##### Table of Contents

---

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-Q



---



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

For the quarterly period ended September 30, 2007



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

For the transition period from  to

Commission File Number: 0-49789



---

Henry County Bancshares, Inc.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Georgia                                                        |  | 58-1485511                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

4806 N. Henry Blvd., Stockbridge, Georgia 30281

(Address of principal executive offices)

(770) 474-7293

(Issuers telephone number)

N/A

(Former name, former address and former fiscal year, if changed since
last report)



---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large
accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

State the number of shares outstanding of each of the issuers classes of common equity, as of November 7, 2007: 14,301,218; $2.50 par value



---



---

##### Table of Contents

HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX



|         |  |                                                                                                                      |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                      |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                                                |  |     
|         |  |                                                                                                                     
|         |  | Item 1. Financial Statements                                                                                         |  |     
|         |  |                                                                                                                     
|         |  | Consolidated Balance Sheets- September 30, 2007 and December 31, 2006                                                |  | 3   
|         |  |                                                                                                                     
|         |  | Consolidated Statements of Income and Comprehensive Income  Three and Nine Months Ended September 30, 2007 and 2006 |  | 4   
|         |  |                                                                                                                     
|         |  | Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2007 and 2006                                |  | 5   
|         |  |                                                                                                                     
|         |  | Notes to Consolidated Financial Statements                                                                           |  | 6-8 
|         |  |                                                                                                                     
|         |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 9-16
|         |  |                                                                                                                     
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 17  
|         |  |                                                                                                                     
|         |  | Item 4. Controls and Procedures                                                                                      |  | 17  
|         |  |                                                                                                                     
|PART II. |  | OTHER INFORMATION                                                                                                    |  |     
|         |  |                                                                                                                     
|         |  | Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 18  
|         |  |                                                                                                                     
|         |  | Item 6 - Exhibits and Reports on Form 8-K                                                                            |  | 18  
|         |  |                                                                                                                     
|         |  | Signatures                                                                                                           |  | 19  
|         |  |                                                                                                                     
|         |  | Certifications                                                                                                       |  | 20  



2



---

##### Table of Contents

PART IFINANCIAL INFORMATION

FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2007 AND DECEMBER 31, 2006

(Unaudited)



|                                                                                    |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                    |  | 2007 |             |   | 2006 |  
|Assets                                                                              |  |      |             |   |      |   |             |  
|Cash and due from banks                                                             |  | $    | 15,418,824  |   |      | $ | 18,584,790  |  
|Interest bearing deposits in banks                                                  |  |      | 1,727,103   |   |      |   | 294,763     |  
|Federal funds sold                                                                  |  |      | 22,400,000  |   |      |   | 5,500,000   |  
|Securities available for sale, at fair value                                        |  |      | 116,437,659 |   |      |   | 84,379,359  |  
|Securities held to maturity, at cost, (fair value 2007 $5,159,000; 2006 $4,167,000) |  |      | 5,221,182   |   |      |   | 4,328,339   |  
|Restricted equity securities, at cost                                               |  |      | 1,897,751   |   |      |   | 2,369,651   |  
|Loans held for sale                                                                 |  |      |            |   |      |   | 666,066     |  
|Loans                                                                               |  |      | 570,601,113 |   |      |   | 561,646,248 |  
|Less allowance for loan losses                                                      |  |      | 6,433,195   |   |      |   | 5,229,838   |  
|                                                                                    |  |      |             |   |      |   |             |  
|Loans, net                                                                          |  |      | 564,167,918 |   |      |   | 556,416,410 |  
|Premises and equipment                                                              |  |      | 10,495,973  |   |      |   | 9,936,123   |  
|Other assets                                                                        |  |      | 14,262,835  |   |      |   | 11,835,315  |  
|                                                                                    |  |      |             |   |      |   |             |  
|Total assets                                                                        |  | $    | 752,029,245 |   |      | $ | 694,310,816 |  
|                                                                                    |  |      |             |   |      |   |             |  
|Liabilities and Stockholders Equity                                                |  |      |             |   |      |   |             |  
|Deposits                                                                            |  |      |             |   |      |   |             |  
|Noninterest-bearing                                                                 |  | $    | 66,028,428  |   |      | $ | 77,493,610  |  
|Interest-bearing                                                                    |  |      | 588,006,246 |   |      |   | 517,379,804 |  
|                                                                                    |  |      |             |   |      |   |             |  
|Total deposits                                                                      |  |      | 654,034,674 |   |      |   | 594,873,414 |  
|Other borrowings                                                                    |  |      | 16,429,494  |   |      |   | 24,221,682  |  
|Other liabilities                                                                   |  |      | 5,052,450   |   |      |   | 4,017,123   |  
|                                                                                    |  |      |             |   |      |   |             |  
|Total liabilities                                                                   |  |      | 675,516,618 |   |      |   | 623,112,219 |  
|                                                                                    |  |      |             |   |      |   |             |  
|                                                                                    |  |     
|Stockholders equity                                                                |  |      |             |   |      |   |             |  
|Common stock, par value $2.50; 30,000,000 shares authorized;                        |  |      |             |   |      |   |             |  
|14,388,749.6 shares issued                                                          |  |      | 35,971,874  |   |      |   | 35,971,874  |  
|Capital surplus                                                                     |  |      | 739,560     |   |      |   | 739,560     |  
|Retained earnings                                                                   |  |      | 41,030,499  |   |      |   | 35,942,063  |  
|Accumulated other comprehensive income (loss)                                       |  |      | 66,295      |   |      |   | (159,299    | )
|Treasury stock, 67,282 shares                                                       |  |      | (1,295,601  | ) |      |   | (1,295,601  | )
|                                                                                    |  |      |             |   |      |   |             |  
|Total stockholders equity                                                          |  |      | 76,512,627  |   |      |   | 71,198,597  |  
|                                                                                    |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                          |  | $    | 752,029,245 |   |      | $ | 694,310,816 |  
|                                                                                    |  |      |             |   |      |   |             |  

See Notes to Consolidated Financial Statements.



3



---

##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Unaudited)



|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                              |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                              |  | 2007                            |            | 2006                           |   | 2007       |  | 2006
|Interest income                                               |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Loans                                                         |  | $                               | 11,101,371 |                                | $ | 11,570,748 |  | $    | 34,514,179 |  | $ | 32,504,971
|Taxable securities                                            |  |                                 | 1,413,061  |                                |   | 723,835    |  |      | 3,748,241  |  |   | 1,994,823 
|Nontaxable securities                                         |  |                                 | 95,190     |                                |   | 94,348     |  |      | 272,074    |  |   | 232,282   
|Deposits in banks                                             |  |                                 | 34,895     |                                |   | 3,941      |  |      | 41,791     |  |   | 10,341    
|Federal funds sold                                            |  |                                 | 195,342    |                                |   | 202,435    |  |      | 766,264    |  |   | 397,574   
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total interest income                                         |  |                                 | 12,839,859 |                                |   | 12,595,307 |  |      | 39,342,549 |  |   | 35,139,991
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Interest expense                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Deposits                                                      |  |                                 | 6,615,861  |                                |   | 5,118,721  |  |      | 18,705,125 |  |   | 13,658,527
|Other borrowings                                              |  |                                 | 176,481    |                                |   | 313,641    |  |      | 792,245    |  |   | 807,354   
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total interest expense                                        |  |                                 | 6,792,342  |                                |   | 5,432,362  |  |      | 19,497,370 |  |   | 14,465,881
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|                                                              |  |                                 |            |                               
|Net interest income                                           |  |                                 | 6,047,517  |                                |   | 7,162,945  |  |      | 19,845,179 |  |   | 20,674,110
|Provision for loan losses                                     |  |                                 | 1,257,754  |                                |   | 110,520    |  |      | 1,434,254  |  |   | 506,860   
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Net interest income after provision for loan losses           |  |                                 | 4,789,763  |                                |   | 7,052,425  |  |      | 18,410,925 |  |   | 20,167,250
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Other operating income                                        |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Service charges on deposit accounts                           |  |                                 | 327,942    |                                |   | 365,484    |  |      | 1,003,703  |  |   | 1,133,170 
|Other service charges and fees                                |  |                                 | 270,452    |                                |   | 284,740    |  |      | 840,771    |  |   | 868,066   
|Mortgage banking income                                       |  |                                 | 163,635    |                                |   | 139,673    |  |      | 491,125    |  |   | 538,540   
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total other income                                            |  |                                 | 762,029    |                                |   | 789,897    |  |      | 2,335,599  |  |   | 2,539,776 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Other expenses                                                |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Salaries and employee benefits                                |  |                                 | 1,887,351  |                                |   | 1,671,982  |  |      | 5,419,357  |  |   | 4,871,299 
|Occupancy and equipment expenses                              |  |                                 | 513,358    |                                |   | 458,161    |  |      | 1,428,129  |  |   | 1,278,324 
|Other operating expenses                                      |  |                                 | 554,083    |                                |   | 550,090    |  |      | 1,723,907  |  |   | 1,601,487 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total other expenses                                          |  |                                 | 2,954,792  |                                |   | 2,680,233  |  |      | 8,571,393  |  |   | 7,751,110 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Income before income taxes                                    |  |                                 | 2,597,000  |                                |   | 5,162,089  |  |      | 12,175,131 |  |   | 14,955,916
|Income tax expense                                            |  |                                 | 936,399    |                                |   | 1,961,160  |  |      | 4,508,832  |  |   | 5,571,770 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Net income                                                    |  |                                 | 1,660,601  |                                |   | 3,200,929  |  |      | 7,666,299  |  |   | 9,384,146 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Other comprehensive income:                                   |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Unrealized gains on securities available for sale, net of tax |  |                                 | 469,709    |                                |   | 320,126    |  |      | 225,594    |  |   | 143,193   
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Comprehensive income                                          |  | $                               | 2,130,310  |                                | $ | 3,521,055  |  | $    | 7,891,893  |  | $ | 9,527,339 
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Earnings per share                                            |  | $                               | 0.12       |                                | $ | 0.22       |  | $    | 0.54       |  | $ | 0.66      
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Weighted average shares outstanding                           |  |                                 | 14,321,468 |                                |   | 14,303,368 |  |      | 14,321,468 |  |   | 14,303,368
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Cash dividends per share                                      |  | $                               | 0.06       |                                | $ | 0.05       |  | $    | 0.18       |  | $ | 0.15      
|                                                              |  |                                 |            |                                |   |            |  |      |            |  |   |           

See Notes to Consolidated Financial Statements.



4



---

##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Unaudited)



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2007 |             |   | 2006 |  
|OPERATING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net income                                                                        |  | $    | 7,666,299   |   |      | $ | 9,384,146   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation                                                                      |  |      | 501,668     |   |      |   | 451,387     |  
|Net decrease in loans held for sale                                               |  |      | 666,066     |   |      |   | 318,000     |  
|Provision for loan losses                                                         |  |      | 1,434,254   |   |      |   | 506,860     |  
|Net (gains) losses on sale of other real estate                                   |  |      | 13,522      |   |      |   | (4,708      | )
|Increase in interest receivable                                                   |  |      | (1,427,501  | ) |      |   | (3,037,645  | )
|Increase in interest payable                                                      |  |      | 264,750     |   |      |   | 1,276,807   |  
|Net other operating activities                                                    |  |      | (169,963    | ) |      |   | 1,399,454   |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 8,949,095   |   |      |   | 10,294,301  |  
|                                                                                  |  |      |             |   |      |   |             |  
|INVESTING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Purchases of securities available for sale                                        |  |      | (70,978,609 | ) |      |   | (39,031,497 | )
|Purchases of securities held to maturity                                          |  |      | (1,001,140  | ) |      |   | (4,215,000  | )
|Proceeds from maturities of securities available for sale                         |  |      | 39,262,119  |   |      |   | 30,880,451  |  
|Proceeds from maturities of securities held to maturity                           |  |      | 108,297     |   |      |   | 181,020     |  
|(Purchases) retirement of restricted equity securities                            |  |      | 471,900     |   |      |   | (321,900    | )
|Net increase in federal funds sold                                                |  |      | (16,900,000 | ) |      |   | (13,100,000 | )
|Net (increase) decrease in interest-bearing deposits in banks                     |  |      | (1,432,340  | ) |      |   | 24,440      |  
|Net increase in loans                                                             |  |      | (10,007,207 | ) |      |   | (41,104,686 | )
|Proceeds from sale of other real estate                                           |  |      | 632,228     |   |      |   | 132,383     |  
|Purchase of premises and equipment                                                |  |      | (1,061,518  | ) |      |   | (664,798    | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash used in investing activities                                             |  |      | (60,906,270 | ) |      |   | (67,219,587 | )
|                                                                                  |  |      |             |   |      |   |             |  
|FINANCING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net increase in deposits                                                          |  |      | 59,161,260  |   |      |   | 54,077,524  |  
|Net proceeds from (repayments of) other borrowings                                |  |      | (7,792,188  | ) |      |   | 5,499,844   |  
|Dividends paid                                                                    |  |      | (2,577,863  | ) |      |   | (2,145,505  | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |      | 48,791,209  |   |      |   | 57,431,863  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net increase (decrease) in cash and due from banks                                |  |      | (3,165,966  | ) |      |   | 506,577     |  
|Cash and due from banks, beginning of period                                      |  |      | 18,584,790  |   |      |   | 15,950,626  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash and due from banks, end of period                                            |  | $    | 15,418,824  |   |      | $ | 16,457,203  |  
|                                                                                  |  |      |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                 |  |      |             |   |      |   |             |  
|Cash paid for:                                                                    |  |      |             |   |      |   |             |  
|Interest                                                                          |  | $    | 19,232,620  |   |      | $ | 13,189,074  |  
|Income taxes                                                                      |  | $    | 5,578,299   |   |      | $ | 5,711,923   |  
|Noncash transactions:                                                             |  |      |             |   |      |   |             |  
|Other real estate acquired in settlement of loans                                 |  | $    | 895,290     |   |      | $ | 364,361     |  
|Financed sales of other real estate owned                                         |  | $    | 73,845      |   |      | $ | 169,262     |  

See Notes to Consolidated Financial Statements.



5



---

##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|NOTE 1. | BASIS OF PRESENTATION
|------- | ---------------------

The consolidated financial
information for Henry County Bancshares, Inc. (the Company) included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim period.

The results of operations for the three and nine month periods ended
September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Standards

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard provides for guidance for using fair value to
measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard,
fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating
the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In February 2007,
the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 would allow the Company an irrevocable election to measure certain financial assets and
liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial
liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not portions of instruments. SFAS 159 also provides
expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Company is currently evaluating
this Statement and has not yet determined the financial assets and liabilities, if any, for which the fair value option would be elected or the potential impact on the consolidated financial statements, if such election were made.



6



---

##### Table of Contents

|NOTE 2. | SUPPLEMENTAL SEGMENT INFORMATION
|------- | --------------------------------

The Company has
two reportable segments: commercial banking and mortgage loan origination. The commercial banking segment provides traditional banking services offered through the First State Bank. The mortgage loan origination segment provides mortgage loan
origination services offered through First Metro.

The accounting policies of the segments are the same as those described in the footnotes
to the December 31, 2006 consolidated financial statements as filed in our annual report on Form 10-K. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.

The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were to third parties, that is, at
current market prices.

The Companys reportable segments are strategic business units that offer different products and services. They
are managed separately because each segment has different types and levels of credit and interest rate risk.



|                                             |  |                   |             |          |   |          |           |  |   |              |   |  |       |            |   |  |   |            
|-------------------------------------------- |  | ----------------- | ----------- | -------- | - | -------- | --------- |  | - | ------------ | - |  | ----- | ---------- | - |  | - | -----------
|                                             |  | INDUSTRY SEGMENTS
|For the Nine Months Ended September 30, 2007 |  | CommercialBanking |             | Mortgage |   |          | All Other |  |   | Eliminations |   |  | Total
|Interest income                              |  | $                 | 39,391,440  |          | $ | 13,101   |           |  | $ |             |   |  | $     | (61,992    | ) |  | $ | 39,342,549 
|Interest expense                             |  |                   | 19,510,471  |          |   | 48,891   |           |  |   |             |   |  |       | (61,992    | ) |  |   | 19,497,370 
|Net interest income (expense)                |  |                   | 19,880,969  |          |   | (35,790  | )         |  |   |             |   |  |       |           |   |  |   | 19,845,179 
|Intersegment net interest income (expense)   |  |                   | 61,992      |          |   | (61,992  | )         |  |   |             |   |  |       |           |   |  |   |           
|Other revenue from external sources          |  |                   | 1,835,024   |          |   | 491,125  |           |  |   | 9,450        |   |  |       |           |   |  |   | 2,335,599  
|Intersegment other revenues                  |  |                   | 18,630      |          |   | (18,630  | )         |  |   |             |   |  |       |           |   |  |   |           
|Depreciation                                 |  |                   | 496,535     |          |   | 450      |           |  |   | 4,683        |   |  |       |           |   |  |   | 501,668    
|Provision for loan losses                    |  |                   | 1,434,254   |          |   |         |           |  |   |             |   |  |       |           |   |  |   | 1,434,254  
|Segment profit (loss)                        |  |                   | 12,327,284  |          |   | (108,731 | )         |  |   | (43,422      | ) |  |       |           |   |  |   | 12,175,131 
|Segment assets                               |  |                   | 752,650,902 |          |   | 825,938  |           |  |   | 1,095,059    |   |  |       | (2,542,654 | ) |  |   | 752,029,245
|Expenditures for premises and equipment      |  |                   | 1,061,518   |          |   |         |           |  |   |             |   |  |       |           |   |  |   | 1,061,518  



7



---

##### Table of Contents

|NOTE 2. | SUPPLEMENTAL SEGMENT INFORMATION (Continued)
|------- | --------------------------------------------



|                                              |  |                   |             |          |   |           |           |  |   |              |   |  |       |            |   |  |   |            
|--------------------------------------------- |  | ----------------- | ----------- | -------- | - | --------- | --------- |  | - | ------------ | - |  | ----- | ---------- | - |  | - | -----------
|                                              |  | INDUSTRY SEGMENTS
|For the Nine Months Ended September 30, 2006  |  | CommercialBanking |             | Mortgage |   |           | All Other |  |   | Eliminations |   |  | Total
|Interest income                               |  | $                 | 35,181,983  |          | $ | 12,311    |           |  | $ |             |   |  | $     | (54,303    | ) |  | $ | 35,139,991 
|Interest expense                              |  |                   | 14,478,192  |          |   | 41,992    |           |  |   |             |   |  |       | (54,303    | ) |  |   | 14,465,881 
|Net interest income (expense)                 |  |                   | 20,703,791  |          |   | (29,681   | )         |  |   |             |   |  |       |           |   |  |   | 20,674,110 
|Intersegment net interest income (expense)    |  |                   | 54,303      |          |   | (54,303   | )         |  |   |             |   |  |       |           |   |  |   |           
|Other revenue from external sources           |  |                   | 1,991,786   |          |   | 538,540   |           |  |   | 9,450        |   |  |       |           |   |  |   | 2,539,776  
|Intersegment other revenues                   |  |                   | 18,630      |          |   | (18,630   | )         |  |   |             |   |  |       |           |   |  |   |           
|Depreciation                                  |  |                   | 444,237     |          |   | 1,049     |           |  |   | 6,101        |   |  |       |           |   |  |   | 451,387    
|Provision for loan losses                     |  |                   | 506,860     |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 506,860    
|Segment profit (loss)                         |  |                   | 15,127,474  |          |   | (120,946  | )         |  |   | (50,612      | ) |  |       |           |   |  |   | 14,955,916 
|Segment assets                                |  |                   | 699,935,961 |          |   | 1,452,341 |           |  |   | 897,721      |   |  |       | (3,120,262 | ) |  |   | 699,165,761
|Expenditures for premises and equipment       |  |                   | 664,798     |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 664,798    
|                                              | 
|                                              |  | INDUSTRY SEGMENTS
|For the Three Months Ended September 30, 2007 |  | CommercialBanking |             | Mortgage |   |           | All Other |  |   | Eliminations |   |  | Total
|Interest income                               |  | $                 | 12,857,397  |          | $ | 4,290     |           |  | $ |             |   |  | $     | (21,828    | ) |  | $ | 12,839,859 
|Interest expense                              |  |                   | 6,796,632   |          |   | 17,538    |           |  |   |             |   |  |       | (21,828    | ) |  |   | 6,792,342  
|Net interest income (expense)                 |  |                   | 6,060,765   |          |   | (13,248   | )         |  |   |             |   |  |       |           |   |  |   | 6,047,517  
|Intersegment net interest income (expense)    |  |                   | 21,828      |          |   | (21,828   | )         |  |   |             |   |  |       |           |   |  |   |           
|Other revenue from external sources           |  |                   | 595,244     |          |   | 163,635   |           |  |   | 3,150        |   |  |       |           |   |  |   | 762,029    
|Intersegment other revenues                   |  |                   | 6,210       |          |   | (6,210    | )         |  |   |             |   |  |       |           |   |  |   |           
|Depreciation                                  |  |                   | 175,067     |          |   | 130       |           |  |   | 1,561        |   |  |       |           |   |  |   | 176,758    
|Provision for loan losses                     |  |                   | 1,257,754   |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 1,257,754  
|Segment profit (loss)                         |  |                   | 2,637,147   |          |   | (28,565   | )         |  |   | (11,582      | ) |  |       |           |   |  |   | 2,597,000  
|Expenditures for premises and equipment       |  |                   | 463,210     |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 463,210    
|                                              | 
|                                              |  | INDUSTRY SEGMENTS
|For the Three Months Ended September 30, 2006 |  | CommercialBanking |             | Mortgage |   |           | All Other |  |   | Eliminations |   |  | Total
|Interest income                               |  | $                 | 12,607,621  |          | $ | 4,903     |           |  | $ |             |   |  | $     | (17,217    | ) |  | $ | 12,595,307 
|Interest expense                              |  |                   | 5,437,265   |          |   | 12,314    |           |  |   |             |   |  |       | (17,217    | ) |  |   | 5,432,362  
|Net interest income (expense)                 |  |                   | 7,170,356   |          |   | (7,411    | )         |  |   |             |   |  |       |           |   |  |   | 7,162,945  
|Intersegment net interest income (expense)    |  |                   | 17,217      |          |   | (17,217   | )         |  |   |             |   |  |       |           |   |  |   |           
|Other revenue from external sources           |  |                   | 647,074     |          |   | 139,673   |           |  |   | 3,150        |   |  |       |           |   |  |   | 789,897    
|Intersegment other revenues                   |  |                   | 6,210       |          |   | (6,210    | )         |  |   |             |   |  |       |           |   |  |   |           
|Depreciation                                  |  |                   | 147,466     |          |   | 160       |           |  |   | 1,561        |   |  |       |           |   |  |   | 149,187    
|Provision for loan losses                     |  |                   | 110,520     |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 110,520    
|Segment profit (loss)                         |  |                   | 5,235,171   |          |   | (62,571   | )         |  |   | (10,511      | ) |  |       |           |   |  |   | 5,162,089  
|Expenditures for premises and equipment       |  |                   | 492,582     |          |   |          |           |  |   |             |   |  |       |           |   |  |   | 492,582    



8



---

##### Table of Contents

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

The following is managements discussion and analysis of certain significant factors which have affected the financial position and operating results of Henry County Bancshares, Inc. and its subsidiaries, The
First State Bank and First Metro Mortgage Co., during the periods included in the accompanying consolidated financial statements.

SPECIAL CAUTIONARY
NOTICE REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements made herein under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) are forward-looking statements for purposes of the Securities Act of 1933, as amended, (the Securities Act) and the Securities Exchange Act of 1934, as amended
(the Exchange Act), and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Henry County Bancshares, Inc. to be materially different from future
results, performance or achievements expressed or implied by such forward-looking statements. Such forward looking statements include statements using the words such as may, will, anticipate, should,
would, believe, contemplate, expect, estimate, continue, may, intend, or other similar words and expressions of the future. Our actual results may differ
significantly from the results we discuss in these forward-looking statements.

These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates
on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and other interest-sensitive assets and liabilities; interest rate risks; and the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including
institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer, and the Internet.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting
principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2006 as filed in our
annual report on form 10-K.

Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of
operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in
preparation of our consolidated financial statements. Please see the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.



9



---

##### Table of Contents

Liquidity and Capital Resources

Our liquidity and capital resources are monitored on a periodic basis by management as well as State and Federal regulatory authorities. As determined under guidelines established by regulatory authorities and
internal policy, our liquidity ratio of 20% at September 30, 2007 was considered satisfactory.

At September 30, 2007, our capital ratios were in
excess of the requirements to be considered well capitalized under prompt corrective action provisions. The Board of Directors has approved the repurchase of up to $1 million of stock into treasury if it is in the best interest of the Company. On
October 23, 2007, the Company purchased 20,250 shares of stock into treasury at a price of $13.50 per share. The regulatory minimum capital requirements to be classified as well-capitalized and our actual capital ratios on a consolidated and
bank-only basis are as follows:



|                           |  |              |   |  |       |   |  |                       |  
|-------------------------- |  | ------------ | - |  | ----- | - |  | --------------------- | -
|                           |  | Actual       |   |  |       |  
|                           |  | Consolidated |   |  | Bank  |   |  | RegulatoryRequirement |  
|Leverage capital ratios    |  | 10.37        | % |  | 10.23 | % |  | 5.00                  | %
|Risk-based capital ratios: |  |              |   |  |       |   |  |                       |  
|Core capital               |  | 12.30        |   |  | 12.14 |   |  | 6.00                  |  
|Total capital              |  | 13.33        |   |  | 13.17 |   |  | 10.00                 |  

Off-Balance Sheet Risk

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of
credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use
the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is as follows:



|                             |  |                   |           
|---------------------------- |  | ----------------- | ----------
|                             |  | September 30,2007
|Commitments to extend credit |  | $                 | 89,426,000
|Letters of credit            |  |                   | 6,264,000 
|                             |  |                   |           
|                             |  | $                 | 95,690,000
|                             |  |                   |           

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed
necessary by us upon extension of credit, is based on our credit evaluation of the customer.



10



---

##### Table of Contents

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third
party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is
required in instances which we deem necessary.

Financial Condition

Following is a summary of our balance sheets for the periods indicated:



|                                   |  |                        |         |                  |   |        
|---------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                   |  | September 30,2007      |         | December 31,2006
|                                   |  | (Dollars in Thousands)
|Cash and due from banks            |  | $                      | 15,419  |                  | $ | 18,585 
|Interest-bearing deposits in banks |  |                        | 1,727   |                  |   | 295    
|Federal funds sold                 |  |                        | 22,400  |                  |   | 5,500  
|Securities                         |  |                        | 123,557 |                  |   | 91,077 
|Loans, net                         |  |                        | 564,168 |                  |   | 556,416
|Loans held for sale                |  |                        |        |                  |   | 666    
|Premises and equipment             |  |                        | 10,496  |                  |   | 9,936  
|Other assets                       |  |                        | 14,262  |                  |   | 11,835 
|                                   |  |                        |         |                  |   |        
|                                   |  | $                      | 752,029 |                  | $ | 694,310
|                                   |  |                        |         |                  |   |        
|                                   |  |                       
|Total deposits                     |  | $                      | 654,035 |                  | $ | 594,873
|Other borrowings                   |  |                        | 16,429  |                  |   | 24,222 
|Other liabilities                  |  |                        | 5,052   |                  |   | 4,017  
|Stockholders equity               |  |                        | 76,513  |                  |   | 71,198 
|                                   |  |                        |         |                  |   |        
|                                   |  | $                      | 752,029 |                  | $ | 694,310
|                                   |  |                        |         |                  |   |        

Our assets increased by 8.31% for the first nine months of 2007. Increases of $59.2 million in deposit growth,
offset by decreases of $7.8 million in other borrowings were primarily used to fund purchases of investment securities and federal funds sold of $32.5 million and $16.9 million, respectively; as well as provide for a net increase of $7.8 million in
loans during the first nine months of 2007. Our loan to deposit ratio, excluding loans held for sale, was 86% as of September 30, 2007 compared to 93% at December 31, 2006. Total deposits included $588 million of interest-bearing deposits
at September 30, 2007, compared to $517 million at December 31, 2006. Our total equity has increased by $5.3 million year-to-date as net income of $7.7 million coupled with increases in unrealized gains on securities available for sale,
net of tax, of $226,000 was offset by dividends paid of $2.6 million.



11



---

##### Table of Contents

Results of Operations For The Three and Nine Months Ended September 30, 2007 and 2006

Following is a summary of our operations for the periods indicated.



|                          |  |                                  |        |      |   |       
|------------------------- |  | -------------------------------- | ------ | ---- | - | ------
|                          |  | Three Months Ended September 30,
|                          |  | 2007                             |        | 2006
|                          |  | (Dollars in Thousands)          
|Interest income           |  | $                                | 12,840 |      | $ | 12,595
|Interest expense          |  |                                  | 6,792  |      |   | 5,432 
|                          |  |                                  |        |      |   |       
|Net interest income       |  |                                  | 6,048  |      |   | 7,163 
|Provision for loan losses |  |                                  | 1,258  |      |   | 111   
|Other income              |  |                                  | 762    |      |   | 790   
|Other expense             |  |                                  | 2,955  |      |   | 2,680 
|                          |  |                                  |        |      |   |       
|Pretax income             |  |                                  | 2,597  |      |   | 5,162 
|Income taxes              |  |                                  | 936    |      |   | 1,961 
|                          |  |                                  |        |      |   |       
|Net income                |  | $                                | 1,661  |      | $ | 3,201 
|                          |  |                                  |        |      |   |       



|                          |  |                                 |        |      |   |       
|------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                          |  | Nine Months Ended September 30,
|                          |  | 2007                            |        | 2006
|                          |  | (Dollars in Thousands)         
|Interest income           |  | $                               | 39,342 |      | $ | 35,140
|Interest expense          |  |                                 | 19,497 |      |   | 14,466
|                          |  |                                 |        |      |   |       
|Net interest income       |  |                                 | 19,845 |      |   | 20,674
|Provision for loan losses |  |                                 | 1,434  |      |   | 507   
|Other income              |  |                                 | 2,335  |      |   | 2,540 
|Other expense             |  |                                 | 8,571  |      |   | 7,751 
|                          |  |                                 |        |      |   |       
|Pretax income             |  |                                 | 12,175 |      |   | 14,956
|Income taxes              |  |                                 | 4,509  |      |   | 5,572 
|                          |  |                                 |        |      |   |       
|Net income                |  | $                               | 7,666  |      | $ | 9,384 
|                          |  |                                 |        |      |   |       



12



---

##### Table of Contents

Our net interest income decreased by $1,115,000 and $829,000 in the third quarter and first nine months of 2007
respectively, as compared to the same periods in 2006. Our net yield on average interest-earning assets decreased to 3.86% in the first nine months of 2007 as compared to 4.38% in the first nine months of 2006. Our net yield on average
interest-earning assets was 4.31% for the entire year of 2006. The decrease in net interest income is primarily attributed to an increase in the cost of interest-bearing liabilities, resulting in increased interest expense, as well as slower loan
growth as compared to the same period in 2006. Our net cost of interest-bearing liabilities increased to 4.63% during the first nine months of 2007 compared to 3.82% for the same period in 2006. The increase in interest expense is largely the result
of the strong competition for deposits in our market area. Our yields on loans increased to 8.22% in the first nine months of 2007 compared to 7.96% in the first nine months of 2006. Although our yields on loans have increased over 2006, we reversed
approximately $888,000 of year-to-date accrued interest income during the third quarter of 2007 on loans placed on nonaccrual, resulting in a decrease of approximately 16 basis points in our net yield on interest-earning assets for the first nine
months of 2007.

The provision for loan losses amounted to $1,258,000 and $1,434,000 for the third quarter and first nine months of 2007, respectively. The
increase in the provision for loan losses is primarily attributed to our estimates of impairments in loans placed on nonaccrual during the quarter ended September 30, 2007. The amounts provided are indicative of our assessment of the inherent risk
in the loan portfolio at September 30, 2007. The allowance for loan losses as a percentage of net loans was 1.13% at September 30, 2007 as compared to .93% at December 31, 2006. The allowance for loan losses is maintained at a level
that is deemed appropriate by management to adequately cover all known and inherent risks in the loan portfolio. Please see the information on page 15 for a further discussion of our allowance for loan losses methodology.

The following table shows our nonperforming assets for the periods ended September 30, 2007, December 31, 2006, and September 30, 2006:



|                                                                                                         |  |                        |        |                  |   |               |  |   |      
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------- |  | - | -----
|                                                                                                         |  | Sept. 30,2007          |        | December 31,2006 |   | Sept. 30,2006
|                                                                                                         |  | (Dollars in Thousands)
|Nonaccrual loans                                                                                         |  | $                      | 17,330 |                  | $ | 416           |  | $ | 1,036
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 3,206  |                  |   | 1,001         |  |   | 1,388
|Restructured loans                                                                                       |  |                        | 0      |                  |   | 0             |  |   | 0    
|                                                                                                         |  |                        |        |                  |   |               |  |   |      
|Total nonperforming loans                                                                                |  | $                      | 20,536 |                  | $ | 1,417         |  | $ | 2,424
|                                                                                                         |  |                        |       
|Other real estate                                                                                        |  |                        | 1,586  |                  |   | 1,411         |  |   | 262  
|                                                                                                         |  |                        |        |                  |   |               |  |   |      
|Total nonperforming assets                                                                               |  | $                      | 22,122 |                  | $ | 2,828         |  | $ | 2,686
|                                                                                                         |  |                        |        |                  |   |               |  |   |      

Nonperforming assets consist of nonaccrual loans, loans restructured due to the debtors financial
difficulties, loans past due 90 days or more as to interest or principal and still accruing, and other real estate owned, which is real estate acquired through foreclosure. Nonaccrual loans are those loans on which recognition of interest income has
been discontinued. Restructured loans generally allow for an extension of the original repayment period or a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. When management believes
there is sufficient doubt as to the collectibility of principal or interest on any loan, or generally when loans are 90 days or more past due, the accrual of interest is discontinued and the loan is designated as nonaccrual, unless the loan is well
secured and in the process of collection.



13



---

##### Table of Contents

Interest payments received on nonaccrual loans are either applied against principal or reported as income according to
managements judgment as to the collectibility of principal. Loans are returned to an accrual status when those factors that indicated doubtful collectibility on a timely basis no longer exist. Other real estate owned is initially recorded at
the lower of cost or estimated value at the date of acquisition. A provision for estimated losses is recorded when a subsequent decline in value occurs.

Nonperforming assets at September 30, 2007 amounted to approximately $22.1 million, or 3.87% of total loans and other real estate. This compares to approximately $2.8 million or .50% of total loans and other real estate at
December 31, 2006, and $2.7 million or .48% at September 30, 2006.

The increase in nonperforming assets is primarily attributed to increases in
nonaccrual loans and loans past due 90 days or more and still accruing. The increase in nonaccrual loans are represented by five separate loan relationships involving real estate development and construction in our local market and that comprise
approximately 90% of the $17.2 million in loans placed on nonaccrual during the quarter ended September 30, 2007. Of these relationships, a development loan in the amount of $7.7 million, comprising 150 developed lots and over 60 undeveloped
lots was placed on nonaccrual during the quarter. As a result of the impairment of this development loan, an additional provision to the loan loss reserve was made during September of approximately $867,000. The property, which is located in our
market, was foreclosed in October and placed into other real estate. Subsequent to the foreclosure, the Company has been in conversations with interested parties involving a potential sale of the development. Another of these relationships is
comprised of 16 construction loans in our local market for which the homes have been completed and are being marketed for sale by the borrower. The change in status of all of these loans placed on nonaccrual is primarily related to the
borrowers illiquidity, as well as increased levels of lot and completed home inventories in our market. The increase in loans 90 days or more and still accruing is primarily attributed to construction loans to several borrowers that are fully
secured by real estate, and that have all been brought current as to interest or have been paid in full subsequent to September 30, 2007.

The
increase in other real estate is primarily attributed to the foreclosure of a single family detached residential dwelling as well as a vacant commercial lot, both of which are valued well in excess of the carrying value and that the Company is
actively marketing for resale.

Subsequent to September 30, 2007, the Company became aware of two separate development loans totaling $3.8 million
about which there is significant doubt as to the ability of the borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status. The loans were not 90 days or more past due as to interest or
principal at September 30, 2007. The Company feels that if uncorrected, the relationship will become nonperforming prior to the end of the next reporting period. At present, the Company has evaluated the underlying collateral securing the loan
and is of the opinion that it adequately protects against incurring a loss.

Although the Company is concerned with the significant increase in
nonperforming assets at September 30, 2007, we are of the opinion that our long term relationships with these customers, familiarity with our local real estate markets and adequate collateral positions in these loans will help to minimize any
losses that may arise as we continue to work with these relationships going forward. We believe that the performance problems existing in our real estate portfolio are a direct result of softening real estate activity and not indicative of a
weakness in previous or current underwriting standards regarding real estate lending. Presently, the vast majority of the Companys credits in the residential development and construction loan category of our portfolio continue to perform;
however, management cannot predict the impact of future economic changes in our nonperforming assets.



14



---

##### Table of Contents

Information regarding certain loans and allowance for loan loss data through September 30, 2007 and 2006 is as
follows:



|                                                                              |  |                                 |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                              |  | Nine Months Ended September 30, |        
|                                                                              |  | 2007                            |         |   | 2006 |  
|                                                                              |  | (Dollars in Thousands)          |        
|Average amount of loans outstanding                                           |  | $                               | 561,574 |   |      | $ | 544,150 |  
|                                                                              |  |                                 |         |   |      |   |         |  
|Balance of allowance for loan losses at beginning of period                   |  | $                               | 5,230   |   |      | $ | 4,972   |  
|                                                                              |  |                                 |         |   |      |   |         |  
|Loans charged off                                                             |  |                                 |         |   |      |   |         |  
|Real estate                                                                   |  |                                 | (186    | ) |      |   |        |  
|Commercial                                                                    |  |                                 | (14     | ) |      |   | (133    | )
|Consumer installment                                                          |  |                                 | (44     | ) |      |   | (48     | )
|                                                                              |  |                                 |         |   |      |   |         |  
|                                                                              |  |                                 | (244    | ) |      |   | (181    | )
|                                                                              |  |                                 |         |   |      |   |         |  
|Loans recovered                                                               |  |                                 |         |   |      |   |         |  
|Real estate                                                                   |  |                                 | 1       |   |      |   |        |  
|Commercial                                                                    |  |                                 | 1       |   |      |   |        |  
|Consumer installment                                                          |  |                                 | 11      |   |      |   | 17      |  
|                                                                              |  |                                 |         |   |      |   |         |  
|                                                                              |  |                                 | 13      |   |      |   | 17      |  
|                                                                              |  |                                 |         |   |      |   |         |  
|Net (charge-offs)/ recoveries                                                 |  |                                 | (231    | ) |      |   | (164    | )
|                                                                              |  |                                 |         |   |      |   |         |  
|Additions to allowance charged to operating expense during period             |  |                                 | 1,434   |   |      |   | 507     |  
|                                                                              |  |                                 |         |   |      |   |         |  
|Balance of allowance for loan losses at end of period                         |  | $                               | 6,433   |   |      | $ | 5,315   |  
|                                                                              |  |                                 |         |   |      |   |         |  
|Ratio of net loans charged off during the period to average loans outstanding |  |                                 | .04     | % |      |   | .03     | %
|                                                                              |  |                                 |         |   |      |   |         |  

The allowance for loan losses is maintained at a level that is deemed appropriate by us to adequately cover all
known and inherent risks in the loan portfolio. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be
accurate. In assessing the adequacy, management relies predominately on its ongoing review of the loan portfolio. This review takes into consideration the judgments of the responsible lending officers and senior management, and also those of
regulatory agencies that review the loan portfolio as part of the regular bank examination process, as well as reviews conducted by our outside loan review firm. In evaluating the allowance, management also considers our loan loss experience, the
amount of past due and nonperforming loans, current and anticipated economic conditions, lender requirements and other appropriate information. Certain nonperforming loans are individually assessed for impairment under Statement of Financial
Accounting Standards (SFAS) No. 114 and assigned specific allocations. Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations.



15



---

##### Table of Contents

Noninterest income

Other
operating income decreased by $28,000 and $204,000 in the third quarter and first nine months of 2007, respectively, as compared to the same periods in 2006. The year-to-date decreases are due primarily to decreased service charges on deposit
accounts of $129,000, decreases of $47,000 in mortgage banking income as a result of decreased mortgage activity and decreased other service charges and fees of $28,000. Decreases in service charges on deposit accounts are primarily attributed to
the continued conversion of our existing service charge accounts to non service charge checking accounts.

Noninterest expense

Other expenses have increased $275,000 in the third quarter of 2007 compared to 2006 and have increased $820,000 for the first nine months of 2007 as compared to the same
periods in 2006. Other expenses have increased during the first nine months of 2007 compared to 2006, primarily as a result of increased salaries and employee benefits, net of capitalized loan fees, of $548,000, increased occupancy and equipment
expense of $150,000 and increases in other operating expenses of $122,000. Increases in salaries and employee benefits are primarily a result of increases in staff as a result of opening our new branch in April of 2007. The increase in occupancy and
equipment expense is primarily attributed to increased depreciation expense of approximately $50,000 and increased ATM network fees of $40,000. The increase in other operating expenses is primarily attributed to increases in other real estate
expense of $42,000, accounting and professional fees of $27,000 and stationery and supplies of $26,000. Our efficiency ratio for the nine months ending September 30, 2007 was 38.64% as we continue to rank at the top of our peer group percentile
in the efficiency of our operations.

Income Taxes

We have
provided for income taxes at an effective tax rate of 37% for the first nine months of 2007 as well as for the first nine months of 2006.

We are not aware
of any known trends, events or uncertainties, other than the effect of events as described above, that will have or are reasonably likely to have a material effect on our liquidity, capital resources, or operations. We are also not aware of any
current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.



16



---

##### Table of Contents

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

We are
exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio
as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities that are commonly pass through securities. Finally, we have no exposure to foreign
currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as interest rate risk. The
repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap
management. It is our policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

GAP management alone is not enough to properly manage
interest rate sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a Prime rate and thus respond
with less volatility to a market rate change.

We use a third party simulation model to monitor changes in net interest income due to changes in market
rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market
value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The third quarter model reflects an increase of 28% in net interest income and an 8% increase in market value equity for a 200 basis point
increase in rates. The same model shows a 4% decrease in net interest income and a 13% decrease in market value equity for a 200 basis point decrease in rates. Our investment committee monitors changes on a quarterly basis, measures the changing
values based on the models performance and determines an appropriate interest rate policy for management to follow in order to minimize the impact on earnings and market value equity in the projected rate environment.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective. In connection with the new rules, we are in the process of further reviewing
and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with
our business.

There have been no changes in our internal controls or in other factors that could affect internal controls subsequent to the date of this
evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.



17



---

##### Table of Contents

II - OTHER INFORMATION



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Issuer Purchases of Equity Securities



|           |  |                                                 |  |                                            |  |                                                                              |  |                                                                                                                            
|---------- |  | ----------------------------------------------- |  | ------------------------------------------ |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|           |  | (a) Total number Of shares (or units) purchased |  | (b) Average price paid per share (or unit) |  | (c) Total number of shares (or units) purchased as part of plans or programs |  | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the
plans or programs
|           |  |                                                 |  |                                           
|10/23/2007 |  | 20,250 shares                                   |  | $13.50                                     |  | N/A                                                                          |  | N/A                                                                                                                        

(a) The shares shown above were purchased in a single, unsolicited open-market transaction from an individual
shareholder. The transaction was not pursuant to a stock repurchase plan.



|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K.
|------- | ---------------------------------



| | (a) | Exhibits.
| | --- | ---------



|     |  |                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.                                                         
|     | 
|31.2 |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.                                                         
|     | 
|32   |  | Certification of the Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



18



---

##### Table of Contents

SIGNATURES

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



|                       |  |  |  |                               |  |                                                                                           
|---------------------- |  |  |  | ----------------------------- |  | ------------------------------------------------------------------------------------------
|                       |  |  |  | HENRY COUNTY BANCSHARES, INC.
|                       |  |  |  | (Registrant)                 
|                       |  |  | 
|Date: November 7, 2007 |  |  |  | By:                           |  | /s/ David H. Gill                                                                         
|                       |  |  |  |                               |  | David H. Gill, President and CEO (Principal
Executive Officer)                            
|                       |  |  | 
|Date: November 7, 2007 |  |  |  | By:                           |  | /s/ Thomas L. Redding                                                                     
|                       |  |  |  |                               |  | Thomas L. Redding, Sr. Vice President and CFO (Principal Financial and Accounting Officer)



19