##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from  to



Commission File Number: 000-23909



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PINNACLE BANKSHARES CORPORATION

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|VIRGINIA                                                       |  | 54-1832714                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



622 Broad Street

Altavista, Virginia 24517

(Address of principal executive offices)



(434) 369-3000

(Issuers telephone number)



---



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 ̈



Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes ̈No  x.



At October 11, 2005, 1,458,706 shares of Pinnacle Bankshares Corporations common stock, $3 par value, were outstanding.



Transitional small business disclosure
format:    Yes ̈No  x.



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION

FORM 10-QSB

September 30, 2005



INDEX



|                                                                                                             |  |            
|------------------------------------------------------------------------------------------------------------ |  | -----------
|                                                                                                             |  | Page Number
|                                                                                                             | 
|Part I. FINANCIAL INFORMATION                                                                                |  |            
|                                                                                                             | 
|Item 1. Financial Statements (Unaudited)                                                                     |  |            
|                                                                                                             | 
|Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                                   |  | 3          
|                                                                                                             | 
|Consolidated Statements of Income for the three-month periods ended September 30, 2005 and 2004              |  | 4          
|                                                                                                             | 
|Consolidated Statements of Income for the nine-month periods ended September 30, 2005 and 2004               |  | 5          
|                                                                                                             | 
|Consolidated Statement of Changes in Stockholders Equity for the nine-month period ended September 30, 2005 |  | 6          
|                                                                                                             | 
|Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2005 and 2004           |  | 7          
|                                                                                                             | 
|Notes to Consolidated Financial Statements                                                                   |  | 8-12       
|                                                                                                             | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 13-19      
|                                                                                                             | 
|Item 3. Controls and Procedures                                                                              |  | 20         
|                                                                                                             | 
|Part II. OTHER INFORMATION                                                                                   |  |            
|                                                                                                             | 
|Item 1. Legal Proceedings                                                                                    |  | 21         
|                                                                                                             | 
|Item 6. Exhibits                                                                                             |  | 21-22      
|                                                                                                             | 
|SIGNATURES                                                                                                   |  | 23         



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##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars)



|                                                                                                                               |  |                                |         |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | ----------------- | - | -------
|                                                                                                                               |  | September 30, 2005 (Unaudited) |         | December 31, 2004
|Assets                                                                                                                         |  |                                |         |                   |   |        
|Cash and cash equivalents (note 2):                                                                                            |  |                                |         |                   |   |        
|Cash and due from banks                                                                                                        |  | $                              | 5,484   |                   | $ | 4,725  
|Federal funds sold                                                                                                             |  |                                | 2,043   |                   |   | 12,611 
|                                                                                                                               |  |                                |         |                   |   |        
|Total cash and cash equivalents                                                                                                |  |                                | 7,527   |                   |   | 17,336 
|                                                                                                                               |  |                               
|Securities (note 3):                                                                                                           |  |                                |         |                   |   |        
|Available-for-sale, at fair value                                                                                              |  |                                | 23,927  |                   |   | 26,387 
|Held-to-maturity, at amortized cost                                                                                            |  |                                | 6,910   |                   |   | 7,837  
|Federal Reserve Bank stock, at cost                                                                                            |  |                                | 75      |                   |   | 75     
|Federal Home Loan Bank stock, at cost                                                                                          |  |                                | 454     |                   |   | 427    
|Loans, net (note 4)                                                                                                            |  |                                | 180,932 |                   |   | 158,846
|Bank premises and equipment, net                                                                                               |  |                                | 5,462   |                   |   | 5,662  
|Accrued income receivable                                                                                                      |  |                                | 1,061   |                   |   | 946    
|Other assets                                                                                                                   |  |                                | 2,196   |                   |   | 2,297  
|                                                                                                                               |  |                                |         |                   |   |        
|Total assets                                                                                                                   |  | $                              | 228,544 |                   | $ | 219,813
|                                                                                                                               |  |                                |         |                   |   |        
|Liabilities and Stockholders Equity                                                                                           |  |                                |         |                   |   |        
|                                                                                                                               |  |                               
|Liabilities:                                                                                                                   |  |                                |         |                   |   |        
|Deposits:                                                                                                                      |  |                                |         |                   |   |        
|Demand                                                                                                                         |  | $                              | 23,743  |                   | $ | 19,764 
|Savings and NOW accounts                                                                                                       |  |                                | 60,864  |                   |   | 59,809 
|Time                                                                                                                           |  |                                | 119,909 |                   |   | 117,066
|                                                                                                                               |  |                                |         |                   |   |        
|Total deposits                                                                                                                 |  |                                | 204,516 |                   |   | 196,639
|                                                                                                                               |  |                                |         |                   |   |        
|Note payable to Federal Home Loan Bank                                                                                         |  |                                | 225     |                   |   | 300    
|Accrued interest payable                                                                                                       |  |                                | 570     |                   |   | 482    
|Other liabilities                                                                                                              |  |                                | 259     |                   |   | 185    
|                                                                                                                               |  |                                |         |                   |   |        
|Total liabilities                                                                                                              |  |                                | 205,570 |                   |   | 197,606
|                                                                                                                               |  |                                |         |                   |   |        
|Stockholders equity:                                                                                                          |  |                                |         |                   |   |        
|Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,458,706 shares in 2005 and 1,457,406 in 2004 |  |                                | 4,376   |                   |   | 4,372  
|Capital surplus                                                                                                                |  |                                | 577     |                   |   | 562    
|Retained earnings                                                                                                              |  |                                | 17,988  |                   |   | 16,970 
|Accumulated other comprehensive income                                                                                         |  |                                | 33      |                   |   | 303    
|                                                                                                                               |  |                                |         |                   |   |        
|Total stockholders equity                                                                                                     |  |                                | 22,974  |                   |   | 22,207 
|                                                                                                                               |  |                                |         |                   |   |        
|Total liabilities and stockholders equity                                                                                     |  | $                              | 228,544 |                   | $ | 219,813
|                                                                                                                               |  |                                |         |                   |   |        



See accompanying notes to unaudited
consolidated financial statements.



3



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars,
except for per share amounts)



|                                                    |  |                                       |       |                                       |   |      
|--------------------------------------------------- |  | ------------------------------------- | ----- | ------------------------------------- | - | -----
|                                                    |  | Three Months Ended September 30, 2005 |       | Three Months Ended September 30, 2004
|Interest income:                                    |  |                                       |       |                                       |   |      
|Interest and fees on loans                          |  | $                                     | 2,805 |                                       | $ | 2,290
|Interest on securities:                             |  |                                       |       |                                       |   |      
|U.S. Government agencies                            |  |                                       | 114   |                                       |   | 127  
|Corporate                                           |  |                                       | 97    |                                       |   | 128  
|States and political subdivisions (taxable)         |  |                                       | 64    |                                       |   | 75   
|States and political subdivisions (tax exempt)      |  |                                       | 94    |                                       |   | 112  
|Other                                               |  |                                       | 7     |                                       |   | 5    
|Interest on federal funds sold                      |  |                                       | 26    |                                       |   | 24   
|                                                    |  |                                       |       |                                       |   |      
|Total interest income                               |  |                                       | 3,207 |                                       |   | 2,761
|                                                    |  |                                       |       |                                       |   |      
|Interest expense:                                   |  |                                       |       |                                       |   |      
|Interest on deposits:                               |  |                                       |       |                                       |   |      
|Savings and NOW accounts                            |  |                                       | 147   |                                       |   | 81   
|Time - under $100,000                               |  |                                       | 808   |                                       |   | 593  
|Time - $100,000 and over                            |  |                                       | 247   |                                       |   | 171  
|Other interest expense                              |  |                                       | 7     |                                       |   | 7    
|                                                    |  |                                       |       |                                       |   |      
|Total interest expense                              |  |                                       | 1,209 |                                       |   | 852  
|                                                    |  |                                       |       |                                       |   |      
|Net interest income                                 |  |                                       | 1,998 |                                       |   | 1,909
|                                                    |  |                                      
|Provision for loan losses                           |  |                                       | 65    |                                       |   | 40   
|                                                    |  |                                       |       |                                       |   |      
|Net interest income after provision for loan losses |  |                                       | 1,933 |                                       |   | 1,869
|                                                    |  |                                       |       |                                       |   |      
|Noninterest income:                                 |  |                                       |       |                                       |   |      
|Service charges on deposit accounts                 |  |                                       | 343   |                                       |   | 332  
|Net realized gain on securities                     |  |                                       | 0     |                                       |   | 30   
|Fees on sales of mortgage loans                     |  |                                       | 88    |                                       |   | 66   
|Commissions and fees                                |  |                                       | 92    |                                       |   | 44   
|Other operating income                              |  |                                       | 132   |                                       |   | 120  
|                                                    |  |                                       |       |                                       |   |      
|Total noninterest income                            |  |                                       | 655   |                                       |   | 592  
|                                                    |  |                                       |       |                                       |   |      
|Noninterest expense:                                |  |                                       |       |                                       |   |      
|Salaries and employee benefits                      |  |                                       | 1,071 |                                       |   | 992  
|Occupancy expense                                   |  |                                       | 99    |                                       |   | 91   
|Furniture and equipment                             |  |                                       | 189   |                                       |   | 163  
|Office supplies and printing                        |  |                                       | 47    |                                       |   | 69   
|Other operating expenses                            |  |                                       | 425   |                                       |   | 502  
|                                                    |  |                                       |       |                                       |   |      
|Total noninterest expense                           |  |                                       | 1,831 |                                       |   | 1,817
|                                                    |  |                                       |       |                                       |   |      
|Income before income tax expense                    |  |                                       | 757   |                                       |   | 644  
|                                                    |  |                                      
|Income tax expense                                  |  |                                       | 229   |                                       |   | 185  
|                                                    |  |                                       |       |                                       |   |      
|Net income                                          |  | $                                     | 528   |                                       | $ | 459  
|                                                    |  |                                       |       |                                       |   |      
|Net income per share (note 5):                      |  |                                       |       |                                       |   |      
|Basic                                               |  | $                                     | 0.36  |                                       | $ | 0.31 
|Diluted                                             |  | $                                     | 0.36  |                                       | $ | 0.31 
|                                                    |  |                                       |       |                                       |   |      



See accompanying notes to unaudited
consolidated financial statements.



4



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands of dollars,
except for per share amounts)



|                                                    |  |                                      |       |                                      |   |      
|--------------------------------------------------- |  | ------------------------------------ | ----- | ------------------------------------ | - | -----
|                                                    |  | Nine Months Ended September 30, 2005 |       | Nine Months Ended September 30, 2004
|Interest income:                                    |  | $                                    | 7,801 |                                      | $ | 6,622
|Interest and fees on loans                          |  |                                      |       |                                      |   |      
|Interest on securities:                             |  |                                      |       |                                      |   |      
|U.S. Government agencies                            |  |                                      | 345   |                                      |   | 376  
|Corporate                                           |  |                                      | 310   |                                      |   | 390  
|States and political subdivisions (taxable)         |  |                                      | 200   |                                      |   | 231  
|States and political subdivisions (tax exempt)      |  |                                      | 315   |                                      |   | 338  
|Other                                               |  |                                      | 21    |                                      |   | 18   
|Interest on federal funds sold                      |  |                                      | 209   |                                      |   | 80   
|                                                    |  |                                      |       |                                      |   |      
|Total interest income                               |  |                                      | 9,201 |                                      |   | 8,055
|                                                    |  |                                      |       |                                      |   |      
|Interest expense:                                   |  |                                      |       |                                      |   |      
|Interest on deposits:                               |  |                                      |       |                                      |   |      
|Savings and NOW accounts                            |  |                                      | 369   |                                      |   | 255  
|Time - under $100,000                               |  |                                      | 2,244 |                                      |   | 1,764
|Time - $100,000 and over                            |  |                                      | 706   |                                      |   | 494  
|Other interest expense                              |  |                                      | 16    |                                      |   | 17   
|                                                    |  |                                      |       |                                      |   |      
|Total interest expense                              |  |                                      | 3,335 |                                      |   | 2,530
|                                                    |  |                                      |       |                                      |   |      
|Net interest income                                 |  |                                      | 5,866 |                                      |   | 5,525
|                                                    |  |                                     
|Provision for loan losses                           |  |                                      | 207   |                                      |   | 203  
|                                                    |  |                                      |       |                                      |   |      
|Net interest income after provision for loan losses |  |                                      | 5,659 |                                      |   | 5,322
|                                                    |  |                                     
|Noninterest income:                                 |  |                                      |       |                                      |   |      
|Service charges on deposit accounts                 |  |                                      | 985   |                                      |   | 959  
|Net realized gain on securities                     |  |                                      |      |                                      |   | 30   
|Fees on sales of mortgage loans                     |  |                                      | 209   |                                      |   | 233  
|Commissions and fees                                |  |                                      | 245   |                                      |   | 137  
|Other operating income                              |  |                                      | 402   |                                      |   | 368  
|                                                    |  |                                      |       |                                      |   |      
|Total noninterest income                            |  |                                      | 1,841 |                                      |   | 1,727
|                                                    |  |                                      |       |                                      |   |      
|Noninterest expense:                                |  |                                      |       |                                      |   |      
|Salaries and employee benefits                      |  |                                      | 3,084 |                                      |   | 2,884
|Occupancy expense                                   |  |                                      | 288   |                                      |   | 259  
|Furniture and equipment                             |  |                                      | 533   |                                      |   | 440  
|Office supplies and printing                        |  |                                      | 141   |                                      |   | 138  
|Other operating expenses                            |  |                                      | 1,265 |                                      |   | 1,376
|                                                    |  |                                      |       |                                      |   |      
|Total noninterest expense                           |  |                                      | 5,311 |                                      |   | 5,097
|                                                    |  |                                      |       |                                      |   |      
|Income before income tax expense                    |  |                                      | 2,189 |                                      |   | 1,952
|                                                    |  |                                     
|Income tax expense                                  |  |                                      | 646   |                                      |   | 558  
|                                                    |  |                                      |       |                                      |   |      
|Net income                                          |  | $                                    | 1,543 |                                      | $ | 1,394
|                                                    |  |                                      |       |                                      |   |      
|Net income per share (note 5):                      |  |                                      |       |                                      |   |      
|Basic                                               |  | $                                    | 1.06  |                                      | $ | 0.96 
|Diluted                                             |  | $                                    | 1.05  |                                      | $ | 0.95 
|                                                    |  |                                      |       |                                      |   |      



See accompanying notes to unaudited
consolidated financial statements.



5



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders Equity

Nine Months Ended September 30, 2005

(Unaudited)

(Amounts in thousands, except share and per share data)



|                                                                                                            |  |              |  |                 |       |                   |   |     |                                       |   |        |       |  |   |      |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ |  | --------------- | ----- | ----------------- | - | --- | ------------------------------------- | - | ------ | ----- |  | - | ---- | - |  | - | ------ | -
|                                                                                                            |  | Common Stock |  | Capital Surplus |       | Retained Earnings |   |     | AccumulatedOther Comprehensive Income |   |        | Total | 
|                                                                                                            |  | Shares       |  | Par Value       |       |                   |   |    
|Balances, December 31, 2004                                                                                 |  | 1,457,406    |  | $               | 4,372 |                   | $ | 562 |                                       | $ | 16,970 |       |  | $ | 303  |   |  | $ | 22,207 |  
|Net income                                                                                                  |  |             |  |                 |      |                   |   |    |                                       |   | 1,543  |       |  |   |     |   |  |   | 1,543  |  
|Change in net unrealized gains on available-for-sale securities, net of deferred income tax benefit of $139 |  |             |  |                 |      |                   |   |    |                                       |   |       |       |  |   | (270 | ) |  |   | (270   | )
|Cash dividends declared by Bankshares ($0.36 per share)                                                     |  |             |  |                 |      |                   |   |    |                                       |   | (525   | )     |  |   |     |   |  |   | (525   | )
|Issuance of common stock                                                                                    |  | 1,300        |  |                 | 4     |                   |   | 15  |                                       |   |       |       |  |   |     |   |  |   | 19     |  
|                                                                                                            |  |              |  |                 |       |                   |   |     |                                       |   |        |       |  |   |      |   |  |   |        |  
|Balances, September 30, 2005                                                                                |  | 1,458,706    |  | $               | 4,376 |                   | $ | 577 |                                       | $ | 17,988 |       |  | $ | 33   |   |  | $ | 22,974 |  
|                                                                                                            |  |              |  |                 |       |                   |   |     |                                       |   |        |       |  |   |      |   |  |   |        |  



See accompanying notes to unaudited
consolidated financial statements.



6



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



|                                                                                  |  |                                      |         |   |                                      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                  |  | Nine Months Ended September 30, 2005 |         |   | Nine Months Ended September 30, 2004 |  
|Cash flows from operating activities:                                             |  |                                      |         |   |                                      |   |         |  
|Net income                                                                        |  | $                                    | 1,543   |   |                                      | $ | 1,394   |  
|                                                                                  |  |                                     
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                      |         |   |                                      |   |         |  
|Depreciation of bank premises and equipment                                       |  |                                      | 349     |   |                                      |   | 294     |  
|Amortization of intangible assets                                                 |  |                                      | 9       |   |                                      |   | 9       |  
|Amortization of unearned fees, net                                                |  |                                      | 36      |   |                                      |   | 40      |  
|Net amortization (accretion) of premiums and discounts on securities              |  |                                      | 25      |   |                                      |   | (11     | )
|Realized gain on securities                                                       |  |                                      |        |   |                                      |   | 30      |  
|Provision for loan losses                                                         |  |                                      | 207     |   |                                      |   | 203     |  
|Originations of mortgage loans held for sale                                      |  |                                      | (10,641 | ) |                                      |   | (1,604  | )
|Sales of mortgage loans held for sale                                             |  |                                      | 10,641  |   |                                      |   | 1,657   |  
|Net decrease (increase) in:                                                       |  |                                      |         |   |                                      |   |         |  
|Accrued income receivable                                                         |  |                                      | (115    | ) |                                      |   | (66     | )
|Other assets                                                                      |  |                                      | 218     |   |                                      |   | (192    | )
|Net increase (decrease) in:                                                       |  |                                      |         |   |                                      |   |         |  
|Accrued interest payable                                                          |  |                                      | 88      |   |                                      |   | 23      |  
|Other liabilities                                                                 |  |                                      | 74      |   |                                      |   | (2      | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by operating activities                                         |  |                                      | 2,434   |   |                                      |   | 1,775   |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Cash flows from investing activities:                                             |  |                                      |         |   |                                      |   |         |  
|Purchases of available-for-sale securities                                        |  |                                      | (3,015  | ) |                                      |   | (3,462  | )
|Purchases of held-to-maturity securities                                          |  |                                      | (500    | ) |                                      |   | (301    | )
|Proceeds from maturities and calls of held-to-maturity securities                 |  |                                      | 1,427   |   |                                      |   | 1,578   |  
|Proceeds from maturities and calls of available-for-sale securities               |  |                                      | 3,709   |   |                                      |   | 945     |  
|Proceeds from paydowns of available-for-sale mortgage-backed securities           |  |                                      | 1,332   |   |                                      |   | 2,028   |  
|(Purchase) Sale of Federal Home Loan Bank stock                                   |  |                                      | (27     | ) |                                      |   | 27      |  
|Collections on loan participations                                                |  |                                      | 582     |   |                                      |   | 1,459   |  
|Net increase in loans made to customers                                           |  |                                      | (23,023 | ) |                                      |   | (10,608 | )
|Recoveries on loans charged off                                                   |  |                                      | 125     |   |                                      |   | 75      |  
|Purchases of bank premises and equipment                                          |  |                                      | (149    | ) |                                      |   | (1,728  | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash used in investing activities                                             |  |                                      | (19,539 | ) |                                      |   | (9,987  | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Cash flows from financing activities:                                             |  |                                      |         |   |                                      |   |         |  
|Net increase in demand, savings and NOW deposits                                  |  |                                      | 5,034   |   |                                      |   | 1,068   |  
|Net increase in time deposits                                                     |  |                                      | 2,843   |   |                                      |   | 4,382   |  
|Repayments of note payable to Federal Home Loan Bank                              |  |                                      | (75     | ) |                                      |   | (75     | )
|Proceeds from issuance of common stock                                            |  |                                      | 19      |   |                                      |   |        |  
|Cash dividends paid                                                               |  |                                      | (525    | ) |                                      |   | (481    | )
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by financing activities                                         |  |                                      | 7,296   |   |                                      |   | 4,894   |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                                      | (9,809  | ) |                                      |   | (3,318  | )
|                                                                                  |  |                                     
|Cash and cash equivalents, beginning of period                                    |  |                                      | 17,336  |   |                                      |   | 13,766  |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  
|                                                                                  |  |                                     
|Cash and cash equivalents, end of period                                          |  | $                                    | 7,527   |   |                                      | $ | 10,448  |  
|                                                                                  |  |                                      |         |   |                                      |   |         |  



See accompanying notes to unaudited
consolidated financial statements.



7



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##### Table of Contents

PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY



Notes to Consolidated Financial Statements

September 30, 2005(Unaudited)

(In thousands, except share and per share data)



(1) General



The consolidated financial statements include the accounts of Pinnacle Bankshares Corporation (Bankshares) and its wholly-owned subsidiary,
The First National Bank of Altavista (the Bank), (collectively the Company). All material intercompany accounts and transactions have been eliminated. The consolidated financial statements conform to accounting principles
generally accepted in the United States of America and to general banking industry practices. In the opinion of the Companys management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring
nature, necessary to present fairly the financial position as of September 30, 2005, the results of operations for the three months and nine months ended September 30, 2005 and 2004 and cash flows for the nine-month periods ended
September 30, 2005 and 2004.



These interim period
consolidated financial statements and financial information should be read in conjunction with the consolidated financial statements and notes thereto included in Pinnacle Bankshares Corporations 2004 Annual Report to Shareholders and
additional information supplied in the 2004 Form 10-KSB.



The
results of operations for the interim period ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005.



The Company has a single reportable segment for purposes of segment reporting.



(2) Cash and Cash Equivalents



For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, interest-bearing deposits, and federal funds sold.



(3) Securities



The amortized costs, gross
unrealized gains, gross unrealized losses, and fair values for securities at September 30, 2005, are shown in the table below. As of September 30, 2005, securities with amortized costs of $2,916 and fair values of $2,973 were pledged as
collateral for public deposits.



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|                                                         |  |                |        |                       |     |                        |      |   |            |       
|-------------------------------------------------------- |  | -------------- | ------ | --------------------- | --- | ---------------------- | ---- | - | ---------- | ------
|Available-for-Sale:                                      |  | AmortizedCosts |        | Gross UnrealizedGains |     | Gross UnrealizedLosses |      |   | FairValues
|Obligations of U.S. Government corporations and agencies |  | $              | 4,018  |                       | 8   |                        | (36  | ) |            | 3,990 
|Obligations of states and political subdivisions         |  |                | 6,922  |                       | 138 |                        | (50  | ) |            | 7,010 
|Mortgage-backed securities- Government                   |  |                | 5,826  |                       | 64  |                        | (61  | ) |            | 5,829 
|Corporate Issues                                         |  |                | 7,060  |                       | 21  |                        | (33  | ) |            | 7,048 
|Other securities                                         |  |                | 50     |                       |    |                        |     |   |            | 50    
|                                                         |  |                |        |                       |     |                        |      |   |            |       
|Totals                                                   |  | $              | 23,876 |                       | 231 |                        | (180 | ) |            | 23,927
|                                                         |  |                |        |                       |     |                        |      |   |            |       
|                                                         |  |                |        |                      
|Held-to-Maturity:                                        |  | AmortizedCosts |        | Gross UnrealizedGains |     | Gross UnrealizedLosses |      |   | FairValues
|Obligations of states and political subdivisions         |  |                | 6,910  |                       | 167 |                        | (40  | ) |            | 7,037 
|                                                         |  |                |        |                       |     |                        |      |   |            |       
|Totals                                                   |  | $              | 6,910  |                       | 167 |                        | (40  | ) |            | 7,037 
|                                                         |  |                |        |                       |     |                        |      |   |            |       



(4) Allowance for Loan Losses



Changes in the allowance for loan losses for the nine
months ended September 30, 2005 and 2004 are as follows:



|                          |  |      |       |   |      |   |       |  
|------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                          |  | 2005 |       |   | 2004 |  
|Balance at January 1,     |  | $    | 1,502 |   |      | $ | 1,528 |  
|                          |  |     
|Provision for loan losses |  |      | 207   |   |      |   | 203   |  
|                          |  |     
|Loans charged off         |  |      | (236  | ) |      |   | (157  | )
|                          |  |     
|Recoveries                |  |      | 125   |   |      |   | 75    |  
|                          |  |      |       |   |      |   |       |  
|                          |  |     
|Balance at September 30,  |  | $    | 1,598 |   |      | $ | 1,649 |  
|                          |  |      |       |   |      |   |       |  



(5) Net Income Per Share



Basic net income per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted



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net income per share reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.



The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods indicated:



|                                      |  |                        |       |                     |           |                 |   |     
|------------------------------------- |  | ---------------------- | ----- | ------------------- | --------- | --------------- | - | ----
|                                      |  | Net Income (Numerator) |       | Shares(Denominator) |           | Per ShareAmount
|Three Months Ended September 30, 2005 |  |                        |       |                     |           |                 |   |     
|Basic net income per share            |  | $                      | 528   |                     | 1,458,706 |                 | $ | 0.36
|                                      |  |                        |       |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                        |      |                     | 15,375    |                 |   |     
|                                      |  |                        |       |                     |           |                 |   |     
|Diluted net income per share          |  | $                      | 528   |                     | 1,474,081 |                 | $ | 0.36
|                                      |  |                        |       |                     |           |                 |   |     
|Three Months Ended September 30, 2004 |  |                        |       |                     |           |                 |   |     
|Basic net income per share            |  | $                      | 459   |                     | 1,457,406 |                 | $ | 0.31
|                                      |  |                        |       |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                        |      |                     | 15,857    |                 |   |     
|                                      |  |                        |       |                     |           |                 |   |     
|Diluted net income per share          |  | $                      | 459   |                     | 1,473,263 |                 | $ | 0.31
|                                      |  |                        |       |                     |           |                 |   |     
|                                      |  |                        |      
|                                      |  | Net Income (Numerator) |       | Shares(Denominator) |           | Per ShareAmount
|Nine Months Ended September 30, 2005  |  |                        |       |                     |           |                 |   |     
|Basic net income per share            |  | $                      | 1,543 |                     | 1,458,589 |                 | $ | 1.06
|                                      |  |                        |       |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                        |      |                     | 16,148    |                 |   |     
|                                      |  |                        |       |                     |           |                 |   |     
|Diluted net income per share          |  | $                      | 1,543 |                     | 1,474,737 |                 | $ | 1.05
|                                      |  |                        |       |                     |           |                 |   |     
|Nine Months Ended September 30, 2004  |  |                        |       |                     |           |                 |   |     
|Basic net income per share            |  | $                      | 1,394 |                     | 1,457,406 |                 | $ | 0.96
|                                      |  |                        |       |                     |           |                 |   |     
|Effect of dilutive stock options      |  |                        |      |                     | 15,767    |                 |   |     
|                                      |  |                        |       |                     |           |                 |   |     
|Diluted net income per share          |  | $                      | 1,394 |                     | 1,473,173 |                 | $ | 0.95
|                                      |  |                        |       |                     |           |                 |   |     



(6) Comprehensive Income



The following table presents comprehensive income for the
interim periods indicated below:



|                                                                                                       |  |                    |      |   |                    |   |    
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ---- | - | ------------------ | - | ---
|                                                                                                       |  | Three Months Ended
|                                                                                                       |  | September 30, 2005 |      |   | September 30, 2004
|Net income                                                                                             |  | $                  | 528  |   |                    | $ | 459
|Change in net unrealized gains (losses) on available-for sale securities, net of deferred income taxes |  |                    | (132 | ) |                    |   | 220
|                                                                                                       |  |                    |      |   |                    |   |    
|Total comprehensive income                                                                             |  | $                  | 396  |   |                    | $ | 679
|                                                                                                       |  |                    |      |   |                    |   |    



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|                                                                                               |  |                    |       |   |                    |   |       |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | -
|                                                                                               |  | Nine Months Ended  |      
|                                                                                               |  | September 30, 2005 |       |   | September 30, 2004 |  
|Net income                                                                                     |  | $                  | 1,543 |   |                    | $ | 1,394 |  
|Change in net unrealized losses on available-for-sale securities, net of deferred income taxes |  |                    | (270  | ) |                    |   | (229  | )
|                                                                                               |  |                    |       |   |                    |   |       |  
|Total comprehensive income                                                                     |  | $                  | 1,273 |   |                    | $ | 1,165 |  
|                                                                                               |  |                    |       |   |                    |   |       |  



(7) Stock Options



The Company has two incentive stock option plans. The 1997 Incentive
Stock Plan (the 1997 Plan), pursuant to which the Companys Board of Directors may grant stock options to officers and key employees, became effective as of May 1, 1997. The 1997 Plan authorizes grants of options to purchase up
to 50,000 shares of the Companys authorized, but unissued common stock. Accordingly, 50,000 shares of authorized, but unissued common stock were reserved for use in the 1997 Plan. All stock options are granted with an exercise price equal to
the stocks fair market value at the date of grant. At September 30, 2005, there were 3,200 shares available for grant under the 1997 Plan.



The 2004 Incentive Stock Plan (the 2004 Plan), pursuant to which the Companys Board of Directors may grant stock options to officers and
key employees, was approved by shareholders on April 13, 2004 and became effective as of May 1, 2004. The 2004 Plan authorizes grants of options to purchase up to 100,000 shares of the Companys authorized, but unissued common stock.
Accordingly, 100,000 shares of authorized, but unissued common stock were reserved for use in the 2004 Plan. All stock options are granted with an exercise price equal to the stocks fair market value at the date of grant. At September 30,
2005 there were 100,000 shares available for grant under the 2004 Plan.



The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, to account for its fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123.



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No compensation cost has been recognized for the Companys stock options in the accompanying
consolidated financial statements. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Companys net income, basic net income per share and diluted net income
per share would have decreased to the pro forma amounts for the interim periods indicated below:



|                                                                                                                  |  |                    |       |   |                   |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | -
|                                                                                                                  |  | Three Months Ended |      
|                                                                                                                  |  | September 30, 2005 |       |   | September 30,2004 |  
|Net income, as reported                                                                                           |  | $                  | 528   |   |                   | $ | 459   |  
|Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects |  |                    | (2    | ) |                   |   | (2    | )
|                                                                                                                  |  |                    |       |   |                   |   |       |  
|Pro forma net income                                                                                              |  | $                  | 526   |   |                   | $ | 457   |  
|                                                                                                                  |  |                    |       |   |                   |   |       |  
|Basic net income per share:                                                                                       |  |                    |       |   |                   |   |       |  
|As reported                                                                                                       |  | $                  | 0.36  |   |                   | $ | 0.31  |  
|Pro forma                                                                                                         |  |                    | 0.36  |   |                   |   | 0.31  |  
|                                                                                                                  |  |                   
|Diluted net income per share:                                                                                     |  |                    |       |   |                   |   |       |  
|As reported                                                                                                       |  | $                  | 0.36  |   |                   | $ | 0.31  |  
|Pro forma                                                                                                         |  |                    | 0.36  |   |                   |   | 0.31  |  
|                                                                                                                  | 
|                                                                                                                  |  | Nine Months Ended  |      
|                                                                                                                  |  | September 30,2005  |       |   | September 30,2004 |  
|Net income, as reported                                                                                           |  | $                  | 1,543 |   |                   | $ | 1,394 |  
|Deduct: Total stock-based employee compensation expense determined under SFAS No. 123, net of related tax effects |  |                    | (6    | ) |                   |   | (6    | )
|                                                                                                                  |  |                    |       |   |                   |   |       |  
|Pro forma net income                                                                                              |  | $                  | 1,537 |   |                   | $ | 1,388 |  
|                                                                                                                  |  |                    |       |   |                   |   |       |  
|Basic net income per share:                                                                                       |  |                    |       |   |                   |   |       |  
|As reported                                                                                                       |  | $                  | 1.06  |   |                   | $ | 0.96  |  
|Pro forma                                                                                                         |  |                    | 1.05  |   |                   |   | 0.96  |  
|                                                                                                                  |  |                   
|Diluted net income per share:                                                                                     |  |                    |       |   |                   |   |       |  
|As reported                                                                                                       |  | $                  | 1.05  |   |                   | $ | 0.95  |  
|Pro forma                                                                                                         |  |                    | 1.04  |   |                   |   | 0.95  |  



(8) Subsequent Declaration of Cash
Dividend



On October 11, 2005 the Board of Directors
declared a quarterly cash dividend in the amount of $0.13 per common share payable to shareholders of record as of October 21, 2005.



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in 000s)



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION



The following discussion is qualified in its entirety by the more detailed information in the unaudited consolidated
financial statements and accompanying notes appearing elsewhere in this Form 10-QSB. In addition to the historical information contained herein, this report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of management, are generally identifiable by use of the words believe, expect,
intend, anticipate, estimate, project, may, will or similar expressions. Although we believe our plans, intentions and expectations reflected in these forward-looking statements
are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results could differ
materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, the legislative/regulatory
climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements contained herein,
and you should not place undue reliance on such statements, which reflect our position as of the date of this report.



THE COMPANY



Pinnacle Bankshares Corporation, a Virginia corporation (Bankshares), was organized in 1997 and is registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended. Bankshares is headquartered in Altavista, Virginia, and conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, The First National Bank of Altavista
(the Bank). Bankshares exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish.



The following discussion supplements and provides information about the major components of the results of operations and
financial condition, liquidity and capital resources of Bankshares and its



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subsidiary (collectively the Company). This discussion and analysis should be read in conjunction with the Companys consolidated financial
statements and accompanying notes.



OVERVIEW



Total assets at September 30, 2005 were $228,544, up
3.97% from $219,813 at December 31, 2004. The principal components of the Companys assets at the end of the period were $30,837 in securities and $180,932 in net loans. During the nine months ended September 30, 2005, net loans
increased 13.90% or $22,086 from $158,846 at December 31, 2004. The Companys lending activities are a principal source of its income. Also during the nine months, securities decreased 9.90% or $3,387 from December 31, 2004.



Total liabilities at September 30, 2005 were $205,570, up
4.03% from $197,606 at December 31, 2004. Demand deposits increased 20.13% or $3,979 from December 31, 2004. Savings and NOW accounts increased 1.76% or $1,055 from December 31, 2004. Time deposits increased 2.43% or $2,843 from
December 31, 2004. Individuals and businesses located within the communities the Company serves provide the Companys deposits.



Total stockholders equity at September 30, 2005 was $22,974, including $17,988 in retained earnings and $33 of accumulated other comprehensive
income, which represents net unrealized gains on available-for-sale securities. At December 31, 2004, total stockholders equity was $22,207.



The Company had net income of $1,543 for the nine months ended September 30, 2005, compared with net income of $1,394 for the comparable period in
2004, an increase of 10.69%. The Company had net income of $528 for the three months ended September 30, 2005, compared with net income of $459 for the comparable period in 2004, an increase of 15.03%. The increase in net income when comparing
the nine months ended September 30, 2005 with the nine months ended September 30, 2004 is attributable to a 6.33% increase in net interest income after provision for loan losses and a 6.60% increase in noninterest income. The increase in
net income when comparing the three months ended September 30, 2005 with the three months ended September 30, 2004 is attributable to a 3.42% increase in net interest income after provision for loan losses and a 10.64% increase in
noninterest income. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005.



Profitability as measured by the Companys return on average assets
(ROA) was 0.92% for the nine months ended September 30, 2005, compared to 0.88% for the same period of 2004. Another key indicator



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of performance, the return on average equity (ROE) for the nine months ended September 30, 2005 was 9.12%, compared
to 8.55% for the nine months ended September 30, 2004.



NET INTEREST INCOME



Net
interest income represents the principal source of earnings for the Company. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities and borrowings, as well as their respective rates and yields, have a significant
impact on the level of net interest income.



Net interest
income was $5,866 for the nine months ended September 30, 2005, up from $5,525 for the nine months ended September 30, 2004 and is attributable to interest income from loans and securities exceeding the cost associated with interest
incurred on deposits. Net interest income was $1,998 for the three months ended September 30, 2005, up from $1,909 for the same period in 2004. The net interest margin was 3.85% for the nine months ended September 30, 2005, compared to
3.85% for the nine months ended September 30, 2004. The net interest margin for the third quarter of 2005 was 3.89% compared to 4.00% in the third quarter of 2004.



Interest income on loans and securities increased 14.23% and 16.15% for the nine and three months ended September 30,
2005, respectively, compared to the same periods of 2004 due mainly to loans repricing and being originated at higher interest rates in 2005 as a result of the overall higher interest rate environment.



Interest and fees from loans was $7,801 for the nine months ended
September 30, 2005, up from $6,622 for the nine months ended September 30, 2004. Interest and fees from loans was $2,805 for the three months ended September 30, 2005, up from $2,290 for the three months ended September 30, 2004.
Interest from securities and fed funds sold was $1,400 for the nine months ended September 30, 2005, down from $1,433 for the nine months ended September 30, 2004. Interest from securities and fed funds sold was $402 for the three months
ended September 30, 2005, down from $471 for the three months ended September 30, 2004.



Interest expense increased 31.82% and 41.90% for the nine and three months ended September 30, 2005, respectively, compared to the same periods of
2004 due to the impact of repricing of deposit liabilities at higher interest rates.



NONINTEREST INCOME



Noninterest income increased $114 or 6.60% for the nine months ended September 30, 2005 compared to the same period of 2004. Noninterest income
increased $63 or 10.64% when comparing the three



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months ended September 30, 2005 to the same period of 2004. The Companys principal sources of noninterest
income are service charges and fees on deposit accounts, particularly transaction accounts, fees on sales of mortgage loans and commissions from investment and insurance sales.



The increases from 2004 were primarily due to a 78.83% or $108 increase in commissions and fees as a result of an $88
increase in commissions from investment sales during the first nine months of 2005. Fees on sales of mortgage loans decreased 10.30% or $24 when comparing the nine months ended September 30, 2005 with the nine months ended
September 30,2004, although production has improved in the second and third quarters of 2005 when compared to the first quarter of 2005.



NONINTEREST EXPENSE



Noninterest expense increased $214 or 4.20%, for the nine months ended September 30, 2005 compared to the same period of 2004. Noninterest expense
increased $14 or 0.77% for the three months ended September 30, 2005 compared to the same period of 2004. The increase in noninterest expense when comparing these periods is primarily attributable to costs associated with operations at the
Forest facility that opened in August of 2004, additional staff and the installation of new hardware and software to improve our banking system. Also contributing to the increase were costs associated with the opening of the new Smith Mountain Lake
loan production office in May 2005.



ALLOWANCE
AND PROVISION FOR LOAN LOSSES



The provision for loan losses
was $207 in the first nine months of 2005 compared to $203 for the same period of 2004, in recognition of managements estimate of risks inherent with lending activities. Among other factors, management considers the Companys historical
loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and current and anticipated economic conditions in making its estimate of risk. There are additional risks
of future loan losses that cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is
an estimate. The allowance 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. The allowance for loan losses was $1,598 as of
September 30, 2005, representing approximately 0.88% of loans receivable. The allowance for loan losses was $1,649 as of September 30, 2004, representing approximately 1.04% of loans receivable. Management believes the allowance was
adequate as of September 30, 2005 to provide for loan losses inherent in the Companys loan portfolio. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and adjusts the provision as deemed
appropriate.



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NON-PERFORMING ASSETS AND IMPAIRED LOANS



Non-performing assets, which consist of nonaccrual loans and foreclosed
properties, were $1,142 at September 30, 2005 and $260 at December 31, 2004. Foreclosed property consists of one property totaling $150 as of September 30, 2005 and December 31, 2004. Nonaccrual loans were $992 at
September 30, 2005 and $260 at December 31, 2004. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of
collection. Impaired loans equaled nonaccrual loans at September 30, 2005 and December 31, 2004. A loan is considered impaired when, based on the then current information and facts, it is probable that we will not be able to collect all
amounts due according to the contractual terms of the loan agreement.



LIQUIDITY



Liquidity
represents an institutions ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. The Companys liquidity is
provided by cash and due from banks, federal funds sold, investments available for sale, managing investment maturities, interest-earning deposits in other financial institutions and loan repayments. The Companys ability to obtain deposits and
purchase funds at favorable rates also affects it liquidity. As a result of the Companys management of liquid assets and its ability to generate liquidity through alternative funding sources, management believes that the Bank maintains overall
liquidity that is sufficient to satisfy its depositors requirements and to meet customers credit needs. The Companys ratio of liquid assets to deposits and short-term borrowings was 15.60% as of September 30, 2005 compared to
22.33% as of December 31, 2004. Additional sources of liquidity available to the Company include its capacity to borrow additional funds through correspondent banks. The Company derives cash flows from its operating, investing, and financing
activities. Cash flows of the Company are primarily used to fund loans and securities and are provided by the deposits and borrowings of the Company.



CAPITAL



The Companys financial position at September 30, 2005 reflects liquidity and capital levels currently adequate to fund anticipated future
business expansion. Capital ratios are well above required regulatory minimums for a well-capitalized institution. The assessment



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of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing
competitive conditions and economic forces. Management reviews the adequacy of the Companys capital regularly. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth
and to absorb potential losses.



Stockholders equity
reached $22,974 at September 30, 2005 compared to $22,207 at December 31, 2004. At September 30, 2005, the Companys leverage ratio (Tier I capital divided by quarterly average assets) was 9.99% compared to 9.85% at
December 31, 2004. Each of these ratios exceeded the required minimum leverage ratio of 4%.



OFF-BALANCE SHEET ARRANGEMENTS



There were no material changes in the Companys off-balance sheet arrangements and commitments from the information provided in the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2004.



The Company, in the normal course of business, may at times be a party to financial instruments such as standby letters of credit. Standby letters of credit as of September 30, 2005 equaled $1,401. Other commitments include commitments
to extend credit. Not all of these commitments will be acted upon; therefore, the cash requirements will likely be significantly less than the commitments themselves. As of September 30, 2005, the Company had unused loan commitments of $50,278,
including $39,122 in unused commitments with an original maturity exceeding one year.



CRITICAL ACCOUNTING POLICIES



Certain critical accounting policies rely on the more significant judgments and estimates used in the preparation of the consolidated financial
statements. The Companys most critical accounting policy relates to the Companys allowance for loan losses, which reflects the estimated losses resulting from the inability of the Companys borrowers to make required loan payments.
If the financial condition of the Companys borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Companys estimates would be updated, and additional provisions for loan losses could be required.
Further information regarding the estimates used in determining the allowance for loan losses is contained in the discussions on Allowance and Provision for Loan Losses on page 15 herein and Loans and Allowance for Loan
Losses on page 28 of the Companys 2004 Annual Report to Shareholders.



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RECENT ACCOUNTING PRONOUNCEMENTS



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) is a revision of SFAS No. 123. This statement supersedes APB Opinion No. 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25 and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements using a fair value-based method. SFAS
No. 123(R) is effective for public companies that file as small business issuers at the beginning of the next fiscal period that begins after December 15, 2005. The impact of SFAS No. 123(R) on the Companys consolidated
financial statements is currently being evaluated. The Company will begin recognizing compensation expense in 2006 for options that have been issued but not yet vested prior to January 1, 2006. Projected compensation expense associated with
adopting SFAS No. 123(R) will approximate $9,500 in 2006. This estimate applies only to options issued through September 30, 2005 but not yet vested prior to January 1, 2006. Any options issued after September 30, 2005 would
increase compensation expense above this estimate for 2006.



In
March 2005, the SEC released Staff Accounting Bulletin No. 107, Share-Based Payment, (SAB 107). SAB 107 expresses the views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides
interpretive guidance related to the interaction between Statement No. 123(R) and certain SEC rules and regulations, and provides the staffs views regarding the valuation of share-based payment arrangements for public companies. SAB 107
does not impact the Companys results of operations at the present time.



As of November 10, 2005, there are no other new accounting standards issued, but not yet adopted by the Company, which are expected to be applicable to the Companys financial position, operating results or
financial statement disclosures.



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##### Table of Contents

Item 3. CONTROLS AND PROCEDURES



The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including the Companys Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required, management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.



Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Companys disclosure
controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Companys periodic reports.



The Companys management is also responsible for establishing and
maintaining adequate internal control over financial reporting and control of the Companys assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. There was no change in the Companys internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting or control over its assets.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



In the normal course of business, the Company is involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Companys financial position,
liquidity or results of operations.



Item 6. EXHIBITS



|              |  |                                                                                                                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                     
|3.1           |  | Amended and Restated Articles of Incorporation (incorporated by reference to Appendix I to registrants amended registration statement on Amendment No. 1 to Form S-4 (File No. 333-20399)
filed on January 30, 1997)           
|              | 
|3.2           |  | Bylaws (incorporated by reference to Exhibit 3(ii) to registrants registration statement on Form S-4 (File No. 333-20399) filed on January 24, 1997)                                                                           
|              | 
|10.1*         |  | 1997 Incentive Stock Plan (incorporated by reference to Exhibit 4.3 to registrants registration statement on Form S-8 filed September 14, 1998)                                                                                
|              | 
|10.2*         |  | Change in Control Agreement between Pinnacle Bankshares Corporation and Robert H. Gilliam, Jr., dated May 12, 1998 (incorporated by reference to Exhibit 10.2 to registrants annual
report on Form 10-KSB filed March 25, 2003)
|              | 
|10.3*         |  | VBA Directors Deferred Compensation Plan for Pinnacle Bankshares Corporation, effective December 1, 1997 (incorporated by reference to Exhibit 10.3 to registrants annual report on
Form 10-KSB filed March 25, 2003)         
|              | 
|10.4*         |  | 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to registrants quarterly report on Form 10-QSB filed on May 10, 2004)                                                                                     
|              | 
|10.5*         |  | Non-Employee Directors Annual Compensation (incorporated by reference to Exhibit 10.5 to registrants annual report on Form 10-KSB filed March 28, 2005)                                                                       
|              | 
|10.6*         |  | Base Salaries of Named Executive Officers of the Registrant (incorporated by reference to Exhibit 10.6 to registrants annual report on Form 10-KSB filed March 28, 2005)                                                       



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##### Table of Contents

|     |  |                                                                                             
|---- |  | --------------------------------------------------------------------------------------------
|31.1 |  | CEO Certification Pursuant to Rule 13a-14(a)                                                
|     | 
|31.2 |  | CFO Certification Pursuant to Rule 13a-14(a)                                                
|     | 
|32.1 |  | CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

---

|* | Denotes management contract.
|- | ----------------------------



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##### Table of Contents

SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                  |  |                                                              
|----------------- |  | -------------------------------------------------------------
|                  |  | PINNACLE BANKSHARES CORPORATION                              
|                  |  | (Registrant)                                                 
|                  | 
|NOVEMBER 10, 2005 |  | /s/ Robert H. Gilliam, Jr.                                   
|Date              |  | Robert H. Gilliam, Jr., President and Chief Executive Officer
|                  |  | (principal executive officer)                                
|                  | 
|NOVEMBER 10, 2005 |  | /s/ Bryan M. Lemley                                          
|Date              |  | Bryan M. Lemley, Secretary,                                  
|                  |  | Treasurer and Chief Financial Officer                        
|                  |  | (principal financial & accounting officer)                   



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