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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(Mark One)

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



For the fiscal year ended December 31, 2003



OR



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



Commission File Number: 000-23909



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PINNACLE BANKSHARES CORPORATION

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                       |  | 54-1832714                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|P.O. Box 29                              |  |           
|Altavista, Virginia 24517                |  | 24517-0029
|(Address of principal executive offices) |  | (Zip Code)



Issuers
telephone number (434) 369-3000



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Securities registered under Section 12(b) of the Exchange Act: None



Securities registered under Section 12(g) of the Exchange Act:



Common Stock, par value $3.00

(Title of Class)



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Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



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



The issuers revenues for the fiscal year ended December 31, 2003: $13,640,000



The aggregate market value of the issuers Common Stock held by nonaffiliates as of February 6, 2004: $28,055,066



The number of shares outstanding of the issuers Common Stock as of
March 16, 2004: 1,457,406 Shares



DOCUMENTS INCORPORATED BY
REFERENCE



Portions of the 2003 Annual Report to Shareholders are
incorporated by reference in Part II of this report, which is attached hereto as Exhibit 13. Portions of the Proxy Statement for the Companys Annual Meeting of Shareholders to be held on April 13, 2004 are incorporated by reference in Part III
of this report.



Transitional small business disclosure
format:     Yes ̈No  x.



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PINNACLE BANKSHARES CORPORATION

2003 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS



|           |  |                                                                                                                |  |     
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                |  | Page
|           |  | PART I                                                                                                         |  |     
|           |  |                                                                                                               
|Item 1.    |  | Description of Business                                                                                        |  | 3   
|           |  | General Development of Business                                                                                |  | 3   
|           |  | Competition                                                                                                    |  | 3   
|           |  | Regulation and Supervision                                                                                     |  | 4   
|           |  | Employees                                                                                                      |  | 9   
|           |  | Executive Officers of the Registrant                                                                           |  | 9   
|Item 2.    |  | Description of Property                                                                                        |  | 10  
|Item 3.    |  | Legal Proceedings                                                                                              |  | 10  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                            |  | 10  
|           |  |                                                                                                               
|           |  | PART II                                                                                                        |  |     
|           |  |                                                                                                               
|Item 5.    |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities |  | 10  
|Item 6.    |  | Managements Discussion and Analysis or Plan of Operation                                                      |  | 10  
|Item 7.    |  | Financial Statements                                                                                           |  | 11  
|Item 8.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           |  | 11  
|Item 8A.   |  | Controls and Procedures                                                                                        |  | 11  
|           |  |                                                                                                               
|           |  | PART III                                                                                                       |  |     
|           |  |                                                                                                               
|Item 9.    |  | Directors and Executive Officers of the Registrant                                                             |  | 11  
|Item 10.   |  | Executive Compensation                                                                                         |  | 11  
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 |  | 12  
|Item 12.   |  | Certain Relationships and Related Transactions                                                                 |  | 12  
|Item 13.   |  | Exhibits and Reports on Form 8-K                                                                               |  | 12  
|Item 14.   |  | Principal Accountant Fees and Services                                                                         |  | 13  
|           | 
|SIGNATURES |  | 14                                                                                                            



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PART I



Item 1. Description of Business.



General Development of Business



Pinnacle Bankshares Corporation, a Virginia corporation (the Company), was organized in 1997 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in
Altavista, Virginia. The Company conducts all of its business activities through the branch offices of its wholly-owned subsidiary bank, The First National Bank of Altavista (the Bank). The Company 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 Companys administrative offices are located at 622 Broad Street, Altavista, Virginia.



The Bank was organized as a national bank in 1908 and commenced general
banking operations in December of that year, providing services to commercial and agricultural businesses and individuals in the Altavista area. With an emphasis on personal service, the Bank today offers a broad range of commercial and retail
banking products and services including checking, savings and time deposits, individual retirement accounts, merchant bankcard processing, residential and commercial mortgages, home equity loans, consumer installment loans, agricultural loans,
investment loans, small business loans, commercial lines of credit and letters of credit.



The Bank serves a trade area consisting primarily of Campbell County, northern Pittsylvania County, southeastern Bedford County, and the city of Lynchburg from facilities located in the town of Altavista and the city
of Lynchburg, Virginia. In October 1998, the Company opened a mortgage loan production office in Forest, Virginia. In June 1999 the Company opened The Airport facility, located just outside the Lynchburg city limits, and in August 2000, opened the
Old Forest Road facility, located on Old Forest Road in Lynchburg, and the Brookville Plaza facility, located on Timberlake Road in Lynchburg. The Company opened these offices to better serve the Lynchburg and northern Campbell County areas.



The Bank has two wholly-owned subsidiaries. FNB Property
Corp., which is a Virginia corporation, was formed to hold title to Bank premises real estate. FNB Property sold land held for sale in 2003 and purchased land in Forest, Virginia that will be used to build a new branch facility. First Properties,
Inc., also a Virginia corporation, was formed to hold title to other real estate owned. No activity occurred in 2004 for First Properties, Inc.



Competition



The banking business
in central Virginia is highly competitive with respect to both loans and deposits and is dominated by a number of major banks that have offices operating throughout the state and in the Companys market area. The Company actively competes for
all types of deposits and loans with other banks and with nonbank financial institutions, including savings and loan associations, finance companies, credit unions, mortgage companies, insurance companies and other lending institutions.



Institutions such as brokerage firms, credit card companies and even
retail establishments offer alternative investment vehicles such as money market funds as well as traditional banking services. Other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity
securities also represent a source of competition for the Company with respect to the acquisition of deposits. Among the advantages that the major banks have over the Company is their ability to finance extensive advertising campaigns and to
allocate their investment assets to regions of highest yield and demand, over a more diverse geographic area. Although major banks have these competitive advantages over small independent banks, the Bank has actively tried to turn the loss of local
independent banks to its competitive advantage by soliciting customers who prefer the personal service offered by a small independent bank.



The Company does not depend upon a single customer or industry, the loss of which would have a material adverse effect on the Companys financial
condition. Two industries that have been affected in the area are the textile and furniture industry. Cheaper production costs overseas has led to job layoffs and a few plant closings in the immediate area but has not affected the companys
overall profitability.



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The Company believes that its prompt response to lending requests is a key factor to the Companys
competitive position in its primary service area. In addition, the accessibility of senior management to customers and local decision-making also distinguish the Company from other area financial institutions.



In order to compete with the other financial institutions in its primary
service area, the Company relies principally upon local promotional activities, personal contact by its officers, directors, employees and stockholders and offering specialized services to customers. The Companys promotional activities
emphasize the advantages of dealing with a local bank attuned to the particular needs of the community.



Regulation and Supervision



Set
forth below is a brief description of the material laws and regulations that affect the Company. The description of these statutes and regulations is only a summary and does not purport to be complete. This discussion is qualified in its entirety by
reference to the statutes and regulations summarized below. No assurance can be given that these statutes or regulations will not change in the future.



General. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the
Exchange Act), which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission (the SEC). As an Exchange Act reporting company, the Company is directly
affected by the Sarbanes-Oxley Act of 2002 (the SOX), which is aimed at improving corporate governance and reporting procedures and requires additional corporate governance measures and expanded disclosure of the Companys corporate
operations and internal controls. The Company is already complying with new SEC and other rules and regulations implemented pursuant to the SOX and intends to comply with any applicable rules and regulations implemented in the future. Although the
Company has incurred and will continue to incur additional expense in complying with the provisions of the SOX and the resulting regulations, this compliance has not had, and is not expected to have, a material impact on the Companys financial
condition or results of operations.



The Company is a bank
holding company within the meaning of the Bank Holding Company Act of 1956, and is registered as such with, and subject to the supervision of, the Federal Reserve Bank of Richmond (the FRB). Generally, a bank holding company is required
to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding
company would own or control more than 5% of the voting shares of such bank. The FRBs approval is also required for the merger or consolidation of bank holding companies.



The Company is required to file periodic reports with the FRB and provide any additional information the FRB may require.
The FRB also has the authority to examine the Company and the Bank, as well as any arrangements between the Company and the Bank, with the cost of any such examinations to be borne by the Company.



Banking subsidiaries of bank holding companies are also subject to certain
restrictions imposed by Federal law in dealings with their holding companies and other affiliates. Subject to certain restrictions set forth in the Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase or invest in the
securities of an affiliate, purchase assets from an affiliate or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the aggregate amount of such transactions of a bank and its subsidiaries with its affiliates
does not exceed 10% of the capital stock and surplus of the bank on a per affiliate basis or 20% of the capital stock and surplus of the bank on an aggregate affiliate basis. In addition, such transactions must be on terms and conditions that are
consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding
company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. Additionally, the Company and its subsidiary are prohibited from
engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services.



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A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company engaged in nonbanking activities. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the FRB has determined by regulation or
order are so closely related to banking as to be a proper incident to banking. In making these determinations, the FRB considers whether the performance of such activities by a bank holding company would offer advantages to the public that outweigh
possible adverse effects.



As a national bank, the Bank is
subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency (the Comptroller). Each depositors account with the Bank is insured by the Federal Deposit Insurance Corporation (the
FDIC) to the maximum amount permitted by law, which is currently $100,000 for each depositor. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not
conflict with or are not preempted by Federal banking law.



The
regulations of the FDIC, the Comptroller and FRB govern most aspects of the Companys business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends,
branching, deposit interest rate ceilings and numerous other matters. As a consequence of the extensive regulation of commercial banking activities in the United States, the Companys business is particularly susceptible to changes in state and
Federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.



Governmental Policies and Legislation. Banking is a business that depends primarily on interest rate
differentials. In general, the difference between the interest rates paid by the Company on its deposits and its other borrowings and the interest rates received by the Company on loans extended to its customers and securities held in its portfolio,
comprise the major portion of the Companys earnings. These rates are highly sensitive to many factors that are beyond the Companys control. Accordingly, the Companys growth and earnings are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.



The commercial banking business is affected not only by general economic conditions, but is also influenced by the monetary and fiscal policies of the Federal government and the policies of its regulatory agencies,
particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in U.S. Government securities, by adjusting the required level of reserves for
financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits, and
also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.



From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of bank holding companies, banks and other financial institutions are frequently
made in Congress, in the Virginia Legislature and brought before various bank holding company and bank regulatory agencies. The likelihood of any major changes and the impact such changes might have are impossible to predict. Certain of the
potentially significant changes that have been enacted recently by Congress or various regulatory or professional agencies are discussed below.



Dividends.There are regulatory restrictions on dividend payments by both the Bank and the Company that may affect the Companys
ability to pay dividends on its Common Stock. See Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.



Capital Requirements. The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy
guidelines for bank holding companies and banks. These capital



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adequacy regulations are based upon a risk-based capital determination, whereby a bank holding companys capital
adequacy is determined in light of the risk, both on- and off-balance sheet, contained in the companys assets. Different categories of assets are assigned risk weightings and are counted as a percentage of their book value.



The regulations divide capital between Tier 1 capital (core capital) and Tier
2 capital. For a bank holding company, Tier 1 capital consists primarily of common stock, related surplus, noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of qualifying cumulative
preferred securities. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan losses up to a maximum of 1.25% of risk weighted assets, limited other types of
preferred stock not included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from
capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The guidelines generally require banks to maintain a total qualifying capital to weighted risk assets level of 8% (the Risk-based Capital Ratio). At
least 4% of the total qualifying capital to weighted risk assets (the Tier 1 Risk-based Capital Ratio) must be Tier 1 capital.



The FRB, the Comptroller and the FDIC have adopted leverage requirements that apply in addition to the risk-based capital requirements. Banks and bank
holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets (the Leverage Ratio) of at least 3.0% for the most highly-rated, financially sound banks and bank holding
companies and a minimum Leverage Ratio of at least 4.0% for all other banks. The FDIC and the FRB define Tier 1 capital for banks in the same manner for both the Leverage Ratio and the Risk-based Capital Ratio. However, the FRB defines Tier 1
capital for bank holding companies in a slightly different manner. An institution may be required to maintain Tier 1 capital of at least 4% or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors deemed
material by regulatory authorities. As of December 31, 2003, the Company and Bank both met all applicable capital requirements imposed by regulation.



Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). There are five capital categories applicable to insured
institutions, each with specific regulatory consequences. If the appropriate Federal banking agency determines, after notice and an opportunity for hearing, that an insured institution is in an unsafe or unsound condition, it may reclassify the
institution to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition. The Comptroller has issued regulations to implement these provisions. Under
these regulations, the categories are:



a. Well Capitalized
 The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a Risk-based Capital Ratio of 10% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 6% or
greater, (iii) having a Leverage Ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.



b. Adequately Capitalized  The institution meets the required minimum
level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a Risk-based Capital Ratio of 8% or greater, (ii)
having a Tier 1 Risk-based Capital Ratio of 4% or greater and (iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings,
Liquidity and Sensitivity to market risk) rating system.



c.
Undercapitalized  The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 8% or (ii) having a Tier 1 Risk-based
Capital Ratio of less than 4% or (iii) having a Leverage Ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a Leverage Ratio of less than 3%.



d. Significantly Undercapitalized  The institution is significantly
below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 6% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 3% or (iii)
having a Leverage Ratio of less than 3%.



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e. Critically Undercapitalized  The institution fails to meet a critical capital level set by the
appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.



An institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to
increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution must provide a limited guarantee that the institution will comply with its
capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish
additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will
further the purpose of prompt corrective action. The appropriate Federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital
restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to
conduct banking activities.



An insured depository institution
may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot
make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of
such a management fee or the making of such would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to the Company.



As of December 31, 2003, both the Company and the Bank were considered well capitalized.



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Deposit Insurance Assessments. FDICIA also requires the FDIC to implement a risk-based
assessment system in which the insurance premium relates to the probability that the deposit insurance fund will incur a loss and directs the FDIC to set semi-annual assessments in an amount necessary to increase the reserve ratio of the Bank
Insurance Fund to at least 1.25% of insured deposits or a higher percentage as determined to be justified by the FDIC.



The FDIC has promulgated implementing regulations that base an institutions risk category partly upon whether the institution is well capitalized
(1), adequately capitalized (2) or less than adequately capitalized (3), as defined under the Prompt Corrective Action Regulations. In addition, each insured depository institution is assigned to one of three
supervisory subgroups. Subgroup A institutions are financially sound institutions with few minor weaknesses, subgroup B institutions demonstrate weaknesses which, if not corrected, could result in significant
deterioration, and subgroup C institutions are those as to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness.
Based on the current capital levels the Company is categorized as a well-capitalized institution in subgroup A.



Mortgage Banking Regulation. The Banks mortgage banking operation is subject to the rules and regulations of, and examination by the
U.S. Department of Housing and Urban Development (HUD), the FHA, the VA and state regulatory authorities with respect to originating, processing and selling mortgage loans. Those rules and regulations, among other things, establish
standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and fees.
In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Home Ownership Equity
Protection Act, and the regulations promulgated thereunder. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the
reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.



Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of
1999 (the GLBA) implemented major changes to the statutory framework for providing banking and other financial services in the United States. The GLBA, among other things, eliminated many of the restrictions on affiliations among banks
and securities firms, insurance firms and other financial service providers. A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incident or complimentary to
financial activities. The activities that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited
merchant banking activities.



To become eligible
for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized,
well-managed and have at least a satisfactory rating under the CRA (discussed below). In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company. While the Company
satisfies these requirements, the Company has not elected for various reasons to be treated as a financial holding company under the GLBA.



We do not believe that the GLBA will have a material adverse impact on the Companys or the Banks operations. To the extent that it allows
banks, securities firms and insurance firms to affiliate, the financial services industry may experience further consolidation. The GLBA may have the result of increasing competition that we face from larger institutions and other companies offering
financial products and services, many of which may have substantially greater financial resources.



The GLBA and certain new regulations issued by federal banking agencies also provide protections against the transfer and use by financial institutions of
consumer nonpublic personal information. A financial institution must provide to its customers, at



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the beginning of the customer relationship and annually thereafter, the institutions policies and procedures
regarding the handling of customers nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from providing a customers personal financial information to unaffiliated third parties
unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.



Community Reinvestment Act. The Bank is subject to the requirements of the Community Reinvestment Act (the
CRA). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. A financial institutions efforts in meeting community credit needs currently is evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers,
acquisitions and applications to open a branch or facility.



USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism
and money laundering. Among other provisions, the USA PATRIOT Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal
government concerning activities that may involve money laundering or terrorists activities. Interim rules implementing the USA PATRIOT Act were issued effective March 4, 2002. The USA PATRIOT Act is considered a significant banking law in
terms of information disclosure regarding certain customer transactions. Although it does create a reporting obligation, the Bank does not expect the USA PATRIOT Act to materially affect its products, services or other business activities.



Reporting Terrorist Activities.The Federal
Bureau of Investigation (FBI) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC. The Bank has
been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.



The Office of Foreign Assets Control (OFAC), which
is a division of the Department of the Treasury is responsible for helping to insure that United States entities do not engage in transactions with enemies of the United States, as defined by various Executive Orders and Acts of
Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer
that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank
actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of
Specially Designated Nationals and Blocked Persons.



Employees



As of December 31,
2003, the Company had 82 full-time employees. The Companys management believes that its employee relations are good.



Executive Officers of the Registrant



|                            |  |                                                                                                                                                                                  
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name (Age)                  |  | Principal Occupation During Past Five Years                                                                                                                                      
|Robert H. Gilliam, Jr. (58) |  | President & Chief Executive Officer of Pinnacle Bankshares Corporation and The First National Bank of Altavista since 1980; Director, Pinnacle Bankshares Corporation since
1980.



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|                        |  |                                                                                                                                                                                                                                                                                                                                                                                     
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Carroll E. Shelton (53) |  | Senior Vice President of Pinnacle Bankshares Corporation and The First National Bank of Altavista since 1990; Director, Pinnacle Bankshares Corporation since 1990.                                                                                                                                                                                                                 
|                        | 
|Bryan M. Lemley (32)    |  | Secretary, Treasurer and Chief Financial Officer of Pinnacle Bankshares Corporation since 2000 and Vice President, Cashier and Chief Financial Officer of The First National Bank of Altavista
since June 2000; Internal Auditor of The First National Bank of Altavista from March through June 2000; Senior Auditor for One Valley Bancorp from August 1994 through February 2000.



Item 2. Description of Property.



The Companys main office and corporate headquarters, located at 622 Broad Street in downtown Altavista, Virginia, is owned and principally occupied by the Bank.



The Vista Office, located at 1301 N. Main Street in Altavista, Virginia,
consists of a single-story building owned by the Bank.



First
National Mortgage, located at 17841 Forest Road in Forest, Virginia, consists of a single-story building leased annually for $800 per month by the Bank.



The Airport Office, located at 14580 Wards Road in Campbell County, Virginia, consists of a single-story building owned by the Bank.



The Old Forest Road Office, located at 3309 Old Forest Road in Lynchburg,
Virginia, consists of a single-story building owned by the Bank.



The Brookville Plaza Office, located at 7805 Timberlake Road in Lynchburg, Virginia, consists of office space leased for $3,125 per month through May, 2006 by the Bank in a local supermarket.



All of these properties are in good operating condition and are adequate for
the Companys present and anticipated future needs. The Company maintains comprehensive general liability and casualty loss insurance covering its properties and activities conducted in or about its properties. The Company believes this
insurance provides adequate protection for liabilities or losses that might arise out of the ownership and use of such properties.



Item 3. Legal Proceedings.



Neither the Company nor any of its properties is involved in any pending legal proceedings, nor are any such proceedings threatened, other than nonmaterial proceedings arising in the ordinary course of the Companys business.



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



No matters were submitted to a vote of security holders during the fourth quarter of the Companys fiscal year ended December 31, 2003.



PART II



Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.



The information contained on page 49 of the 2003 Annual Report to Shareholders, under the caption, Market for Common
Equity and Related Stockholder Matters, is incorporated herein by reference.



Item 6. Managements Discussion and Analysis or Plan of Operation.



The information presented under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations on
pages 6 through 21 of the 2003 Annual Report to Shareholders is incorporated herein by reference.



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Item 7. Financial Statements.



The consolidated financial statements of the Company and its subsidiary, including the accompanying notes, and independent auditors report thereon, contained on pages 22 through 48 of the 2003 Annual Report to Shareholders, are
incorporated herein by reference.



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



The information presented under the caption Change in Independent Auditors on page 11 of the 2004 Proxy Statement is incorporated herein by
reference.



Item 8A. Controls and Procedures.



Pursuant to provisions of the Securities Exchange Act of 1934, the Companys Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under their supervision, for the Company. They have designed such disclosure controls and procedures to ensure that material information relating to the Company, is made
known to them by others within the Company, particularly during the periods when the Companys quarterly and annual reports are being prepared. They have evaluated the effectiveness of the Companys disclosure controls and procedures, and
based on their evaluation, concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report on Form 10-KSB.



There were no changes in the Companys internal control over financial reporting during the Companys fourth
quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



Except as otherwise
indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Companys 2004 Annual Meeting of Shareholders (2004 Proxy Statement) to be held on April 13, 2004.



Item 9. Directors and Executive Officers of the Registrant



The information with respect to the directors of the Company is contained on pages 3 through 6 of the 2004 Proxy Statement under the caption Election of Directors, and is incorporated herein by reference.
The information regarding the Section 16(a) reporting requirements of the directors and executive officers is contained on page 10 of the 2004 Proxy Statement under the caption Section 16(a) Beneficial Ownership Reporting Compliance, and
is incorporated herein by reference. The information concerning the executive officers of the Company required by this item is included in Part I of this Form 10-KSB under the caption Executive Officers of the Registrant. The information
regarding the Companys Audit Committee is contained on pages 10 and 11 of the 2004 Proxy Statement under the caption Meetings and Committees of the Board of Directors, and is incorporated herein by reference.



The Company has adopted a Code of Conduct and Conflict of Interest Policy
that applies to the directors, executives and employees of the Company and the Bank, including the Companys Chief Executive Officer, Chief Financial Officer, Controller and other persons performing similar functions. A copy of this Code of
Conduct is attached hereto as Exhibit 14.



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##### Table of Contents

Item 10. Executive Compensation.



Information on Executive Compensation is contained on pages 6 through 9 of the 2004 Proxy Statement and is incorporated herein by reference. Information on compensation of directors is contained on page 6 of the 2004
Proxy Statement and is incorporated herein by reference.



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



Information on Security Ownership of Certain Beneficial Owners and Management is contained on pages 2 and 3 of the 2004 Proxy Statement and is
incorporated herein by reference.



Information as of December
31, 2003 with respect to certain compensation plans under which equity securities of the Company are authorized for issuance is contained on page 7 of the 2004 Proxy Statement and is incorporated herein by reference.



Item 12. Certain Relationships and Related Transactions.



Information on Interests of Management in Certain Transactions is contained on page 6 of the 2004 Proxy Statement and is incorporated herein by reference.



Item 13. Exhibits and Reports on Form 8-K.



| | (a) | Exhibit Index
| | --- | -------------



|               |  |                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                     
|3.1            |  | Amended and Restated Articles of Incorporation (incorporated by reference to Appendix 1 to registrants amended registration statement on Form S-4 (File No. 333-20399) filed on January
30, 1997)                              
|               | 
|3.2            |  | Bylaws (incorporated by reference to Exhibit 3.2 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 Directors 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)         
|               | 
|13             |  | 2003 Annual Report to Shareholders                                                                                                                                                                                              
|               | 
|14             |  | Pinnacle Bankshares Corporation Code of Conduct and Conflict of Interest Policy                                                                                                                                                 
|               | 
|21             |  | Subsidiaries                                                                                                                                                                                                                    



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##### Table of Contents

|     |  |                                                                                             
|---- |  | --------------------------------------------------------------------------------------------
|     | 
|23   |  | Consent of KPMG LLP                                                                         
|     | 
|31.1 |  | CEO Certification Pursuant to Rule 13a-14(a)                                                
|     | 
|31.2 |  | CFO Certification Pursuant to Rule 13a-14(a)                                                
|     | 
|32   |  | CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)



| | (b) | Reports on Form 8-K
| | --- | -------------------



Current Report on Form 8-K, filed January 29, 2004, reporting a change in independent auditor.



Item 14. Principal Accountant Fees and Services.



The information contained on page 12 of the 2004 Proxy Statement under the captions Audit and Non-Audit Fees and Pre-Approval Policies is incorporated herein by reference.



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##### Table of Contents

SIGNATURES



In accordance with
Section 13 or 15(d) 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)                                                
|                   | 
|MARCH 9, 2004 Date |  | /s/ Robert H. Gilliam, Jr.                                  
|                   |  | Robert H. Gilliam Jr., President and Chief Executive Officer



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



|                                                 |  |                                                                                               |  |              
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | -------------
|Signature                                        |  | Title                                                                                         |  | Date         
|/s/ Robert H. Gilliam, Jr.Robert H. Gilliam, Jr. |  | President, Chief Executive Officer and Director (principal executive officer)                 |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ Bryan M. LemleyBryan M. Lemley               |  | Secretary, Treasurer and Chief Financial Officer (principal financial and accounting officer) |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ A. Willard ArthurA. Willard Arthur           |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ James E. Burton, IVJames E. Burton, IV       |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ John P. ErbJohn P. Erb                       |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ R.B. Hancock, Jr.R.B. Hancock, Jr.           |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ James P. Kent, Jr.James P. Kent, Jr.         |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ Percy O. MoorePercy O. Moore                 |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ William F. OveracreWilliam F. Overacre       |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ Herman P. Rogers, Jr.Herman P. Rogers, Jr.   |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ Carroll E. SheltonCarroll E. Shelton         |  | Vice President and Director                                                                   |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ John L. WallerJohn L. Waller                 |  | Director                                                                                      |  | March 9, 2004
|                                                 |  |                                                                                              
|/s/ Michael E. WatsonMichael E. Watson           |  | Director                                                                                      |  | March 9, 2004



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