  and the Bank's  assets,  liabilities,  and certain
           off-balance-sheet  items as calculated  under  regulatory  accounting
           practices.   The  Company's  and  the  Bank's  capital   amounts  and
           classification  are also  subject  to  qualitative  judgments  by the
           regulators about components, risk weightings, and other factors.

           Quantitative  measures  established  by regulation to ensure  capital
           adequacy require the Company and 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, 2003,  that the Company and
           the Bank meet all  capital  adequacy  requirements  to which they are
           subject.

           As of December 31, 2003, 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 Bank's prompt  corrective
           action category for bank capital.

           The Company's and the Bank's  actual  capital  amounts and ratios are
           also  presented  in  the  table.  Dollar  amounts  are  presented  in
           thousands.

<TABLE>
<CAPTION>
                                                                                                  For Capital
                                                                        Actual                  Adequacy Purposes
                                                                  --------------------        ----------------------
                                                                  Amount        Ratio         Amount         Ratio
                                                                  ------      ---------       ------       ---------
           As of December 31, 2003:
              <S>                                                 <C>          <C>            <C>         <C>
              Total capital to risk-weighted assets:
                Consolidated                                       $22,303      11.64%        $15,323        8.00%
                Mountain National Bank                              21,795      11.39%         15,303        8.00%

              Tier I capital to risk-weighted assets:
                Consolidated                                        19,345      10.10%          7,661        4.00%
                Mountain National Bank                              19,653      10.27%          7,651        4.00%

              Tier I capital to average assets:
                Consolidated                                        19,345       8.87%          8,728        4.00%
                Mountain National Bank                              19,653       9.01%          8,725        4.00%

</TABLE>


                                      F-23
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 15. Regulatory Matters (continued)

<TABLE>
<CAPTION>
                                                                                                 For Capital
                                                                         Actual                Adequacy Purposes
                                                                  ---------------------       ----------------------
                                                                  Amount        Ratio         Amount         Ratio
                                                                  ------      ---------       ------       ---------
           As of December 31, 2002:
             <S>                                                  <C>           <C>           <C>           <C>
              Total capital to risk-weighted assets:
                Consolidated                                       $14,449       9.22%        $12,541        8.00%
                Mountain National Bank                              20,377      13.16%         12,392        8.00%

              Tier I capital to risk-weighted assets:
                Consolidated                                        12,854       8.20%          6,271        4.00%
                Mountain National Bank                              18,782      12.13%          6,196        4.00%

              Tier I capital to average assets:
                Consolidated                                        12,854       6.67%          7,704        4.00%
                Mountain National Bank                              18,782       9.75%          7,704        4.00%

</TABLE>

Note 16.   Other Comprehensive Income

           Other  comprehensive  income consists of unrealized holding 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, 2003 and 2002, is as follows:

<TABLE>
<CAPTION>
                                                                                            Tax
                                                                      Before-Tax         (Expense)        Net-of-Tax
                                                                        Amount            Benefit           Amount
                                                                    ------------        -----------       ----------

              Year ended December 31, 2003:
                <S>                                                    <C>               <C>               <C>
                Unrealized holding gains and losses
                  arising during the period                            $(205,202)        $  77,977         $(127,225)
                Less reclassification adjustment for
                  gains realized in net income                            85,272           (32,403)           52,869
                                                                     -----------         ---------       -----------

                                                                       $(290,474)         $110,380         $(180,094)
                                                                       =========          ========         =========

              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
                                                                      ==========        ==========       ===========
</TABLE>


                                       F-24
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 17. Earnings Per Common Share

           Basic  earnings  per  share  represents  income  available  to common
           stockholders divided by the weighted-average  number of common shares
           outstanding  during the period.  Diluted  earnings per share reflects
           additional common shares that would have been outstanding if dilutive
           potential common shares had been issued, as well as any adjustment to
           income that would result from the assumed issuance.

           Potential  common shares that may be issued by the Company  relate to
           outstanding  stock  options,  determined  using  the  treasury  stock
           method.

           Earnings per common share have been computed based on the following:

<TABLE>
<CAPTION>

                                                                              2003                2002
                                                                           ----------         ----------

             <S>                                                           <C>                <C>
              Net income applicable to common stock                        $1,663,276         $1,408,982
                                                                           ==========         ==========

              Average number of common shares outstanding                   1,259,801          1,259,702
              Effect of dilutive stock options                                 83,896             40,792
                                                                           ----------         ----------

              Average number of common shares outstanding used
                to calculate diluted earnings per common share              1,343,697          1,300,494
                                                                           ==========         ==========
</TABLE>


Note 18.   Adoption of Recently Issued Statements of Financial Accounting
           Standards

           In April  2002,  the  Financial  Accounting  Standards  Board  issued
           Statement of Financial  Accounting  Standards No. 145, "Rescission of
           FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
           and Technical  Corrections." This statement  eliminates  Statement of
           Financial  Accounting  Standards No. 4,  "Reporting  Gains and Losses
           from  Extinguishment  of Debt" as amended by  Statement  of Financial
           Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy
           Sinking-Fund  Requirements."  As a  result,  gains  and  losses  from
           extinguishment of debt are required to be classified as extraordinary
           items if they  meet the  definition  of  unusual  and  infrequent  as
           prescribed   in   Accounting   Principles   Board   Opinion  No.  30.
           Additionally,  Statement of Financial  Accounting  Standards  No. 145
           amends   Statement  of  Financial   Accounting   Standards   No.  13,
           "Accounting for Leases" to require that lease modifications that have
           economic effects similar to sale-leaseback  transactions be accounted
           for in the same manner as sale-leaseback  transactions.  Statement of
           Financial   Accounting  Standards  No.  145  addresses  a  number  of
           additional  issues that were not  substantive in nature.  Adoption of
           this  standard  did  not  have a  material  impact  on the  Company's
           consolidated financial statements.


                                       F-25
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 18.   Adoption of Recently Issued Statements of Financial Accounting
           Standards (continued)

           In  June  2002,  the  Financial  Accounting  Standards  Board  issued
           Statement of Financial  Accounting Standards No. 146, "Accounting for
           Costs  Associated with Exit or Disposal  Activities."  This statement
           nullifies  Emerging  Issues  Task Force  Issue No.  94-3,  "Liability
           Recognition for Certain Employee Termination Benefits and Other Costs
           to  Exit  an  Activity   (including   Certain  Costs  Incurred  in  a
           Restructuring)"  and requires that a liability  for costs  associated
           with an exit or disposal activity be recognized when the liability is
           probable and  represents  obligations  to transfer  assets or provide
           services  as a result of past  transactions.  The  provisions  of the
           statement  are  effective  for exit or disposal  activities  that are
           initiated  after  December 31, 2002,  and its adoption did not have a
           material impact on the Company's consolidated financial statements.

           In October 2002,  the  Financial  Accounting  Standards  Board issued
           Statement of Financial Accounting Standards No. 147, "Acquisitions of
           Certain Financial  Institutions - an Amendment of FASB Statements No.
           72 and 144 and FASB  Interpretation  No. 9." This  statement  removes
           acquisitions  of  financial  institutions  from  the  scope  of  both
           Statement of Financial Accounting Standards No. 72 and Interpretation
           No. 9 and  requires  that  those  transactions  be  accounted  for in
           accordance with Statement of Financial  Accounting Standards No. 141,
           "Business  Combinations" and No. 142,  "Goodwill and Other Intangible
           Assets." As a result,  the requirement in paragraph 5 of Statement 72
           to recognize (and subsequently amortize) any excess of the fair value
           of liabilities  assumed over the fair value of assets  acquired as an
           unidentifiable  intangible  asset  (SFAS No. 72  goodwill)  no longer
           applies to acquisitions  within the scope of the statement.  Adoption
           of this standard had no material effect on the Company's consolidated
           financial statements.

           In December 2002,  the Financial  Accounting  Standards  Board issued
           Statement of Financial  Accounting Standards No. 148, "Accounting for
           Stock-Based  Compensation  - Transition and Disclosure - an amendment
           of FASB  Statement  No.  123." This  statement  provides  alternative
           methods of transition for a voluntary  change to the fair value based
           method  of  accounting  for  stock-based  employee  compensation.  In
           addition,  this  statement  amends  the  disclosure  requirements  of
           Statement No. 123 to require prominent disclosures in both annual and
           interim  financial  statements  about the  method of  accounting  for
           stock-based  employee  compensation and the effect of the method used
           on reported  results.  As permitted by SFAS No. 148, the Company will
           continue to apply the  provisions of APB Opinion No. 25,  "Accounting
           for Stock-Based  Compensation",  for all employee stock option grants
           and has elected to  disclose  pro forma net income and  earnings  per
           share  amounts as if the fair value based  method had been applied in
           measuring compensation costs. These disclosures have been included in
           Note 1. In addition,  the Company is awaiting  further  guidance that
           may result from  current  FASB stock  compensation  projects and will
           continue to evaluate any developments concerning mandated, as opposed
           to optional, fair value based expense recognition.


                                       F-26
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 18.   Adoption of Recently Issued Statements of Financial Accounting
           Standards (continued)

           In April 2003, the FASB issued SFAS No. 149,  "Amendment of Statement
           133 on Derivative Instruments and Hedging Activities." This Statement
           amends  and  clarifies   financial   accounting   and  reporting  for
           derivative instruments,  including certain embedded derivatives,  and
           for hedging activities under SFAS No. 133, "Accounting for Derivative
           Instruments and Hedging  Activities."  This Statement amends SFAS No.
           133 to  reflect  the  decisions  made  as  part  of  the  Derivatives
           Implementation  Group and in other FASB  projects  or  deliberations.
           SFAS No. 149 is  effective  for  contracts  entered  into or modified
           after June 30, 2003, and for hedging  relationships  designated after
           June 30, 2003.  Adoption of this  Standard had no material  effect on
           the Company's consolidated financial statements.

           In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain
           Financial  Instruments with  Characteristics  of Both Liabilities and
           Equity."  This  Statement  establishes  standards  for how an  entity
           classifies   and  measures   certain   financial   instruments   with
           characteristics  of both  liabilities  and equity.  This Statement is
           effective for financial  instruments  entered into or modified  after
           May 31, 2003,  and  otherwise  is  effective at the  beginning of the
           first interim period beginning after June 15, 2003.  Adoption of this
           Standard  had  no  material  effect  on  the  Company's  consolidated
           financial statements.

           In November  2002,  the FASB issued  Interpretation  No. 45, (FIN 45)
           "Guarantor's  Accounting and Disclosure  Requirements for Guarantees,
           Including  Indirect  Guarantees  of  Indebtedness  of Others,"  which
           elaborates  on the  disclosures  to be made by a guarantor  about its
           obligations under certain guarantees issued. It also clarifies that a
           guarantor is required to recognize,  at the inception of a guarantee,
           a  liability  for the fair  value  of the  obligation  undertaken  in
           issuing the guarantee.  The Interpretation  expands on the accounting
           guidance of SFAS No. 5, "Accounting for Contingencies,"  SFAS No. 57,
           "Related Party  Disclosures,"  and SFAS No. 107,  "Disclosures  about
           Fair Value of Financial  Instruments." It also  incorporates  without
           change the provisions of FASB  Interpretation  No. 34, "Disclosure of
           Indirect  Guarantees of Indebtedness of Others," which is superseded.
           The  initial   recognition   and   measurement   provisions  of  this
           Interpretation  apply on a prospective  basis to guarantees issued or
           modified after December 31, 2002. The disclosure requirements in this
           Interpretation  were  effective for periods ending after December 15,
           2002. Adoption of this Standard did not have a material effect on the
           Company's consolidated financial statements.


                                       F-27
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 18.   Adoption of Recently Issued Statements of Financial Accounting
           Standards (continued)

           In December 2003, the FASB issued revised  Interpretation No. 46 (FIN
           46),    "Consolidation   of   Variable   Interest   Entities."   This
           Interpretation clarifies the application of ARB No. 51, "Consolidated
           Financial Statements," for certain entities in which equity investors
           do not have the  characteristics of a controlling  financial interest
           or do not have  sufficient  equity at risk for the  entity to finance
           its activities  without  additional  subordinated  support from other
           parties.  This Interpretation  requires variable interest entities to
           be  consolidated  by the primary  beneficiary  which  represents  the
           enterprise  that will absorb the  majority of the  variable  interest
           entities'  expected  losses if they occur,  receive a majority of the
           variable interest  entities' residual returns if they occur, or both.
           This  Interpretation  was  effective for variable  interest  entities
           created after January 31, 2003, and for variable interest entities in
           which an  enterprise  obtains  an  interest  after  that  date.  This
           Interpretation  is  effective  in the first  fiscal  year or  interim
           period beginning after March 15, 2004, for variable interest entities
           in which an  enterprise  holds a variable  interest that was acquired
           before February 1, 2003, with earlier adoption permitted. Adoption of
           this  Standard  did  not  have a  material  effect  on the  Company's
           consolidated financial statements.


Note 19.   Stock Dividend

           Effective  December 31,  2003,  the Board  declared a stock  dividend
           equal to 5 percent  of the  total  outstanding  common  stock on that
           date. In lieu of fractional  shares,  certain  stockholders  received
           cash  payments  totaling  $7,245.  All per share data included in the
           accompanying  financial statements have been restated to reflect this
           stock dividend.


                                       F-28
<PAGE>

Note 20.   Condensed Parent Information

<TABLE>
<CAPTION>
                                     BALANCE SHEETS
                                     --------------
                                                                                         2003               2002
                                                                                     -------------      ------------
           ASSETS
           <S>                                                                       <C>                <C>
              Cash                                                                   $     223,797      $     19,937
              Investment in subsidiary                                                  19,631,442        18,940,791
              Other assets                                                                 395,027            52,025
                                                                                     -------------      ------------

                    Total assets                                                       $20,250,266       $19,012,753
                                                                                       ===========      ============

           LIABILITIES AND STOCKHOLDERS' EQUITY
              Notes payable                                                           $  5,671,000      $  6,000,000
              Other liabilities                                                             80,576                 -
                                                                                     -------------      ------------

                    Total liabilities                                                    5,751,576         6,000,000

              Stockholders' equity                                                      14,498,690        13,012,753
                                                                                     -------------      ------------

                    Total liabilities and stockholders' equity                         $20,250,266       $19,012,753
                                                                                     =============      ============


                                  STATEMENTS OF INCOME
                                  --------------------
           INCOME                                                                     $      1,080       $         -

           EXPENSES                                                                        239,532           130,062
                                                                                     -------------      ------------

           Loss before equity in undistributed earnings of subsidiary                     (238,452)         (130,062)

           Equity in undistributed earnings of subsidiary                                1,818,375           777,240

           Income taxes                                                                     83,353            52,025
                                                                                     -------------      ------------

                    Net income                                                        $  1,663,276       $   699,203
                                                                                     =============      ============

</TABLE>


                                      F-29
<PAGE>

                MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2003 and 2002
--------------------------------------------------------------------------------

Note 20.   Condensed Parent Information (continued)

<TABLE>
<CAPTION>
                                                                                       2003                2002
                                                                                ----------------      --------------

                                STATEMENTS OF CASH FLOWS
                                ------------------------

           CASH FLOWS FROM OPERATING ACTIVITIES
             <S>                                                                       <C>             <C>
              Net income                                                                $1,663,276      $    699,203
              Adjustments to reconcile net income to net cash
                provided by operating activities:
                  Equity in undistributed income of subsidiary                            (870,745)         (627,241)
                  Other                                                                    (91,426)          (52,025)
                                                                                       -----------       ------------

                    Net cash provided by operating activities                              701,105            19,937
                                                                                       -----------       -----------

           CASH FLOWS FROM INVESTING ACTIVITIES
              Purchase of stock in capital trust                                          (171,000)                -
              Capital contribution to subsidiary                                                 -        (6,000,000)
                                                                                       -----------       -----------

                    Net cash used in investing activities                                 (171,000)       (6,000,000)
                                                                                       -----------       -----------

           CASH FLOWS FROM FINANCING ACTIVITIES
              Proceeds from note payable                                                 5,671,000         6,000,000
              Principal payments on note payable                                        (6,000,000)                -
              Redemption of fractional shares                                               (7,245)                -
              Issuance of common stock                                                      10,000                 -
                                                                                       -----------       -----------

                    Net cash provided by (used in) financing activities                   (326,245)        6,000,000
                                                                                       -----------       -----------

           NET INCREASE IN CASH AND CASH
              EQUIVALENTS                                                                  203,860            19,937

           CASH AND CASH EQUIVALENTS, beginning of year                                     19,937                 -
                                                                                       -----------       -----------

           CASH AND CASH EQUIVALENTS, end of year                                      $   223,797       $    19,937
                                                                                       ===========       ===========

           SUPPLEMENTAL DISCLOSURES OF CASH FLOW
              INFORMATION
                Cash paid (received) during the year for:
                  Interest                                                             $   214,740       $    82,958
                  Income taxes                                                            (107,621)          (48,134)
                                                                                      ============       ===========
</TABLE>



                                       F-30