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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO

SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2007

Commission File No. 0-28780



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CARDINAL BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Virginia                 |  | 54-1804471                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

101 Jacksonville Circle, P. O. Box 215, Floyd, Virginia 24091

(Address of principal executive offices)

(540) 745-4191

(Registrants telephone number)



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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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):

Large Accelerated Filer ̈Accelerated Filer ̈Non-accelerated Filer  x     .

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

The number of shares outstanding of the issuers
Common Stock, $10 par value as of May 9, 2007 was 1,535,733.



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##### Table of Contents

CARDINAL BANKSHARES CORPORATION

FORM 10-Q

March 31, 2007

INDEX



|         |  |                                                                                                      |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                      |  | Page
|Part I.  |  | Financial Information                                                                                |  |     
|         |  |                                                                                                     
|Item 1.  |  | Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006 (Audited)         |  | 3   
|         |  |                                                                                                     
|         |  | Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 (Unaudited)     |  | 4   
|         |  |                                                                                                     
|         |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (Unaudited) |  | 5   
|         |  |                                                                                                     
|         |  | Notes to Consolidated Statements (Unaudited)                                                         |  | 6   
|         |  |                                                                                                     
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 7   
|         |  |                                                                                                     
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 10  
|         |  |                                                                                                     
|Item 4.  |  | Controls and Procedures                                                                              |  | 11  
|         |  |                                                                                                     
|Part II. |  | Other Information                                                                                    |  |     
|         |  |                                                                                                     
|Item 1.  |  | Legal Proceedings                                                                                    |  | 12  
|         |  |                                                                                                     
|Item 1A. |  | Risk Factors                                                                                         |  | 13  
|         |  |                                                                                                     
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 13  
|         |  |                                                                                                     
|Item 3.  |  | Defaults Upon Senior Securities                                                                      |  | 13  
|         |  |                                                                                                     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                  |  | 13  
|         |  |                                                                                                     
|Item 5.  |  | Other Information                                                                                    |  | 13  
|         |  |                                                                                                     
|Item 6.  |  | Exhibits                                                                                             |  | 13  



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##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Balance Sheets



|                                                                                                          |  |                            |         |   |                             |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | --------------------------- | - | ------- | -
|(In thousands, except share data)                                                                         |  | (Unaudited) March 31, 2007 |         |   | (Audited) December 31, 2006 |  
|                                                                                                          | 
|                                                                                                          | 
|Assets                                                                                                    |  |                            |         |   |                             |   |         |  
|Cash and due from banks                                                                                   |  | $                          | 3,399   |   |                             | $ | 3,416   |  
|Interest-bearing deposits in banks                                                                        |  |                            | 29,450  |   |                             |   | 21,135  |  
|Federal funds sold                                                                                        |  |                            | 8,700   |   |                             |   | 8,800   |  
|Investment securities available for sale, at fair value                                                   |  |                            | 21,834  |   |                             |   | 23,654  |  
|Investment securities held to maturity (fair value March 31, 2007 - $18,962; December 31, 2006 - $17,443) |  |                            | 19,020  |   |                             |   | 17,248  |  
|Restricted equity securities                                                                              |  |                            | 536     |   |                             |   | 554     |  
|                                                                                                          |  |                           
|Total loans                                                                                               |  |                            | 119,388 |   |                             |   | 122,974 |  
|Allowance for loan losses                                                                                 |  |                            | (1,670  | ) |                             |   | (1,640  | )
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Net loans                                                                                                 |  |                            | 117,718 |   |                             |   | 121,334 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|                                                                                                          |  |                           
|Bank premises and equipment, net                                                                          |  |                            | 4,185   |   |                             |   | 4,071   |  
|Accrued interest receivable                                                                               |  |                            | 935     |   |                             |   | 974     |  
|Foreclosed properties                                                                                     |  |                            | 212     |   |                             |   | 212     |  
|Bank owned life insurance                                                                                 |  |                            | 4,614   |   |                             |   | 4,789   |  
|Other assets                                                                                              |  |                            | 1,595   |   |                             |   | 1,662   |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Total assets                                                                                              |  | $                          | 212,198 |   |                             | $ | 207,849 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Liabilities and Stockholders' Equity                                                                      |  |                            |         |   |                             |   |         |  
|Noninterest-bearing deposits                                                                              |  | $                          | 28,487  |   |                             | $ | 28,279  |  
|Interest-bearing deposits                                                                                 |  |                            | 152,491 |   |                             |   | 148,993 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Total deposits                                                                                            |  |                            | 180,978 |   |                             |   | 177,272 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Accrued interest payable                                                                                  |  |                            | 238     |   |                             |   | 221     |  
|Other liabilities                                                                                         |  |                            | 1,841   |   |                             |   | 1,966   |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Total liabilities                                                                                         |  |                            | 183,057 |   |                             |   | 179,459 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Commitments and contingent liabilities                                                                    |  |                            |        |   |                             |   |        |  
|                                                                                                          |  |                           
|Stockholders' Equity                                                                                      |  |                            |         |   |                             |   |         |  
|Common stock, $10 par value, 5,000,000 shares authorized,                                                 |  |                            |         |   |                             |   |         |  
|1,535,733 shares issued and outstanding                                                                   |  |                            | 15,357  |   |                             |   | 15,357  |  
|Additional paid-in capital                                                                                |  |                            | 2,925   |   |                             |   | 2,925   |  
|Retained earnings                                                                                         |  |                            | 11,190  |   |                             |   | 10,453  |  
|Accumulated other comprehensive income, net                                                               |  |                            | (331    | ) |                             |   | (345    | )
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Total stockholders' equity                                                                                |  |                            | 29,141  |   |                             |   | 28,390  |  
|                                                                                                          |  |                            |         |   |                             |   |         |  
|Total liabilities and stockholders' equity                                                                |  | $                          | 212,198 |   |                             | $ | 207,849 |  
|                                                                                                          |  |                            |         |   |                             |   |         |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)



|                                                                       |  |                              |           |      |   |          
|---------------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                                       |  | Three months ended March 31,
|(In thousands, except share data)                                      |  | 2007                         |           | 2006
|Interest income                                                        |  |                              |           |      |   |          
|Loans and fees on loans                                                |  | $                            | 2,276     |      | $ | 2,316    
|Federal funds sold and securities purchased under agreements to resell |  |                              |           |      |   |          
|                                                                       |  |                              | 111       |      |   | 27       
|Investment securities:                                                 |  |                              |           |      |   |          
|Taxable                                                                |  |                              | 276       |      |   | 192      
|Exempt from federal income tax                                         |  |                              | 220       |      |   | 218      
|Deposits with banks                                                    |  |                              | 292       |      |   | 111      
|                                                                       |  |                              |           |      |   |          
|Total interest income                                                  |  |                              | 3,175     |      |   | 2,864    
|                                                                       |  |                              |           |      |   |          
|Interest expense                                                       |  |                              |           |      |   |          
|Deposits                                                               |  |                              | 1,433     |      |   | 969      
|                                                                       |  |                              |           |      |   |          
|Total interest expense                                                 |  |                              | 1,433     |      |   | 969      
|                                                                       |  |                              |           |      |   |          
|Net interest income                                                    |  |                              | 1,742     |      |   | 1,895    
|Provision for loan losses                                              |  |                              | 20        |      |   | 20       
|                                                                       |  |                              |           |      |   |          
|Net interest income after provision for loan losses                    |  |                              | 1,722     |      |   | 1,875    
|                                                                       |  |                              |           |      |   |          
|Noninterest income                                                     |  |                              |           |      |   |          
|Service charges on deposit accounts                                    |  |                              | 50        |      |   | 68       
|Other service charges and fees                                         |  |                              | 24        |      |   | 23       
|Net realized gains on sales of securities                              |  |                              | 1         |      |   | 3        
|Other operating income                                                 |  |                              | 281       |      |   | 130      
|                                                                       |  |                              |           |      |   |          
|Total noninterest income                                               |  |                              | 356       |      |   | 224      
|                                                                       |  |                              |           |      |   |          
|Noninterest expense                                                    |  |                              |           |      |   |          
|Salaries and employee benefits                                         |  |                              | 711       |      |   | 747      
|Occupancy and equipment                                                |  |                              | 171       |      |   | 173      
|Other operating expense                                                |  |                              | 311       |      |   | 307      
|                                                                       |  |                              |           |      |   |          
|Total noninterest expense                                              |  |                              | 1,193     |      |   | 1,227    
|                                                                       |  |                              |           |      |   |          
|Income before income taxes                                             |  |                              | 885       |      |   | 872      
|                                                                       |  |                              | 148       |      |   | 209      
|                                                                       |  |                              |           |      |   |          
|Net Income                                                             |  | $                            | 737       |      | $ | 663      
|                                                                       |  |                              |           |      |   |          
|Basic earnings per share                                               |  | $                            | 0.48      |      | $ | 0.43     
|Diluted earnings per share                                             |  | $                            | 0.48      |      | $ | 0.43     
|Weighted average basic shares outstanding                              |  |                              | 1,535,733 |      |   | 1,535,733
|Weighted average diluted shares outstanding                            |  |                              | 1,535,733 |      |   | 1,535,733
|                                                                       |  |                              |           |      |   |          

See Notes to Consolidated Financial Statements.



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Cardinal Bankshares Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                  |  |      |        |   |      |   |        |   |  |  |  |  |  | 
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | - |  |  |  |  |  | 
|(In thousands) Three Months Ended March 31,                                       |  | 2007 |        |   | 2006 |  
|Cash flows from operating activities                                              |  |      |        |   |      |   |        |  
|Net income                                                                        |  | $    | 737    |   |      | $ | 663    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |      | 81     |   |      |   | 85     |  
|Net amortization (accretion) of bond premiums/discounts                           |  |      | 20     |   |      |   | 7      |  
|Provision for loan losses                                                         |  |      | 20     |   |      |   | 20     |  
|Net realized (gains) losses on investment securities                              |  |      | (1     | ) |      |   | (3     | )
|Deferred compensation and pension expense                                         |  |      | 44     |   |      |   | 64     |  
|Changes in operating assets and liabilities:                                      |  |      |        |   |      |   |        |  
|(Increase) decrease in accrued interest receivable                                |  |      | 39     |   |      |   | 13     |  
|Increase (decrease) in accrued interest payable                                   |  |      | 17     |   |      |   | 8      |  
|Net change in other operating assets and liabilities                              |  |      | 68     |   |      |   | 198    |  
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |      | 1,025  |   |      |   | 1,055  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash flows from investing activities                                              |  |      |        |   |      |   |        |  
|Net (increase) decrease in interest-bearing deposits in banks                     |  |      | (8,315 | ) |      |   | (706   | )
|Net (increase) decrease in federal funds sold                                     |  |      | 100    |   |      |   | 3,550  |  
|Purchase of investment securities                                                 |  |      | (3,453 | ) |      |   | (1,688 | )
|Proceeds from sale of available for sale securities                               |  |      |       |   |      |   |       |  
|Purchase of restricted equity securities                                          |  |      |       |   |      |   | (8     | )
|Proceeds from redemption of equity securities                                     |  |      | 18     |   |      |   |       |  
|Proceeds from maturity and redemption of investment securities                    |  |      | 3,501  |   |      |   | 942    |  
|Sale of foreclosed properties                                                     |  |      |       |   |      |   |       |  
|Net (increase) decrease in loans                                                  |  |      | 3,596  |   |      |   | 619    |  
|Net purchases of bank premises and equipment                                      |  |      | (195   | ) |      |   | (5     | )
|                                                                                  |  |      |        |   |      |   |        |  
|Net cash (used) provided by investing activities                                  |  |      | (4,748 | ) |      |   | 2,704  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Financing Activities                                                              |  |      |        |   |      |   |        |  
|Net increase (decrease) in noninterest-bearing deposits                           |  |      | 208    |   |      |   | 600    |  
|Net increase (decrease) in interest-bearing deposits                              |  |      | 3,498  |   |      |   | (5,516 | )
|Net increase (decrease) in securities sold                                        |  |      |       |   |      |   | (134   | )
|Net cash (used) provided by financing activities                                  |  |      | 3,706  |   |      |   | (5,050 | )
|                                                                                  |  |      |        |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |      | (17    | ) |      |   | (1,291 | )
|                                                                                  |  |      |        |   |      |   |        |  
|Cash and cash equivalents, beginning                                              |  |      | 3,416  |   |      |   | 4,292  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Cash and cash equivalents, ending                                                 |  | $    | 3,399  |   |      | $ | 3,001  |  
|                                                                                  |  |      |        |   |      |   |        |  
|                                                                                  |  |     
|Supplemental disclosures of cash flow information                                 |  |      |        |   |      |   |        |  
|Interest paid                                                                     |  | $    | 1,416  |   |      | $ | 961    |  
|Income taxes paid                                                                 |  | $    | 225    |   |      | $ |       |  
|                                                                                  |  |      |        |   |      |   |        |  

See Notes to Consolidated Financial Statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the
disclosures and notes required by generally accepted accounting principles. In the opinion of management, all material adjustments (which are of a normal recurring nature) considered necessary for a fair presentation have been made. The results for
the interim period are not necessarily indicative of the results to be expected for the entire year or any other interim period. The information reported herein should be read in conjunction with the Notes to Consolidated Financial Statements
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006. Certain previously reported amounts have been reclassified to conform to current presentations.

Note 2. Allowance for Loan Losses

Changes in the allowance for loan losses
are as follows:



|                                             |  |      |       |      |   |       |  
|-------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Three months ended March 31, (In thousands)  |  | 2007 |       | 2006 |  
|Balance, at January 1                        |  | $    | 1,640 |      | $ | 1,427 |  
|Provision charged to expense                 |  |      | 20    |      |   | 20    |  
|Recoveries of amounts previously charged off |  |      | 10    |      |   | 5     |  
|Loans charged off                            |  |      |      |      |   | (8    | )
|                                             |  |      |       |      |   |       |  
|Balance, at March 31,                        |  | $    | 1,670 |      | $ | 1,444 |  
|                                             |  |      |       |      |   |       |  

Note 3. Commitments and Contingencies

The Companys exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and stand-by letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Companys commitments at March 31 for the years indicated follows:



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|(In thousands)               |  | 2007 |        | 2006
|Commitments to extend credit |  | $    | 9,522  |      | $ | 17,953
|Standby letters of credit    |  |      | 487    |      |   | 473   
|                             |  |      |        |      |   |       
|Total                        |  | $    | 10,009 |      | $ | 18,426
|                             |  |      |        |      |   |       

Note 4. Employee Benefit Plan

The Bank has a qualified noncontributory, defined benefit pension plan which covers substantially all of its employees. The benefits are primarily based on years of service and earnings. The following is a summary of the components of the
net periodic benefit cost.



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Three months ended March 31                  |  | 2007 |         |   | 2006 |  
|Service cost                                 |  | $    | 44,713  |   |      | $ | 58,318  |  
|Interest cost                                |  |      | 50,527  |   |      |   | 49,051  |  
|Expected return on plan assets               |  |      | (53,611 | ) |      |   | (49,062 | )
|Amortization of net obligation at transition |  |      | (1,007  | ) |      |   | (1,007  | )
|Amortization of prior service cost           |  |      | 1,495   |   |      |   | 1,495   |  
|Recognized net actuarial loss                |  |      | 1,708   |   |      |   | 5,636   |  
|                                             |  |      |         |   |      |   |         |  
|Net periodic benefit cost                    |  | $    | 43,825  |   |      | $ | 64,431  |  
|                                             |  |      |         |   |      |   |         |  



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##### Table of Contents

The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected
to contribute $175 thousand to its pension plan in 2007. As of March 31, 2007, no contributions have been made.



|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Cardinal Bankshares Corporation (the Company and Cardinal Bankshares), a Virginia corporation, is a bank holding company headquartered in Floyd, Virginia. The Company serves the marketplace
primarily through its wholly owned banking subsidiary, Bank of Floyd (the Bank), a Virginia chartered, Federal Reserve member commercial bank. The Banks deposits are insured by the Federal Deposit Insurance Corporation (the
FDIC) to the extent provided by law. Bank of Floyd is supervised and examined by the Federal Reserve and the Bureau of Financial Institutions of the State Corporation Commission of the Commonwealth of Virginia (the SCC). At
March 31, 2007, the Bank operated seven branch facilities in the counties of Floyd, Montgomery, Roanoke and Carroll. The main office is in Floyd with a limited service office located in Willis. The Roanoke offices are in the Cave Spring and
Tanglewood Mall areas of Roanoke County. The Salem office is located on West Main Street in Salem, Virginia. The Hillsville office is located in Carroll County. The Christiansburg office serves Montgomery County. On May 1, 2007, the Bank opened
its eighth branch in Pulaski County serving the Fairlawn community.

Through Bank of Floyds network of banking facilities, Cardinal Bankshares
provides a wide range of commercial banking services to individuals, small to medium-sized businesses, institutions and governments located in Virginia. The Company conducts substantially all of the business operations of a typical independent
commercial bank, including the acceptance of checking and savings deposits, and the making of commercial, real estate, personal, home improvement, automobile and other installment loans. The Company also offers other related services, such as
travelers checks, safe deposit boxes, depositor transfer, customer note payment, collection, notary public, escrow, drive-in and ATM facilities, and other customary banking services. Cardinal Bankshares does not offer trust services.

The following discussion provides information about the major components of the financial condition, results of operations, asset quality, liquidity, and
capital resources of Cardinal Bankshares. The discussion and analysis should be read in conjunction with the Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets as of March 31, 2007 were $212.2 million, an increase of $4.3 million from year-end 2006. Total loans
declined 3.0% or $3.6 million during the quarter to $117.7 million.

The investment securities portfolio reflected a slight decrease of $48 thousand. This
decrease was a result of maturities of agency and municipal securities in the amount of $2.2 million, usual pay downs in the amount of $793 thousand in mortgage-backed securities offset by purchases of investment securities totaling approximately
$3.5 million. Federal funds sold declined $100 thousand during the quarter.

As of March 31, 2007, total deposits were $181.0 million, up
approximately $3.7 million compared to year-end 2006. Non-interest-bearing core deposits remained level at $28.5 million as compared to $28.3 million at year-end 2006. Interest-bearing deposits increased 2.3% or $3.5 million to $152.5 million.
Deposits greater than $100 thousand amounted to $51.3 million at March 31, 2007 as compared to $52.0 million at year-end 2006.

Stockholders
equity was $29.1 million as of March 31, 2007 compared to $28.4 million as of December 31, 2006. Net income for the quarter of $737 thousand principally accounted for the increase in stockholders equity.



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##### Table of Contents

RESULTS OF OPERATIONS

Net income for the three months ended March 31, 2007 was $737 thousand, up 11.2% compared to $663 thousand for the three months ended March 31, 2006. Diluted earnings per share increased 11.6% to $.48 for the three months ended
March 31, 2007. Diluted earnings per share for the same period a year earlier was $.43.

Total interest income for the three months ended
March 31, 2007 increased $311 thousand to $3.2 million, an increase of 10.9% over the same prior year quarter. This resulted primarily from the effect of increased earnings from higher average deposits with banks. The increase in interest
income was the principal contributing factor to improved profitability for the first quarter of 2007 compared to the first quarter of 2006. Noninterest income increased 58.9% to $356 thousand. Total interest expense increased $464 thousand to $1.4
million, reflecting the effect of higher yields on interest-bearing deposits. Noninterest expense decreased 2.8% to $1.2 million for the first quarter of 2007 as compared to the first quarter of 2006. The primary expense that attributed to this
noninterest expense decrease was a slight decrease in salaries and employee benefits as compared to the first quarter of 2006.

ASSET QUALITY

The allowance for loan losses represents managements estimate of an amount adequate to absorb potential future losses inherent in the loan
portfolio. In assessing the adequacy of the allowance, management relies predominately on its ongoing review of the lending process and the risk characteristics of the portfolio in the aggregate. Among other factors, management considers the
Companys loan loss experience, the amount of past-due loans, current and anticipated economic conditions, and the estimated current values of collateral securing loans in assessing the level of the allowance for loan losses. In the first
quarter of 2007 the provision for loan losses was $20 thousand as compared to $20 thousand provision for the same period in 2006. Based upon managements periodic reviews of the loan portfolio using the above mentioned factors, the current year
increase in the provision for loan losses was felt appropriate. Management believes the provision recorded in 2007 maintains the allowance at a level adequate to cover potential losses.

The allowance for loan losses totaled $1.7 million at March 31, 2007. The allowance for loan losses to period end loans was 1.40% at March 31, 2007 compared to 1.33% and 1.12% at December 31, 2006 and
March 31, 2006, respectively. The Company recovered balances previously charged off on loans in the amount of $10 thousand during the quarter. This compares with net charge offs for the three months ended March 31, 2006 of $3 thousand.

The allowance for loan losses represents managements estimate of an amount adequate to provide for potential losses inherent in the loan portfolio.
The adequacy of the loan loss reserve and the related provision are based upon managements evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition
of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance to outstanding loans and delinquency trends.

While management uses all available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Various regulatory agencies, as an integral part of their examination
process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due, and other real estate owned, were $866 thousand as of
March 31, 2007 compared to $869 thousand as of December 31, 2006. Management does not expect to incur any material losses related to nonperforming assets. As of March 31, 2007 the companys impaired loans with a valuation
allowance amounted to $3.4 million, unchanged from December 31, 2006. The valuation allowance related to the loans was $768 thousand at March 31, 2007 and $743 thousand at December 31, 2006.



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LIQUIDITY

In
determining the Companys liquidity requirements, both sides of the balance sheet are managed to ensure that adequate funding sources are available to support loan growth, deposit withdrawals or any unanticipated need for funds.

Securities available for sale that mature within one year, or securities that have a weighted average life of one year or less are sources of liquidity. Anticipated
mortgage-backed securities pay downs and maturing loans also generate cashflows to meet liquidity requirements. Wholesale funding sources are also used to supply liquidity such as federal funds purchased and large denomination certificates of
deposit. The Company considers its sources of liquidity to be adequate to meet its anticipated needs.

CAPITAL RESOURCES

Cardinal Bankshares capital position provides the necessary assurance required to support anticipated asset growth and to absorb potential losses.

The Companys Tier I capital position was $29.5 million at March 31, 2007, or 21.40% of risk-weighted assets. Total risk-based capital was $31.1 million or
22.61% of risk-weighted assets

Tier I capital consists primarily of common stockholders equity, while total risk-based capital includes the
allowance for loan losses. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. To be well capitalized under current risk-based capital standards, all banks are
required to have Tier I capital of at least 4% and total capital of 8%. Based on these standards, Cardinal Bankshares is categorized as well capitalized at March 31, 2007.

In addition to the risk-based capital guidelines, banking regulatory agencies have adopted leverage capital ratio requirements. The leverage ratio  or core capital to assets ratio  works in tandem with the
risk-capital guidelines. The minimum leverage ratios range from three to five percent. At March 31, 2007, the Companys leverage capital ratio was 14.44%.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements. The Company may also
make written forward-looking statements in periodic reports to the Securities and Exchange Commission, proxy statements, offering circulars and prospectuses, press releases and other written materials and oral statements made by Cardinal
Bankshares officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Companys beliefs and expectations, are forward-looking statements. These statements are based on
beliefs and assumptions of the Companys management, and on information currently available to management. Forward-looking statements include statements preceded by, followed by or that include the words believes,
expects, estimates, anticipates, plans, or similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of
them in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. Management cautions the readers
that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following: competitive pressures among depository and other
financial institutions may increase significantly; changes in the interest rate environment may reduce margins; general economic or business conditions may lead to a deterioration in credit quality or a reduced demand for credit; legislative or
regulatory changes, including changes in accounting standards, may adversely affect the business in which Cardinal Bankshares is engaged; changes may occur in the securities markets; and competitors of the Company may have greater financial
resources and develop products that enable such competitors to compete more successfully than Cardinal Bankshares.

Other factors that may cause actual
results to differ from the forward-looking statements include the following: the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; changes in consumer spending
and savings habits; the effects of competitors pricing policies; the Companys success in managing the costs associated with



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the expansion of existing distribution channels and developing new ones, and in realizing increased revenues from such distribution channels, including
cross-selling initiatives; and mergers and acquisitions and their integration into the Company and managements ability to manage these other risks.

Management of Cardinal Bankshares believes these forward-looking statements are reasonable; however undue reliance should not be placed on such forward-looking statements, which are based on current expectations.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of Cardinal
Bankshares may differ materially from those expressed in forward-looking statements contained in this report. Many of the factors that will determine these results and values are beyond the Companys ability to control or predict.



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
principal goals of the Companys asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors withdrawals
or borrowers loans without significant loss. Interest rate risk management seeks to balance the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Company from wide
fluctuations in its net interest income.

Management must insure that adequate funds are available at all times to meet the needs of its customers. On the
asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include
core deposits, the ability to increase large denomination certificates, federal funds lines from correspondent banks, borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, as well as the ability to generate funds through the
issuance of long-term debt and equity.

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense
as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that
will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates.

The Company uses a number of tools to
manage its interest rate risk, including simulating net interest income under various scenarios, monitoring the present value change in equity under the same scenarios, and monitoring the difference or gap between rate sensitive assets and rate
sensitive liabilities over various time periods.

The earnings simulation model forecasts annual net income under a variety of scenarios that incorporate
changes in absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effect on net interest income from gradual changes in the Prime Rate of up to 200 basis points
up or down over a 12-month period. The current model indicates that an increase in rates of 200 basis points over the next twelve months would result in an increase in net interest income of $1.1 million, or 14.60%, while a similar decrease in rates
would result in a decrease in net interest income of $1.2 million, or 15.89%. The model also incorporates managements forecasts for balance sheet growth, noninterest income and noninterest expense. The interest rate scenarios are used for
analytical purposes and do not represent managements view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to the earnings of the Company. Modeling the
sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings sensitivity analysis incorporates managements best estimate of interest rate and balance sheet
dynamics under various market rate movements, the actual behavior and resulting earning impact likely will differ from projected.



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Additional qualitative information about interest rate risk is included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2006. There have not been any material changes since December 31, 2006.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

As of the end of the period covered by
this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, including internal controls and procedures for financial reporting. Our principal executive officer and principal
financial officer supervised this evaluation and have concluded that our disclosure controls and procedures are effective. Subsequent to this evaluation, (i) there have been no significant changes in our internal controls or in other factors
that could significantly affect our disclosure controls and procedures and (ii) we have not taken any corrective actions with regard to our disclosure controls and procedures to correct any significant deficiencies and weaknesses.

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for executing it. While we have evaluated
the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.



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Part II. OTHER INFORMATION



|Item: | 1 Legal proceedings
|----- | -------------------

The Company was named as a defendant
in a complaint filed by a former employee with the United States Department of Labor under Section 806 of the Sarbanes-Oxley Act. The plaintiff alleged in his complaint that his termination in October, 2002 violated the Act. He is seeking
reinstatement, back pay and damages. The Company maintains that the independent members of its Board of Directors terminated the plaintiff lawfully because he refused to comply with the directives of the Audit Committee in their attempt to look into
certain matters raised by the plaintiff. The Audit Committee, after full investigation, later concluded that the matters raised by the plaintiff had no merit. The Boards decision was initially upheld by the Department of Labor. The plaintiff
appealed that decision. The Department of Labor Administrative Law Judge reversed the earlier decision in the Companys favor and entered a decision in favor of the plaintiff in January 2004. The Company appealed that decision. The
Administrative Review Board of the Department of Labor agreed to review the decision of the Administrative Law Judge in February 2004. Their decision to review suspended the decision of the Administrative Law Judge prior to any determination of
damages by the Administrative Law Judge. In May 2004, the Administrative Review Board within the Department of Labor determined that it had accepted the Companys petition for review prematurely.

Because of the uncertainty regarding the procedural handling of this case within the DOL, to preserve its ultimate ability to appeal to the Federal
Courts, in June 2004, the Company filed with the United States Court of Appeals for the Fourth Circuit a Petition for Review of the decisions of the United States Department of Labor. The appeal was determined to be premature. The parties submitted
evidence to the Administrative Law Judge of damages without a further hearing in December 2004 and January 2005. The Administrative Law Judge rendered a Supplemental Recommended Decision and Order in February 2005, which awarded damages to the
plaintiff of $65 thousand, plus attorneys fees of $108 thousand, and ordered the plaintiffs reinstatement. The Company filed a petition for review to the Administrative Review Board of the Department of Labor. The case was accepted for
review by the Administrative Review Board in March 2005. The Companys management believes it has substantial grounds for a successful appeal of the decision in the plaintiffs favor and will pursue appeals vigorously. Both sides have
submitted briefs to the Administrative Review Board and are awaiting the Administrative Review Boards decision.

Meanwhile plaintiff
made several unsuccessful attempts to force his reinstatement on the Company. He moved the Administrative Law Judge for sanctions against the Company for failure to reinstate him. The motion was denied on August 9, 2005. On
August 30, 2005, plaintiff filed a complaint in the United States District Court for the Western District of Virginia seeking to enforce what he claimed was a preliminary order of reinstatement issued by the Administrative Law Judge. The
Court granted the Companys motion to dismiss January 14, 2006, on the grounds that there is no preliminary order of reinstatement to enforce. Plaintiff then filed two motions simultaneously, one to the Administrative Law Judge
seeking expedited clarification of the purported order of reinstatement and another to the U.S. District Court to alter or amend its dismissal of his petition. Both of plaintiffs motions were denied, on January 24 and
January 26, respectively.

Then, on February 8, 2006, the plaintiff made a motion to the Administrative Review Board for
expedited declaration of preliminary order of reinstatement. This motion was granted by the ARB on March 31, 2006, essentially concluding that notwithstanding the District Courts decision the Administrative Law Judge had
issued a preliminary reinstatement order. On April 17, 2006, the Company filed a motion with the Department of Labor Administrative Review Board seeking a stay of the preliminary order of reinstatement. This motion was denied on June 9,
2006, leaving the preliminary order of reinstatement in effect.



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On July 6, 2006, plaintiff filed another Petition to enforce the Department of Labors
preliminary order of reinstatement with the United States District Court in Roanoke, Virginia. The Company moved to dismiss the petition on the basis that the Sarbanes-Oxley statute does not give the District Court jurisdiction to enforce a
Department of Labor Preliminary Order of reinstatement. The Department of Labor intervened to support the plaintiffs petition. Each of the Companys directors intervened as individuals to oppose reinstatement. The American Association of
Bank Directors similarly intervened in support of the Company and the Companys Directors and to oppose enforcement of the Order of Reinstatement.

On October 5, 2006, the District Court granted Cardinals motion to dismiss, concluding that the Court did not have jurisdiction to enforce a Department of Labor Preliminary Order of Reinstatement.

On December 4, 2006, the plaintiff and the United States Department of Labor appealed the District Courts dismissal to the
United States Court of Appeals for the Fourth Circuit. The appeal is pending. The American Bankers Association, the American Association of Bank Directors, the Virginia Bankers Association and the Virginia Association of Community banks have each
filed briefs with the Fourth Circuit supporting the Companys position in the case.



| | 1A. | Risk factors
| | --- | ------------

In addition to the other information set
forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.



| | 2 | Unregistered sales of equity securities and use of proceeds - None
| | - | ------------------------------------------------------------------



| | 3 | Defaults upon senior securities - None
| | - | --------------------------------------



| | 4 | Submission of matters to a vote of security holders - None
| | - | ----------------------------------------------------------



| | 5 | Other information - None
| | - | ------------------------



| | 6 | Exhibits
| | - | --------

31.1  Certification of
Chief Executive Officer Pursuant To Rule 13a-14(a)

31.2  Certification of Principal Financial Officer Pursuant To
Rule 13a-14(a)

32.1  Certification of Chief Executive Officer and Principal Financial Officer Pursuant To 18 U.S.C.
Section 1350



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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 thereto duly authorized.



|                                                                 
|-----------------------------------------------------------------
|CARDINAL BANKSHARES CORPORATION                                  
|                                                                 
|/s/Ronald Leon Moore                                             
|Ronald Leon Moore                                                
|Chairman of the Board, President and Chief Executive Officer     
|                                                                 
|/s/Stephanie K. Sigman                                           
|Stephanie K. Sigman                                              
|Senior Vice President, Controller and Principal Financial Officer
|                                                                 
|Date: May 9, 2007                                                



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