SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10 - Q

            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

                         Commission File Number: 0-13086



                       FNB FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          North Carolina                                      56 - 1382275
--------------------------------------------------------------------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                          Identification Number)


202 South Main Street, Reidsville, North Carolina              27320
--------------------------------------------------------------------------------
  (Address of principal executive offices)                  (Zip Code)


                                 (336) 342-3346
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not Applicable
--------------------------------------------------------------------------------
(Former name,  former  address,  and former fiscal years,  if changed since last
                                    report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.

Yes  [X]       No  [ ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes  [X]         No  [ ]

4,391,281  common  shares were  outstanding  as of October 31, 2003,  with a par
value per share of $1.00.

<PAGE>


<TABLE>
<CAPTION>

                       FNB FINANCIAL SERVICES CORPORATION

                                    FORM 10-Q

                                      INDEX

                                                                                 Page

 PART    I  FINANCIAL INFORMATION

 Item    1  Financial Statements

            Consolidated Balance Sheets
<S>                                                                                <C>
            September 30, 2003 and December 31, 2002                               3

            Consolidated Statements of Income and Comprehensive Income Three and
            Nine Months Ended September 30, 2003 and 2002                          4

            Consolidated Statements of Cash Flows
            Nine months ended September 30, 2003 and 2002                          5

            Notes to Consolidated Financial Statements                             7

 Item    2  Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                 13

 Item    3  Quantitative and Qualitative Disclosures About Market Risk            18

 Item    4  Controls and Procedures                                               20


 PART    II OTHER INFORMATION

 Item    1  Legal Proceedings                                                     20

 Item    2  Changes in Securities and Use of Proceeds                             20

 Item    3  Defaults Upon Senior Securities                                       20

 Item    4  Submission of Matters to a Vote of Security Holders                   20

 Item    5  Other Information                                                     20

 Item    6  Exhibits and Reports on Form 8 - K                                    20

                                       2
</TABLE>


<PAGE>


<TABLE>
<CAPTION>



PART    I.  FINANCIAL INFORMATION
Item    1.  Financial Statements

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)

                                                                      September 30,     December 31,
                                                                           2003             2002
                                                                       (Unaudited)        (Audited)
                                                                      -------------    -------------
ASSETS

<S>                                                                   <C>              <C>
Cash and due from banks                                               $   22,277       $   24,524
Investment securities:
     Securities available for sale                                       147,208          125,084
     Federal Home Loan Bank and Federal Reserve Bank Stock                 3,232            3,732
Loans, net of allowance for credit losses of $7,071 at
      September 30, 2003 and $7,059 at December 31, 2002                 555,671          556,541
Premises and equipment, net                                               12,843           10,916
Accrued income and other assets                                           20,696           13,235
                                                                      -------------    -------------

               Total assets                                           $  761,927       $  734,032
                                                                      =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
     Noninterest bearing                                              $   66,958       $   61,651
     Interest bearing                                                    566,594          543,354
                                                                      -------------    -------------
               Total deposits                                            633,552          605,005

Federal funds purchased and retail repurchase agreements                  12,840            8,258
Other borrowings                                                          47,500           52,500
Accrued expenses and other liabilities                                     3,635            3,936
                                                                      -------------    -------------

               Total liabilities                                         697,527          669,699
                                                                      -------------    -------------

Shareholders' Equity:
Preferred stock no par value; authorized 10,000,000 shares;
               none issued                                                    --               --
Common stock, $1.00 par value; authorized 40,000,000 shares;
               outstanding 4,394,231 at September 30, 2003 and
               4,467,239 at December 31, 2002                              4,394            4,467
Paid-in capital                                                           22,411           23,833
Retained earnings                                                         38,156           34,549
Accumulated other comprehensive income (loss)                              (561)            1,484
                                                                      -------------    -------------

               Total shareholders' equity                                 64,400           64,333
                                                                      -------------    -------------

               Total liabilities and shareholders' equity             $  761,927       $  734,032
                                                                      =============    =============

</TABLE>


     See notes to unaudited consolidated financial statements.

                                       3
<PAGE>


<TABLE>
<CAPTION>

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited; dollars in thousands, except per share data)

                                                            Three Months Ended         Nine Months Ended
                                                              September 30,              September 30,
                                                       -------------------------   -----------------------

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

Interest income
<S>                                                    <C>            <C>          <C>          <C>
     Loans                                             $     9,054    $    9,416   $   27,153   $   27,658

     Federal funds sold and overnight deposits                  27           107           68          150
     Investment securities
               Taxable                                         879         1,235        3,148        3,987
               Tax exempt                                      329            50          759          243
               Other                                            34            58          129          177
                                                       -----------    ----------   ----------   ----------


               Total interest income                        10,323        10,866       31,257       32,215
                                                       -----------    ----------   ----------   ----------


Interest expense
     Deposits                                                3,770         4,437       11,866       13,578
     Federal funds purchased and other borrowings              348           431        1,166        1,103
                                                       -----------    ----------   ----------   ----------


               Total interest expense                        4,118         4,868       13,032       14,681
                                                       -----------    ----------   ----------   ----------


Net interest income                                          6,205         5,998       18,225       17,534
Provision for credit losses                                    303           250        1,080        1,215
                                                       -----------    ----------   ----------   ----------


Net interest income after provision for credit losses        5,902         5,748       17,145       16,319

Noninterest income
     Service charges on deposit accounts                       959           783        2,590        2,028
     Net gain on sales of securities                             0            --          562          318
     Net gain on disposition of asset                            0            --            0          104
     Investment services fees                                  179            51          422          197
     Mortgage banking fees                                     719           318        1,664          760
     Other income                                              154           100          334          323
                                                       -----------    ----------   ----------   ----------


               Total noninterest income                      2,011         1,252        5,572        3,730

Noninterest expense
     Salaries and employee benefits                          2,625         2,437        7,751        7,373
     Occupancy expense                                         298           291          856          820
     Furniture and equipment expense                           638           458        1,746        1,437
     Insurance expense, including FDIC assessment               38            55          134          152
     Marketing expense                                         194            80          376          199
     Printing and supply expense                               118           100          328          329
     Other expenses                                          1,101           616        3,191        2,635
                                                       -----------    ----------   ----------   ----------


               Total noninterest expense                     5,012         4,037       14,382       12,945

Income before income taxes                                   2,901         2,963        8,335        7,104
Income tax expense                                             965         1,032        2,875        2,386
                                                       -----------    ----------   ----------   ----------


Net income                                                   1,936         1,931        5,460        4,718
Other comprehensive income (loss)                           (2,187)           83       (2,045)          (4
                                                       -----------    ----------   ----------   ----------


Comprehensive income (loss)                            $      (249)   $    2,014   $    3,415   $    4,714

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

Per share data
     Net income, basic                                 $      0.44    $     0.43   $     1.23   $     1.03

     Net income, diluted                               $      0.42    $     0.42   $     1.19   $     1.01

     Cash dividends                                    $      0.14    $     0.13   $     0.42   $     0.39

Weighted average shares outstanding, basic               4,399,919     4,549,869    4,436,949    4,587,011
Weighted average shares outstanding, diluted             4,570,652     4,658,277    4,577,517    4,682,293

</TABLE>

            See notes to unaudited consolidated financial statements.

                                       4
<PAGE>


<TABLE>
<CAPTION>



FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARy
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)

                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                            ---------------------------
                                                                                2003           2002
                                                                            -----------    ------------

Cash flows from operating activities:
<S>                                                                         <C>            <C>
          Interest received                                                 $    28,893    $     32,645
          Fees and commissions received                                           7,556           3,658
          Interest paid                                                         (13,378)        (14,914)
          Noninterest expense paid                                              (14,069)        (12,369)
          Income taxes paid                                                      (2,769)         (2,752)
          Funding of loans held for sale                                        (93,800)        (18,824)
          Proceeds from sales of loans held for sale                             93,243          18,964
                                                                            -----------    ------------

               Net cash provided by operating activities                          5,676           6,408
                                                                            -----------    ------------

Cash flows from investing activities:
          Proceeds from sales or calls of securities available for sale          94,373          55,318
          Proceeds from maturities of securities available for sale               3,300              --
          Purchases of securities                                              (120,618)        (49,587)
          Capital expenditures                                                   (3,022)           (369)
          Increase in other real estate owned                                    (2,498)         (1,319)
          (Increase) decrease in gross loans                                      1,886         (18,831)
                                                                            -----------    ------------

               Net cash used in investing activities                            (26,579)        (14,788)
                                                                            -----------    ------------

Cash flows from financing activities:
          Increase (decrease) in demand, savings and interest
                checking accounts                                                12,192          (1,749)
          Increase in time deposits                                              16,354           6,521
          Decrease in federal funds purchased and
                retail repurchase agreements                                     (1,542)        (11,751)
          Increase (decrease) in other borrowings                                (5,000)         22,500
          Proceeds from issuance of common stock                                    415           1,200
          Repurchase of common stock                                             (1,910)         (3,450)
          Dividends paid                                                         (1,853)         (1,783)
                                                                            -----------    ------------

               Net cash provided by financing activities                         18,656          11,488
                                                                            -----------    ------------

Net increase (decrease) in cash and cash equivalents                             (2,247)          3,108
Cash and cash equivalents, January 1                                             24,524          23,673
                                                                            -----------    ------------

Cash and cash equivalents, September 30                                     $    22,277    $     26,781
                                                                            ===========    ============

Supplemental disclosure of non-cash transactions:
Non-cash transfers from loans to other real estate                          $     1,585    $      1,526
                                                                            ===========    ============

</TABLE>

            See notes to unaudited consolidated financial statements.

                                       5
<PAGE>


<TABLE>
<CAPTION>



FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)

Reconciliation of net income to net cash provided by operating activities:


                                                                          Nine Months Ended
                                                                            September 30,
                                                                        ---------------------
                                                                           2003       2002
                                                                        ----------   --------

<S>                                                                     <C>          <C>
Net income                                                              $  5,460     $  4,718

Adjustments to reconcile net income to net cash provided by operating
activities:
   Provision for credit losses                                             1,080        1,215
   Depreciation                                                            1,135          961
   Accretion and amortization                                                610          131
   Gain on sales of securities available for sale                           (562)        (318)
   Funding of loans held for sale                                        (93,800)     (18,824)
   Proceeds from sales of loans held for sale                             93,243       18,964
   Gain on other assets                                                       (4)        (104)
   (Increase) decrease in accrued income and other assets                 (1,185)         252
   Decrease in accrued expenses and other liabilities                       (301)        (587)
                                                                        ----------   ---------

               Net cash provided by operating activities                $  5,676     $  6,408
                                                                        ==========   =========
</TABLE>

         See notes to unaudited consolidated financial statements.

                                       6

<PAGE>



FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.   Basis of Presentation

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with generally  accepted  accounting  principles and with
the  instructions  to Form 10-Q and Rule 10-01 of Regulation  S-X.  Accordingly,
these statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial  statements.  In
the opinion of  management,  all  adjustments  (consisting  of normal  recurring
accruals)  considered  necessary  for a fair  presentation  have been  included.
Operating  results for the  nine-month  period ended  September 30, 2003 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2003.

2.   Significant Activities

     FNB Financial  Services  Corporation  (the  "Company") is a North  Carolina
financial holding company. The Company's wholly owned subsidiary,  FNB Southeast
(the "Bank"), is a North Carolina chartered commercial bank. As of September 30,
2003,  the Bank operated  thirteen  banking  offices in North  Carolina and five
banking  offices in Virginia.  The Bank has two wholly owned  subsidiaries;  FNB
Southeast  Investment  Services,  Inc.,  which operated  three offices,  and FNB
Southeast Mortgage  Corporation,  which operated seven offices.  The Company and
the Bank are headquartered in Reidsville, North Carolina.

3.   New Accounting Pronouncements

     During 2003, the Securities and Exchange  Commission has promulgated  rules
to implement several  provisions of the  Sarbanes-Oxley Act of 2002. These rules
included conditions for using financial measures that excluded  information that
would be required under generally  accepted  accounting  principles,  ("non-GAAP
financial measures").  Additionally,  new rules expand the number of events that
require current reporting on Form 8-K.  Furthermore;  new rules have been issued
pertaining to an audit committee and its need for a financial expert and code of
ethics requirements for senior management.  Also, new rules were issued defining
audit committee  responsibility for external auditor retention and determination
of external  auditor  independence.  Additional  rules have been  promulgated to
implement  provisions  requiring  management to certify its responsibilities for
establishing,  maintaining  and  monitoring  internal  reporting and  disclosure
controls.  Management  anticipates  additional  costs to  implement  the various
provisions of this law; however, it is difficult to determine the full impact of
implementation until such time as all rules have been promulgated.

     In December 2002, the FASB issued FASB Statement No. 148,  "Accounting  for
Stock-Based  Compensation-Transition  and Disclosure"  (SFAS 148),  which amends
FASB Statement No. 123, "Accounting for Stock Based Compensation" (SFAS 123), to
provide alternative methods of transition for an entity that voluntarily changes
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation.  The provisions of the statement were effective December 31, 2002.
Management currently intends to continue to account for stock-based compensation
under the  intrinsic  value  method  set forth in  Accounting  Principles  Board
("APB") Opinion 25 and related interpretations.  For this reason, the transition
guidance  of SFAS  148 does not have an  impact  on the  Company's  consolidated
balance sheet or consolidated statements of income and comprehensive income. The
Statement  does amend  existing  guidance with respect to required  disclosures,
regardless of the method of accounting used. The revised disclosure requirements
are presented herein.

     The  proforma  impact on net income and net income per share as if the fair
value of  stock-based  compensation  plans had been  recorded as a component  of
compensation expense in the consolidated  financial statements as of the date of
grant of awards  related to such plans,  pursuant to the  provisions of SFAS 123
and SFAS 148, is disclosed as follows.


                                       7
<PAGE>


(Dollars in thousands, except per share data)         Nine Months Ended
                                                         September 30,
                                                   -------------------------
                                                       2003           2002
                                                   ---------     -----------
Net income, as reported                            $   5,460     $   4,718
   Less: Stock-based compensation as calculated
      per fair value method, net of tax effect          (173)         (349)
                                                   ---------     -----------
         Proforma net income                       $   5,287     $   4,369

Earnings per share:
    Basic - as reported                            $   1.23      $   1.03
    Basic - proforma                               $   1.19      $   0.95
    Diluted - as reported                          $   1.19      $   1.01
    Diluted - proforma                             $   1.15      $   0.93

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used in 2003 and 2002:  dividend yield of 3.26% and 3.30%;  expected
volatility of 4.58% and 16.0%;  risk free interest rates of 3.50% and 3.47%, and
expected lives of seven years for both periods.

     These plans provide that shares granted come from the Company's  authorized
but  unissued or  reacquired  common  stock.  The price of the  options  granted
pursuant  to these  plans will not be less than 100  percent of the fair  market
value of the shares on the date of grant. The options granted in 1989, 1992, and
1995 vest ratably over a five-year  period,  and the options granted in 1996 and
thereafter vest ratably over a four-year  period.  No option will be exercisable
after ten years from the date granted.

     On November  25,  2002,  the FASB issued FASB  Interpretation  No. 45 ("FIN
45"),"Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
Including  Indirect  Guarantees of Indebtedness of Others (an  interpretation of
FASB  Statements  No. 5, 57, and 107 and rescission of FASB  Interpretation  No.
34)."  FIN  45  clarifies  the  requirements  of  FASB  Statement  No.  5  (SFAS
5),"Accounting for Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees.  For guarantees that
fall within the scope of FIN 45, the  Interpretation  requires  that  guarantors
recognize  a  liability  equal  to the  fair  value  of the  guarantee  upon its
issuance.  The Corporation's primary guarantees included within the scope of FIN
45  relates  to  financial  standby  letters  of  credit  issued  to  commercial
customers.  FIN 45 requires the liability recognized in standalone  arm's-length
transactions  to be  the  premium  received  or  receivable  by  the  guarantor.
Management does not anticipate the implementation of this interpretation to have
a material impact on the Company's financial statements.

     In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  ("FIN
46"),"Consolidation  of Variable  Interest  Entities (an  interpretation  of ARB
No.51)." FIN 46 addresses the  consolidation by business  enterprises of certain
variable interest entities. Management does not anticipate the implementation of
this  interpretation  to  have a  material  impact  on the  Company's  financial
statements.

     In April 2003, the FASB issued Statement of Financial  Accounting Standards
No. 149  "Amendment  of  Statement  133 on  Derivative  Instruments  and Hedging
Activities." FSAB Statements No. 133 "Accounting for Derivative  Instruments and
Hedging  Activities" and No. 138 "Accounting for Certain Derivative  Instruments
and Certain Hedging  Activities,"  establish  accounting and reporting standards
for derivative  instruments  including  derivatives  embedded in other contracts
(collectively  referred  to as  derivatives)  and for hedging  activities.  This
Statement 149 amends  Statement 133 for certain  decisions  made by the Board as
part of the  Derivatives  Implementation  Group (DIG)  process.  This  Statement
contains  amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting  Measurements,"  and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91 "Accounting
for Nonrefundable  Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases," No. 95,  "Statement of Cash Flows," and No.
126,  "Exemption from Certain Required  Disclosures about Financial  Instruments
for Certain Nonpublic  Entities." The Company is presently evaluating the effect
of this pronouncement.

                                       8
<PAGE>


     In May 2003, FASB issued  Statement of Financial  Accounting  Standards No.
150 "Accounting for Certain Financial  Instruments with  Characteristics of both
Liabilities and Equity".  This Statement establishes standards for how an issuer
classifies and measures certain financial  instruments with  characteristics  of
both  liabilities  and equity.  It requires that an issuer  classify a financial
instrument  that is  within  its  scope  as a  liability  (or an  asset  in some
circumstances).  Many of those instruments were previously classified as equity.
Some of the  provisions  of this  Statement  are  consistent  with  the  current
definition  of  liabilities  in FASB  Concepts  Statement  No.  6,  Elements  of
Financial Statements.  The remaining provisions of this Statement are consistent
with the  Board's  proposal  to revise  that  definition  to  encompass  certain
obligations that a reporting entity can or must settle by issuing its own equity
shares,  depending  on the nature of the  relationship  established  between the
holder and the issuer.  While the Board  still  plans to revise that  definition
through an amendment to Concepts Statement 6, the Board decided to defer issuing
that  amendment  until it has concluded its  deliberations  on the next phase of
this  project.  That  next  phase  will  deal with  certain  compound  financial
instruments  including  puttable  shares,  convertible  bonds,  and dual-indexed
financial  instruments.  This  Statement is effective for financial  instruments
entered into or modified  after May 31, 2003,  and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,  except for
mandatorily  redeemable financial instruments of nonpublic entities. It is to be
implemented  by reporting  the  cumulative  effect of a change in an  accounting
principle  for  financial  instruments  created  before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted.  Management does not anticipate the implementation
of this statement to have a material  impact on the  Corporation's  consolidated
financial position or consolidated results of operations.

     Based on the Company's  operations as of September 30, 2003,  none of these
standards  are  expected to have a material  effect on the  Company's  financial
statements.


4.   Comprehensive Income

     The  Company's  other  comprehensive  income  for the three and nine  month
periods  ended  September  30, 2003 and 2002  consists of  unrealized  gains and
losses on  available  for sale  securities,  net of  related  income  taxes,  as
follows:

<TABLE>
<CAPTION>


     (Dollars in thousands)                  Three Months Ended        Nine Months Ended
                                               September 30,            September 30,
                                           ----------------------    --------------------
                                            2003           2002        2003        2002
                                           ----------    --------    --------   ---------

<S>                                        <C>           <C>         <C>        <C>
     Unrealized gains (losses) on
         available for sale securities     $   (3,585)   $    135    $ (3,914)  $     311

     Reclassification of realized gains           --           --        (562)       (318)
                                           ----------    --------    --------   ---------
     Other comprehensive income (loss)
          before tax                           (3,585)        135      (3,352)         (7)

     Income tax effect                          1,398         (52)      1,307           3
                                           ----------    --------    --------   ---------
                                           $   (2,187)   $     83    $ (2,045)  $      (4)
     Other comprehensive income (loss)     ==========    ========    ========   =========

</TABLE>

                                       9
<PAGE>




5.   Segment Information

     The Company  follows the  provisions  of Statement of Financial  Accounting
Standards  ("SFAS") No. 131,  "Disclosure  about  Segments of an Enterprise  and
Related Information." SFAS 131 establishes standards for determining an entity's
operating  segments  and the  type  and  level of  financial  information  to be
disclosed in both annual and interim financial  statements.  It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.

     Operating  segments are components of an enterprise with separate financial
information  available for use by the chief operating decision maker to allocate
resources and to assess performance.  The Company has determined that it has one
significant  operating  segment:  the providing of general financial services to
the  customers  of its wholly  owned  subsidiary,  FNB  Southeast.  The  various
products  offered by FNB  Southeast  are those  generally  offered by  community
banks,  and the  allocation of resources is based on the overall  performance of
the  Company,  rather  than the  individual  performance  of banking  offices or
products.

6.   Calculation of Earnings Per Common Share

     Basic and diluted  earnings per share amounts have been computed based upon
net income as presented in the  accompanying  income  statements  divided by the
weighted  average  number  of  common  shares   outstanding  or  assumed  to  be
outstanding as summarized.
<TABLE>
<CAPTION>


                                               Three Months Ended             Nine Months Ended
                                                 September 30,                  September 30,
                                             ---------------------------   -------------------------
                                                 2003           2002         2003           2002
                                             ------------    -----------   ----------    -----------

<S>                                            <C>             <C>          <C>            <C>
  Weighted average number of shares
     used in basic EPS                         4,399,919       4,549,869    4,436,949      4,587,011
  Effect of dilutive stock options               170,733         108,408      140,568         95,282
                                             ------------    -----------   ----------    -----------


  Weighted average number of common
     shares and dilutive potential common
     shares used in dilutive EPS               4,570,652       4,658,277    4,577,517      4,682,293
                                             ============    ===========   ==========    ===========

</TABLE>

     As of September 30, 2003,  there were 114,833  potentially  dilutive  share
options  not  included  in the  weighted  average  calculation  since the option
exercise prices are greater than the fair market value of the common shares.

7.   Investment Securities
<TABLE>
<CAPTION>


                                                   September 30, 2003         December 31, 2002
                                             ---------------------------   -----------------------
           (Dollars in thousands)             Amortized         Fair        Amortized       Fair
                                                 Cost           Value         Cost          Value
                                             ------------    -----------   ----------    ---------
     Available for sale:
<S>                                          <C>             <C>           <C>           <C>
        U.S. Agency securities               $  93,169       $  92,651     $  97,364     $  99,024
        Mortgage backed securities              21,883          21,865        17,945        18,388
        State and municipal obligations         32,720          32,322         7,036         7,351
        Other                                      357             370           306           321
                                             ------------    -----------   ----------    ---------
            Total available for sale           148,129         147,208       122,651       125,084
     Federal Reserve Bank and
         Federal Home Loan Bank stock            3,232           3,232         3,732         3,732
                                             ------------    -----------   ----------    ---------
             Total investment securities     $ 151,361       $ 150,440     $ 126,383     $ 128,816
                                             ============    ===========   ==========    =========
</TABLE>

                                       10
<PAGE>




8.   Loans (net of unearned income)

     (Dollars in thousands)                      September 30,    December 31,
                                                      2003            2002
                                                 -------------    ------------


     Loan Category:

        Real estate - commercial                 $    154,311     $   170,657
        Real estate - residential                      94,866         119,316
        Real estate - construction                    111,479          87,696
        Commercial, financial and agricultural         88,434          87,458
        Consumer                                      113,652          98,473
                                                 -------------    ------------

                         Gross loans             $    562,742     $   563,600
                                                 =============    ============

9.   Allowance for Credit Losses
<TABLE>
<CAPTION>

                                             September 30, 2003            December 31, 2002
                                        ---------------------------    ----------------------------

     (Dollars in thousands)                           % of Loans in                % of Loans in
                                                      Each Category                 Each Category
                                        Allowance    to Total Loans    Allowance    to Total Loans
                                        ---------    --------------    ---------   ----------------
     Balance at end of period
     applicable to:

<S>                                     <C>                   <C>      <C>                 <C>
          Real estate - construction    $      5              20       $       7           16
          Real estate - mortgage              58              44             180
                                                                                           51
          Commercial                       5,182              16           5,201           16
          Consumer                         1,829              20           1,671           17
                                        ---------    --------------    ---------   ----------------

               Total                    $  7,071            100%       $   7,059          100%
                                        =========    ==============    =========   ================

</TABLE>


                                       11
<PAGE>


<TABLE>
<CAPTION>




10.  Analysis of Allowance for Credit Losses

                                                                    Nine Months Ended
                                                                      September 30,
                                                             -------------------------
     (Dollars in thousands)                                      2003          2002
                                                             -------------------------

<S>                                                          <C>            <C>
     Balance, beginning of period                            $    7,059     $   6,731

     Charge-offs                                                  1,237         1,080
     Recoveries                                                    (169)         (272)
                                                             -----------    ----------

     Net charge-offs                                              1,068           808
                                                             -----------    ----------

     Provision charged to operations                              1,080         1,215
                                                             -----------    ----------

     Balance, end of period                                  $    7,071     $   7,138
                                                             ===========    ==========

     Ratio of annualized net charge-offs during the period to
               average loans outstanding during the period         0.25%         0.20%
                                                             ===========    ==========

     Ratio of allowance for credit losses to month-end loans       1.26%         1.29%
                                                             ===========    ==========
</TABLE>

<TABLE>
<CAPTION>


11.  Nonperforming Assets

                                                             September 30,    December 31,
    (Dollars in thousands)                                      2003            2002
                                                             -------------   -------------

<S>                                                          <C>             <C>
     Nonaccrual  (1)                                         $   7,443       $  3,614

     Past due 90 days or more and still accruing interest           56             65
     Other real estate                                           2,574          1,662
     Renegotiated troubled debt                                     --            --

</TABLE>



(1)  Other than  amounts  listed  above,  there are no other  loans  which:  (a)
     represent  or  result  from  trends  or   uncertainties   which  management
     reasonably   expects  will  materially  affect  future  operating  results,
     liquidity,  or capital  resources,  or (b) represent material credits about
     which  management is aware of any  information  which causes  management to
     have serious  doubts as to the ability of such borrowers to comply with the
     loan repayment terms.

                                       12
<PAGE>



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations

Information  set forth  below may  contain  various  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, which statements represent the Company's
judgment  concerning the future and are subject to risks and uncertainties  that
could cause the Company's actual operating  results to differ  materially.  Such
forward-looking  statements  can be  identified  by the  use of  forward-looking
terminology,  such  as  "may",  "will",  "expect",   "anticipate",   "estimate",
"believe", or "continue", or the negative thereof or other variations thereof or
comparable   terminology.   The  Company  cautions  that  such   forward-looking
statements  are further  qualified  by  important  factors  that could cause the
Company's  actual  operating  results  to differ  materially  from  those in the
forward-looking statements.

Critical Accounting Policies

     The  Company's   accounting   policies  are  fundamental  to  understanding
management's  discussion  and analysis of results of  operations  and  financial
condition. The Company's significant accounting policies are discussed in detail
in Note 1 of the  consolidated  financial  statements  included in the Company's
2002 Annual  Report.  The  following  is a summary of the  allowance  for credit
losses,  one of the most  complex  and  judgmental  accounting  policies  of the
Company.

     The allowance for credit losses,  which is utilized to absorb actual losses
in the loan portfolio,  is maintained at a level  consistent  with  management's
best estimate of probable  credit losses  incurred as of the balance sheet date.
The  Company's  allowance  for  credit  losses  is also  analyzed  quarterly  by
management.  This analysis  includes a methodology that separates the total loan
portfolio into homogeneous loan classifications for purposes of evaluating risk.
The  required  allowance  is  calculated  by  applying a risk  adjusted  reserve
requirement to the dollar volume of loans within a homogenous group.  Major loan
portfolio subgroups include:  risk graded commercial loans, mortgage loans, home
equity loans, retail loans and retail credit lines. Management also analyzes the
loan  portfolio on an ongoing  basis to evaluate  current risk levels,  and risk
grades are adjusted  accordingly.  While management uses the best information to
make  evaluations,  future  adjustments  may be necessary,  if economic or other
conditions differ substantially from the assumptions used.

Summary

     On  January  27,  2003  the  Company   completed  the  acquisition  of  the
Harrisonburg,  Virginia  branch of another  financial  institution.  The Company
acquired approximately $5.4 million in loans and $11.0 million in deposits.

     Assets at  September  30,  2003 were $761.9  million,  an increase of $27.9
million since December 31, 2002. An increase in investment  securities available
for sale of $21.6 million was the principal factor contributing to this increase
in assets  during  the first  nine  months of 2003.  Over the past nine  months,
noninterest-bearing  deposits  increased  $5.3 million,  while  interest-bearing
deposits rose $23.2 million.

     Net income for the quarter  ended  September  30, 2003, of $1.9 million was
$5,000,  or .3%,  higher than the amount  earned in the third quarter last year.
Diluted  earnings  per share for the third  quarters of 2003 and 2002 were $0.42
per share.  For the nine months to date of 2003,  earnings of $5.5  million were
$742,000, or 15.7%, higher than the same period a year ago. Diluted earnings per
share for the nine  months  ended  September  30,  2003 and 2002 were  $1.19 and
$1.01, respectively.

Interest Income and Interest Expense

     Total  interest  income was $10.3  million  for the third  quarter of 2003,
compared to $10.9 million during the same period in 2002. Average earning assets
for the current quarter were $724.2 million,  an increase of 6.8% over the third
quarter  average of $677.8  million a year ago.  Interest  income from loans was
$9.1  million,  down 3.8% from $9.4  million in the third  quarter of 2002.  The
decrease in interest income was driven primarily by a continuing  decline in the
prime  lending rate.  Average loans of $571.8  million were 3.2% higher than the

                                       13
<PAGE>

$553.9 million last year. For the nine months ended on September 30, 2003, total
interest  income was $31.3  million,  compared to $32.2 million  during the same
period in 2002.  Earning  assets  averaged  $716.8 million during the first nine
months of 2003, an 8.7% increase over the 2002 average of $659.7 million.

     Interest  income on  investments  totaled $1.3 million for the three months
ended September 30, 2003,  compared to $1.5 million for the same period in 2002.
The $45.2 million,  or 45.5%,  increase in the average balance of the investment
portfolio  was  offset by a decline  in the yield from 5.21% in 2002 to 3.84% in
2003.  Investment  income for the nine-month period totaled $4.1 million in 2003
and $4.6 million in 2002. Market pressure  continues on yields as interest rates
are at 45 year lows.

     Third quarter  total  interest  expense was $4.1 million,  compared to $4.9
million from the third quarter of last year, a 15.4% decrease.  Average interest
bearing liabilities for the third quarter 2003 increased 8.4%, to $628.5 million
from $579.6 million for the third quarter of 2002.  Total  interest  expense for
the first nine  months of 2003 was $13.0  million,  an 11.2%  decrease  from the
$14.7 million  expense for the first nine months of 2002.  Overall cost of funds
for the nine  months  ended  September  30,  2003 and 2002 was 2.55% and  3.16%,
respectively.

     Interest expense on deposits for the third quarter decreased 15.0%, to $3.8
million for 2003 from $4.4 million in 2002.  Average  interest  bearing deposits
increased 12.0%, to $578.2 million, from $516.2 for the third quarter of 2002. A
campaign  directed  at  increasing  certificates  of  deposit  accounted  for  a
significant amount of this growth.  Deposit interest expense for the nine months
ended September 30, 2003,  decreased from $13.6 million in 2002 to $11.9 million
in 2003.  The  average  rate for the nine months on  interest  bearing  deposits
decreased  to 2.84% in 2003;  from  3.62% one year  earlier  while  the  average
balance of interest  bearing deposits  increased  11.4%,  from $502.1 million in
2002 to $559.1 million in 2003.

     Interest  expense on  federal  funds  purchased  and other  borrowings  was
$348,000 for the quarter ended September 30, 2003, down 19.2%,  from $430,000 in
the third  quarter of 2002.  For the nine months ended  September  30,  interest
expense for this category increased from $1.1 million in 2002 to $1.2 million in
2003.

Comparable net interest margins are as follows:
                                                                 Liability
Time Period                     Asset Yield     Rate        Interest Rate Spread
                                -----------    --------    ---------------------
Third Quarter, 2003                5.75%    -   2.60%     =       3.15%
Third Quarter, 2002                6.38%    -   3.33%     =       3.05%

Year-To-Date, 2003                 5.90%    -   2.82%     =       3.08%
Year-To-Date, 2002                 6.56%    -   3.49%     =       3.07%

Provision for Credit Losses

     A  provision  for credit  losses is charged  against  earnings  in order to
maintain the allowance  for credit losses at a level that reflects  management's
evaluation of the incurred losses  inherent in the portfolio.  The amount of the
provision is based on continuing  assessments of nonperforming  and "watch list"
loans,  analytical  reviews of loan loss  experience in relation to  outstanding
loans, loan charge-offs,  nonperforming  asset trends and management's  judgment
with respect to current and expected economic conditions and their impact on the
existing credit portfolio.
     The  provision  for credit losses in the third quarter of 2003 was $303,000
compared to $250,000 in 2002. The allowance for credit losses as a percentage of
gross loans  outstanding was 1.26% at September 30, 2003,  1.25% at December 31,
2002,  and 1.29% at  September  30, 2002.  Annualized  net credit  losses,  as a
percent of average loans,  was 0.23% and 0.01% for the quarters ended  September
30, 2003 and 2002,  respectively.  Year to date  annualized  net credit loss was
0.25% of average  loans in 2003,  compared to 0.20% for the same period in 2002.
For the first nine months of 2003,  the provision was $1.1 million,  compared to
$1.2 million for the same period a year ago.

                                       14


<PAGE>


Noninterest Income and Noninterest Expense

     Noninterest  income in the third  quarter of this year  increased  60.6% to
$2.0  million from $1.3  million in the same period last year.  Deposit  service
charges  of  $959,000  for the third  quarter of 2003  increased  22.5% from the
$783,000 in the third quarter of 2002.  Enhancements  to deposit service charges
contributed  to this increase.  Noninterest  income in the third quarter of 2003
included  $718,000 in mortgage  banking fees and $179,000 in investment  service
fees  compared  to  revenues  of $318,000  and  $51,000,  respectively,  for the
previous  year.  Total  noninterest  income  for the first  nine  months of 2003
totaled $5.6 million; a 49.4% increase over the $3.7 million earned in the first
nine months of 2002.  Mortgage  banking  fees totaled $1.7 million for the first
nine  months of 2003,  compared  to  $760,000  for the same  period in 2002,  an
increase of 119.0%. The $904,000 increase in mortgage banking fees for the first
nine  months  of  2003  was  attributable  to  the  continuing   growth  of  the
mortgage-banking  subsidiary,  combined with the refinancing activity associated
with the declining  interest rate  environment.  Deposit service charges of $2.6
million for the nine months were 27.7% higher than the $2.0 million  recorded in
the same period last year.  Net gains on  securities  available for sale totaled
$562,000  for the first nine  months of 2003,  a 76.5%  increase  over the gains
recorded for the same period a year ago.

     Noninterest expense for the third quarter of 2003 was $5.0 million, a 24.0%
increase over the $4.0 million  expense in the third  quarter of 2002.  Salaries
and  employee  benefits  increased  $187,000  because  of higher  insurance  and
retirement  costs  and  furniture  and  equipment  expense  increased  $187,000,
compared to third quarter 2002. Other expense for the third quarters of 2003 and
2002 totaled $1.1 million and $617,000, respectively. Other expense in the first
nine months of 2003 totaled $3.2 million, an increase of $556,000 from the first
nine months of 2002. This year's nine-month noninterest expense of $14.4 million
was 11.1% higher than the $12.9 million in the same period last year.

Income Taxes

     The  effective  income tax rate of 34.5% for the first nine  months of 2003
was higher than the 33.6% rate for the same period of 2002. The lower  effective
tax rate for 2002 was  primarily  due to the reduced  amount of current  expense
required to provide  adequate income tax provision  during the first nine months
of 2002. The Company  anticipates  the effective tax rate for the 2003 full year
will be similar to the results of the first nine months of 2003.

ANALYSIS OF FINANCIAL CONDITION

     The  Company's  total  assets at  September  30,  2003 and 2002 were $761.9
million and $720.4 million,  respectively. The $41.5 million growth represents a
5.8%  increase  over one year  earlier.  Since  December 31,  2002,  assets have
increased $27.9 million An increase in investment  securities available for sale
of $21.6  million was the  principal  factor  contributing  to this  increase in
assets  during the first nine  months of 2003.  Average  earning  assets for the
third  quarter of 2003 were  $724.2  million,  or 6.8%,  higher  than the $677.8
million average for the same quarter last year.

     Loans at September  30, 2003  totaled  $562.7  million,  compared to $554.2
million one year  earlier,  an increase  of 1.5%.  Loans were $563.6  million at
December  31,  2002.  Average  loans for the third  quarter of 2003 were  $571.8
million,  a 3.2%  increase over the $553.9  million  average in this same period
last year.

     Investment  securities  of $150.4  million at September 30, 2003 were 23.0%
higher than the $122.4 million balance a year ago. Average investment securities
were $144.6  million and $99.3 million for the third  quarters of 2003 and 2002,
respectively.  The Company elected to use the proceeds from successful campaigns
directed  at  increasing  core  deposits  to fund the  growth in the  investment
portfolio.

                                       15
<PAGE>


     Deposits  totaled  $633.6  million at September  30, 2003, a 7.1%  increase
versus $591.5  million one year ago, and a 4.7% increase from the $605.0 million
recorded  at  December  31,  2002.  At  the  end  of  the  third  quarter  2003,
noninterest-bearing deposits were $67.0 million, or 10.6% of total deposits. The
increase  in deposits  was the result of  campaigns  designed to attract  demand
deposits and certificates of deposit with a nine-month maturity. As mentioned in
the  preceding  paragraph,  the growth in core  deposits  funded the rise in the
investment  portfolio,  as  well  as  contributing  to  the  decrease  in  other
borrowings.

     At September 30, 2003,  borrowings at the Federal Home Loan Bank of Atlanta
(FHLB)  totaled $47.5  million,  a decrease of 9.5% compared to $52.5 million at
December 31, 2002.  Federal  funds  purchased and retail  repurchase  agreements
totaled  $3.5  million at  September  30,  2003, a decrease of $4.7 million from
December 31, 2002.

     Shareholders'  equity  increased  to $64.4  million at the end of the third
quarter 2003,  compared to $64.3 million at December 31, 2002.  The Company paid
dividends of $0.14 per share during the quarter ended September 30, 2003, a 7.7%
increase  over the $0.13 per share  dividend rate for the third quarter of 2002.
Year to date dividends per share for 2003 were $0.42, compared to $0.39 in 2002.
A second stock  repurchase  program of the outstanding  common stock,  initiated
during the fourth quarter of 2002,  continued in 2003.  This program is intended
to help  the  Company  achieve  its goal of  building  shareholder  value  while
maintaining  appropriate  capital levels. A total of 223,851 shares are eligible
to be  repurchased,  and through  September 30, 2003, a total of 121,553  shares
have been  purchased at an average price of $17.980.  In  accordance  with state
law, repurchased shares are cancelled and are no longer considered issued.

Asset Quality

     The credit loss allowance  ratio was 1.26% at September 30, 2003,  1.25% at
December 31, 2002,  and 1.29% at September  30, 2002.  For the third  quarter of
2003, provision charges against earnings totaled $303,000,  compared to $250,000
in the third  quarter of 2002.  Net  charge-offs  for the third  quarter of 2003
totaled  $324,000,  or a 0.23%  annualized  loss ratio  based on  average  loans
outstanding,  compared  to net  charge-offs  for the  third  quarter  of 2002 of
$20,000,  or 0.01%  annualized  loss ratio.  Annualized net  charge-offs for the
first nine months of 2003 and 2002 were 0.25% and 0.20%, respectively,  based on
average loans outstanding.

     Other real estate owned at September 30, 2003 was $2.6 million, compared to
$1.7  million  at  December  31,  2002.  Approximately  $1.6  million  has  been
transferred from loans into other real estate and approximately $689,000 of such
assets  were  disposed  of during the first nine  months of 2003.  A net loss of
$38,000  has been  recorded on  disposition  of other real estate in the current
year.

     Management  places  great  emphasis  on  maintaining  the  Company's  asset
quality.  The  allowance for credit  losses,  which is utilized to absorb actual
losses  in  the  loan  portfolio,  is  maintained  at a  level  consistent  with
management's  best estimate of probable credit losses incurred as of the balance
sheet date. Management believes the allowance for credit losses is sufficient to
absorb known risk in the portfolio.

The loan  portfolio  is analyzed on an ongoing  basis to evaluate  current  risk
levels, and risk grades are adjusted  accordingly.  The Company's  allowance for
credit losses is also analyzed quarterly by management. This analysis includes a
methodology  that  separates  the total loan  portfolio  into  homogeneous  loan
classifications for purposes of evaluating risk and considers the current status
of  the  portfolio,   historical  charge-off   experience,   current  levels  of
delinquent,  impaired and  non-performing  loans,  as well as economic and other
risk factors.  It is also subject to regulatory  examinations and determinations
as to adequacy,  which may take into  account  such  factors as the  methodology
employed and other analytical measures in comparison to a group of peer banks. .
The  required  allowance  is  calculated  by  applying a risk  adjusted  reserve
requirement to the dollar volume of loans within a homogenous group.  Major loan
portfolio subgroups include:  risk graded commercial loans, mortgage loans, home
equity loans,  retail loans and retail credit lines. The provisions of Statement
of  Financial  Accounting  Standard  No.  114 ("SFAS No.  114"),  Accounting  by
Creditors for  Impairment of a Loan, and related  pronouncements  are applied to
individually  significant loans.  Finally,  individual  reserves may be recorded
based on a review of loans on the  "watch  list." At  September  30,  2003,  the
recorded investment in loans considered impaired was approximately  $12,920,672.
Impaired  loans at September  30, 2003  consisted of  $1,168,442 of retail loans
past due 90 days or  more,  and  $11,752,230  of risk  grade 7 and risk  grade 8
commercial loans.  Calculated  reserves for impaired loans at September 30, 2003
totaled $2,261,532.

                                       16
<PAGE>


Capital Resources

     Banks and financial holding companies, as regulated institutions, must meet
required  levels of capital.  The Office of the  Commissioner  of Banks in North
Carolina  and the  Board of  Governors  of the  Federal  Reserve,  which are the
primary  regulatory  agencies for FNB Southeast  and the Company,  respectively,
have  adopted  minimum   capital   regulations  or  guidelines  that  categorize
components  and the  level of risk  associated  with  various  types of  assets.
Financial  institutions are required to maintain a level of capital commensurate
with  the  risk  profile  assigned  to  their  assets  in  accordance  with  the
guidelines.

     As shown in the following  table,  the Company and its wholly owned banking
subsidiary   have  capital  levels   exceeding  the  minimum  levels  for  "well
capitalized" banks and financial holding companies as of September 30, 2003.

                                Regulatory Guidelines
                         -----------------------------------
                            Well        Adequately                     FNB
  Ratio                  Capitalized   Capitalized     Company      Southeast
                         -----------   -----------   ------------   ---------

  Total Capital              10.0%         8.0%         12.1%          11.8%
  Tier 1 Capital              6.0          4.0          10.9           10.6
  Leverage Capital            5.0          4.0           8.3            8.2




Sarbanes-Oxley Act of 2002

     On July 30, 2002,  the  Sarbanes-Oxley  Act of 2002 was signed into law and
became some of the most  sweeping  federal  legislation  addressing  accounting,
corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act
is  wide-ranging as it applies to all public  companies and imposes  significant
new requirements for public company governance and disclosure requirements. Some
of the provisions of the Sarbanes-Oxley  Act became effective  immediately while
others will be implemented over the coming months.

     In  general,  the  Sarbanes-Oxley  Act  mandates  important  new  corporate
governance and financial reporting requirements intended to enhance the accuracy
and transparency of public companies' reported financial results. It establishes
new  responsibilities  for corporate chief executive  officers,  chief financial
officers and audit committees in the financial  reporting  process and creates a
new  regulatory  body to oversee  auditors of public  companies.  It backs these
requirements with new SEC enforcement  tools,  increases  criminal penalties for
federal mail, wire and securities fraud, and creates new criminal  penalties for
document and record  destruction in connection with federal  investigations.  It
also increases the  opportunity  for more private  litigation by lengthening the
statute of  limitations  for  securities  fraud claims and providing new federal
corporate whistleblower protection.

     The full impact of the  Sarbanes-Oxley  Act cannot be fully  measured until
the SEC acts to  implement  the  numerous  provisions  for  which  Congress  has
delegated implementation authority. The economic and operational effects of this
new legislation on public companies,  including the Bank, will be significant in
terms of the time,  resources and costs  associated  with complying with the new
law.  Because the  Sarbanes-Oxley  Act,  for the most part,  applies  equally to
larger and smaller public companies,  the Bank will be presented with additional
challenges as a smaller,  community-oriented  financial  institution  seeking to
compete with larger financial institutions in its market.


                                       17
<PAGE>



Liquidity Management

     Liquidity  management  refers to the ability to meet  day-to-day  cash flow
requirements  based  primarily  on activity in loan and deposit  accounts of the
Company's  customers.  Deposit  withdrawals,  loan funding and general corporate
activity create a need for liquidity for the Company.  Liquidity is derived from
sources  such as  deposit  growth;  maturity,  calls,  or  sales  of  investment
securities;  principal and interest payments on loans;  access to borrowed funds
or lines of credit; and profits.

     During the first nine months of 2003 the  Company had net cash  provided by
operating  activities of $5.7 million.  This was a decrease from $6.4 million of
net cash provided by operating  activities in the first nine months of 2002. The
decrease is  primarily  attributable  to the decline of $3.8 million in interest
received and a $1.7 million  increase  noninterest  expense  paid,  offset by an
increase in fees and commissions received.

     Net cash used in  investing  activities  in the first  nine  months of 2003
totaled $26.4  million.  Purchases of investment  securities in the current year
totaled $120.4 million and proceeds from sales, calls, or maturity of securities
were $97.6 million. This compares to the first nine months of 2002 when proceeds
from sales and/or calls of  securities  totaled  $55.3  million and purchases of
securities  totaled $49.6 million,  resulting in net cash provided by investment
activities  of $14.8  million.  A decrease in loans  outstanding  provided  $1.9
million in cash during  2003,  compared to an increase in  outstanding  loans in
2002 that used $18.8  million of cash  during the same  period in 2002.  Capital
expenditures used $3.0 million in 2003, compared to $369,000 in 2002.

     Financing  activities in the 2003 first nine months provided $18.5 million,
based  primarily  on $28.5  million  rise in  deposits.  These cash inflows were
partially  offset by a repayment of other  borrowings of $6.5 million during the
first nine  months.  During the 2002 first  nine  months,  financing  activities
provided $11.5 million.

     Overall cash and cash  equivalents  totaled  $22.3 million at September 30,
2003  compared  to $24.5  million  at  December  31,  2002 and $26.8  million at
September 30, 2002.

     Liquidity  is further  enhanced by an  approximately  $115  million line of
credit with the FHLB  collateralized  by FHLB stock,  investment  securities and
qualifying 1-4 family residential mortgage loans, and qualifying commercial real
estate  loans.  The Company  provides  various  reports to the FHLB on a regular
basis  throughout the year to maintain the availability of the credit line. Each
borrowing request to the FHLB is initiated  through an advance  application that
is subject to approval by the FHLB before  funds are  advanced  under the credit
agreement.

     The Company  also has  unsecured  overnight  borrowing  lines  totaling $19
million available through four financial  institutions.  These lines are used to
manage the day-to-day,  short-term liquidity needs of the Company.  Each Federal
funds  line has a  requirement  to repay the line in full on a  frequent  basis,
typically within five to ten business days.

Effects of Inflation

     Inflation  affects  financial  institutions in ways that are different from
most commercial and industrial companies,  which have significant investments in
fixed assets and  inventories.  The effect of  inflation  on interest  rates can
materially impact bank operations, which rely on net interest margins as a major
source of earnings. Non-interest expenses, such as salaries and wages, occupancy
and equipment cost are also negatively impacted by inflation.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Market  risk is the  possible  chance of loss from  unfavorable  changes in
market prices and rates.  These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on  interest-earning  assets, over interest expense on
interest-bearing liabilities.


                                       18
<PAGE>


     The Company considers  interest rate risk to be its most significant market
risk, which could  potentially  have the greatest impact on operating  earnings.
The Company is asset  sensitive,  which means that falling  interest rates could
result in a reduced  amount of net interest  income.  The monitoring of interest
rate risk is part of the Company's overall  asset/liability  management process.
The primary  oversight of  asset/liability  management  rests with the Company's
Asset and Liability Committee.  The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established policies.

     The Company has not experienced  any substantive  changes in portfolio risk
during the nine months ended September 30, 2003.

                                       19
<PAGE>



Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

     Within  90 days  prior  to the date of this  report,  the  Company's  Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness of
the Company's  disclosure controls and procedures in accordance with Rule 13a-14
under the Exchange Act. Based on their  evaluation,  the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process,  summarize and report in a
timely  manner the  information  that the Company is required to disclose in its
Exchange Act reports.

Changes in internal controls

     There were no significant  changes in the Company's internal controls or in
other factors that could  significantly  affect these controls subsequent to the
date of the evaluation referred to above.




PART II. OTHER INFORMATION



Item 1.    Legal Proceedings

           None.

Item 2.    Changes in Securities and Use of Proceeds

           None.




Item 3.    Defaults Upon Senior Securities

           Not Applicable.




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

           None.

Item 5.    Other Information

           None.




Item 6.    Exhibits and Reports on Form 8-K

           (a)  Exhibits

           Exhibit No. Description
           ----------  -----------

              3.01     Amended and Restated Articles of Incorporation.
              3.02     By laws of Company, as amended.
              4.01     Specimen Common Stock Certificate.
             10.01     Stock Compensation Plan of the Registrant approved
                       April 11, 1989, by the shareholders of the
                       Registrant, with forms of stock option and stock
                       bonus agreements attached.
             10.02     Omnibus Equity Compensation Plan of the Registrant.
             10.03     Severance Policy for Senior Officers of the
                       Registrant (employed for five years or more).
             10.04     Revised Severance Plan for Senior Officers of the
                       Registrant (employed for five years or more).

                                       20
<PAGE>

             10.05     Severance Policy for Senior Officers of the
                       Registrant (employed for less than five years).
             10.07     Benefit Equivalency Plan of the Registrant effective
                       January 1, 1994.
             10.08     Annual Management Incentive Plan of the Registrant.
             10.09     Long Term Incentive Plan of the Registrant.
             10.10     Long Term Incentive Plan of the Registrant for certain
                       Senior Management employees.
             10.11     Employment Agreement dated May 18, 1995, between the
                       Registrant, as employer, and Ernest J. Sewell, President
                       and Chief Executive Officer of the Registrant.
             10.12     Amendment to Employment Agreement between the Registrant,
                       as employer, and Ernest J. Sewell, President and Chief
                       Executive Officer of the Registrant dated May 16, 2002.
             10.13     Split-Dollar Agreement dated January 27, 1995,  between
                       the Registrant and Ernest J. Sewell.
             10.14     Lease, dated January 31, 1997,  between the  Registrant
                       and Landmark Commercial, Inc., relating to the Wilmington
                       branch office.
             10.15     Amendment to Benefit Equivalency Plan of the Registrant
                       effective January 1, 1998.
             10.15     Amendment to Benefit Equivalency Plan of the Registrant
                       effective January 1, 1998.
             10.15     Amendment to Benefit Equivalency Plan of the Registrant
                       effective January 1, 1998.
             10.15     Amendment to Benefit Equivalency Plan of the Registrant
                       effective January 1, 1998.



(b)  Reports on Form 8-K

           None.


                                       21
<PAGE>





                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                            FNB FINANCIAL SERVICES CORPORATION
                                            (Registrant)



         November 10, 2003                  /s/ Michael W. Shelton
                                            ------------------------------------
                                                Michael W. Shelton
                                                (Vice President, Secretary and
                                                Treasurer)


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