##### 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 June 30, 2008



| ̈ | 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 or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act.



|                                                                          |  |                              |  |                     
|------------------------------------------------------------------------- |  | ---------------------------- |  | --------------------
|Large accelerated filer   ̈                                                |  |                              |  | Accelerated filer  x
|Non-accelerated filer     ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company   ̈

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 August 5, 2008: 14,245,690; $2.50 par value.









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##### Table of Contents

HENRY COUNTY BANCSHARES, INC AND SUBSIDIARIES

INDEX



|         |  |                                                                                                                           |  |      
|-------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | -----
|         |  |                                                                                                                           |  | Page 
|PART I.  |  | FINANCIAL INFORMATION                                                                                                     |  |      
|         |  |                                                                                                                          
|         |  | Item 1. Financial Statements                                                                                              |  |      
|         |  |                                                                                                                          
|         |  | Consolidated Balance Sheets - June 30, 2008 and December 31, 2007                                                         |  | 3    
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Operations and Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2008 and 2007 |  | 4    
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Cash Flows - Six Months Ended June 30, 2008 and 2007                                           |  | 5    
|         |  |                                                                                                                          
|         |  | Notes to Consolidated Financial Statements                                                                                |  | 6-10 
|         |  |                                                                                                                          
|         |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 11-18
|         |  |                                                                                                                          
|         |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 19   
|         |  |                                                                                                                          
|         |  | Item 4. Controls and Procedures                                                                                           |  | 19   
|         |  |                                                                                                                          
|PART II. |  | OTHER INFORMATION                                                                                                         |  |      
|         |  |                                                                                                                          
|         |  | Item 6 - Exhibits and Reports on Form 8-K                                                                                 |  | 20   
|         |  |                                                                                                                          
|         |  | Signatures                                                                                                                |  | 21   



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##### Table of Contents

PART I - FINANCIAL INFORMATION

FINANCIAL STATEMENTS

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2008 AND DECEMBER 31, 2007

(Unaudited)



|                                                                                        |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                        |  | 2008 |             |   | 2007 |  
|Assets                                                                                  |  |      |             |   |      |   |             |  
|Cash and due from banks                                                                 |  | $    | 15,767,337  |   |      | $ | 16,826,236  |  
|Interest bearing deposits in banks                                                      |  |      | 122,361     |   |      |   | 2,731,987   |  
|Federal funds sold                                                                      |  |      |            |   |      |   | 9,500,000   |  
|Securities available for sale, at fair value                                            |  |      | 73,591,942  |   |      |   | 87,717,716  |  
|Securities held to maturity, at cost, (fair value 2008 $4,153,442; 2007 $4,143,401)     |  |      | 4,162,579   |   |      |   | 4,164,690   |  
|Restricted equity securities, at cost                                                   |  |      | 1,877,851   |   |      |   | 1,897,751   |  
|Loans held for sale                                                                     |  |      | 882,922     |   |      |   | 950,405     |  
|                                                                                        |  |     
|Loans                                                                                   |  |      | 554,544,204 |   |      |   | 569,387,551 |  
|Less allowance for loan losses                                                          |  |      | 10,219,776  |   |      |   | 7,657,387   |  
|                                                                                        |  |      |             |   |      |   |             |  
|Loans, net                                                                              |  |      | 544,324,428 |   |      |   | 561,730,164 |  
|                                                                                        |  |     
|Premises and equipment                                                                  |  |      | 10,003,330  |   |      |   | 10,341,368  |  
|Other real estate                                                                       |  |      | 16,666,464  |   |      |   | 10,394,433  |  
|Other assets                                                                            |  |      | 13,004,275  |   |      |   | 12,741,299  |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total assets                                                                            |  | $    | 680,403,489 |   |      | $ | 718,996,049 |  
|                                                                                        |  |      |             |   |      |   |             |  
|Liabilities and Stockholders Equity                                                    |  |      |             |   |      |   |             |  
|Deposits                                                                                |  |      |             |   |      |   |             |  
|Noninterest-bearing                                                                     |  | $    | 68,644,826  |   |      | $ | 71,388,083  |  
|Interest-bearing                                                                        |  |      | 524,853,366 |   |      |   | 554,463,038 |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total deposits                                                                          |  |      | 593,498,192 |   |      |   | 625,851,121 |  
|                                                                                        |  |      |             |   |      |   |             |  
|Federal funds purchased                                                                 |  |      | 2,000,000   |   |      |   |            |  
|Other borrowings                                                                        |  |      | 7,383,812   |   |      |   | 13,424,498  |  
|Other liabilities                                                                       |  |      | 3,733,243   |   |      |   | 4,186,288   |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities                                                                       |  |      | 606,615,247 |   |      |   | 643,461,907 |  
|                                                                                        |  |      |             |   |      |   |             |  
|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                                                                       |  |      | 39,588,849  |   |      |   | 40,644,829  |  
|Accumulated other comprehensive income (loss)                                           |  |      | (193,437    | ) |      |   | 435,733     |  
|Treasury stock, 143,060 and 138,560 shares, respectively                                |  |      | (2,318,604  | ) |      |   | (2,257,854  | )
|                                                                                        |  |      |             |   |      |   |             |  
|Total stockholders equity                                                              |  |      | 73,788,242  |   |      |   | 75,534,142  |  
|                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                              |  | $    | 680,403,489 |   |      | $ | 718,996,049 |  
|                                                                                        |  |      |             |   |      |   |             |  

See Notes to Consolidated Financial Statements.



3



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HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)



|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                               |  | Three Months EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                                               |  | 2008                       |            |   | 2007                     |   |            | 2008 |  |   | 2007       |  
|Interest income                                                |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Loans                                                          |  | $                          | 7,572,206  |   |                          | $ | 11,787,540 |      |  | $ | 17,351,110 |   |  | $ | 23,412,808 |  
|Taxable securities                                             |  |                            | 886,473    |   |                          |   | 1,285,083  |      |  |   | 2,037,107  |   |  |   | 2,335,180  |  
|Nontaxable securities                                          |  |                            | 86,881     |   |                          |   | 87,775     |      |  |   | 166,326    |   |  |   | 176,884    |  
|Deposits in banks                                              |  |                            | 2,168      |   |                          |   | 1,659      |      |  |   | 33,327     |   |  |   | 6,896      |  
|Federal funds sold                                             |  |                            | 36,899     |   |                          |   | 360,902    |      |  |   | 141,701    |   |  |   | 570,922    |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                          |  |                            | 8,584,627  |   |                          |   | 13,522,959 |      |  |   | 19,729,571 |   |  |   | 26,502,690 |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Interest expense                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Deposits                                                       |  |                            | 4,938,220  |   |                          |   | 6,315,854  |      |  |   | 10,747,138 |   |  |   | 12,089,264 |  
|Other borrowings                                               |  |                            | 26,265     |   |                          |   | 307,869    |      |  |   | 144,344    |   |  |   | 615,764    |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Total interest expense                                         |  |                            | 4,964,485  |   |                          |   | 6,623,723  |      |  |   | 10,891,482 |   |  |   | 12,705,028 |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net interest income                                            |  |                            | 3,620,142  |   |                          |   | 6,899,236  |      |  |   | 8,838,089  |   |  |   | 13,797,662 |  
|Provision for loan losses                                      |  |                            | 1,525,750  |   |                          |   | 164,000    |      |  |   | 2,635,750  |   |  |   | 176,500    |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses            |  |                            | 2,094,392  |   |                          |   | 6,735,236  |      |  |   | 6,202,339  |   |  |   | 13,621,162 |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Other operating income                                         |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Service charges on deposit accounts                            |  |                            | 339,116    |   |                          |   | 338,671    |      |  |   | 676,178    |   |  |   | 675,761    |  
|Other service charges and fees                                 |  |                            | 277,571    |   |                          |   | 281,141    |      |  |   | 532,099    |   |  |   | 570,319    |  
|Mortgage banking income                                        |  |                            | 121,579    |   |                          |   | 169,198    |      |  |   | 242,184    |   |  |   | 327,490    |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                             |  |                            | 738,266    |   |                          |   | 789,010    |      |  |   | 1,450,461  |   |  |   | 1,573,570  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Other expenses                                                 |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Salaries and employee benefits                                 |  |                            | 1,800,029  |   |                          |   | 1,768,113  |      |  |   | 3,665,766  |   |  |   | 3,532,006  |  
|Occupancy and equipment expenses                               |  |                            | 485,035    |   |                          |   | 476,700    |      |  |   | 966,909    |   |  |   | 914,771    |  
|Other real estate writedowns                                   |  |                            | 842,606    |   |                          |   |           |      |  |   | 951,670    |   |  |   |           |  
|Other operating expenses                                       |  |                            | 644,508    |   |                          |   | 612,127    |      |  |   | 1,276,611  |   |  |   | 1,169,824  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Total other expenses                                           |  |                            | 3,772,178  |   |                          |   | 2,856,940  |      |  |   | 6,860,956  |   |  |   | 5,616,601  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                              |  |                            | (939,520   | ) |                          |   | 4,667,306  |      |  |   | 791,844    |   |  |   | 9,578,131  |  
|                                                               |  |                            |            |  
|Income tax expense (benefit)                                   |  |                            | (502,360   | ) |                          |   | 1,704,932  |      |  |   | 138,340    |   |  |   | 3,572,433  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                              |  |                            | (437,160   | ) |                          |   | 2,962,374  |      |  |   | 653,504    |   |  |   | 6,005,698  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Other comprehensive loss:                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Unrealized losses on securities available for sale, net of tax |  |                            | (1,015,911 | ) |                          |   | (324,540   | )    |  |   | (629,170   | ) |  |   | (244,115   | )
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Comprehensive income (loss)                                    |  | $                          | (1,453,071 | ) |                          | $ | 2,637,834  |      |  | $ | 24,334     |   |  | $ | 5,761,583  |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share                                      |  | $                          | (0.03      | ) |                          | $ | 0.21       |      |  | $ | 0.05       |   |  | $ | 0.42       |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Weighted average shares outstanding                            |  |                            | 14,245,690 |   |                          |   | 14,321,468 |      |  |   | 14,245,739 |   |  |   | 14,321,468 |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Cash dividends per share                                       |  | $                          | 0.06       |   |                          | $ | 0.06       |      |  | $ | 0.12       |   |  | $ | 0.12       |  
|                                                               |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

HENRY COUNTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2008 |             |   | 2007 |  
|OPERATING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net income                                                                        |  | $    | 653,504     |   |      | $ | 6,005,698   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation                                                                      |  |      | 347,211     |   |      |   | 324,910     |  
|Net (increase) decrease in loans held for sale                                    |  |      | 67,483      |   |      |   | (221,573    | )
|Provision for loan losses                                                         |  |      | 2,635,750   |   |      |   | 176,500     |  
|Writedowns of other real estate owned                                             |  |      | 951,670     |   |      |   |            |  
|Net losses on sale of other real estate                                           |  |      |            |   |      |   | 13,522      |  
|(Increase) decrease in interest receivable                                        |  |      | 2,793,382   |   |      |   | (775,810    | )
|Increase (decrease) in interest payable                                           |  |      | (837,190    | ) |      |   | 395,141     |  
|Net other operating activities                                                    |  |      | (2,348,095  | ) |      |   | 72,853      |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 4,263,715   |   |      |   | 5,991,241   |  
|                                                                                  |  |      |             |   |      |   |             |  
|INVESTING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Purchases of securities available for sale                                        |  |      | (34,587,704 | ) |      |   | (46,172,928 | )
|Purchases of securities held to maturity                                          |  |      |            |   |      |   | (1,001,140  | )
|Proceeds from maturities of securities available for sale                         |  |      | 47,760,190  |   |      |   | 21,683,708  |  
|Proceeds from maturities of securities held to maturity                           |  |      | 2,111       |   |      |   | 103,120     |  
|Retirement of restricted equity securities                                        |  |      | 19,900      |   |      |   | 471,900     |  
|Net decrease in federal funds sold                                                |  |      | 9,500,000   |   |      |   | 700,000     |  
|Net (increase) decrease in interest-bearing deposits in banks                     |  |      | 2,609,626   |   |      |   | (534,173    | )
|Net (increase) decrease in loans                                                  |  |      | 7,255,444   |   |      |   | (8,813,342  | )
|Proceeds from sale of other real estate                                           |  |      | 290,841     |   |      |   | 370,541     |  
|Purchase of premises and equipment                                                |  |      | (9,173      | ) |      |   | (598,308    | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash (used in) provided by investing activities                               |  |      | 32,841,235  |   |      |   | (33,790,622 | )
|                                                                                  |  |      |             |   |      |   |             |  
|FINANCING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net increase (decrease) in deposits                                               |  |      | (32,352,929 | ) |      |   | 37,690,039  |  
|Net increase in federal funds purchased                                           |  |      | 2,000,000   |   |      |   |            |  
|Net repayments of other borrowings                                                |  |      | (6,040,686  | ) |      |   | (10,377,974 | )
|Dividends paid                                                                    |  |      | (1,709,484  | ) |      |   | (1,718,576  | )
|Purchase of treasury stock                                                        |  |      | (60,750     | ) |      |   |            |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by (used in) financing activities                               |  |      | (38,163,849 | ) |      |   | 25,593,489  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Net decrease in cash and due from banks                                           |  |      | (1,058,899  | ) |      |   | (2,205,892  | )
|                                                                                  |  |     
|Cash and due from banks, beginning of period                                      |  |      | 16,826,236  |   |      |   | 18,584,790  |  
|                                                                                  |  |      |             |   |      |   |             |  
|Cash and due from banks, end of period                                            |  | $    | 15,767,337  |   |      | $ | 16,378,898  |  
|                                                                                  |  |      |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                 |  |      |             |   |      |   |             |  
|Cash paid for:                                                                    |  |      |             |   |      |   |             |  
|Interest                                                                          |  | $    | 11,728,672  |   |      | $ | 12,309,887  |  
|                                                                                  |  |     
|Income taxes                                                                      |  | $    | 1,339,742   |   |      | $ | 3,678,299   |  
|                                                                                  |  |     
|Noncash transactions                                                              |  |      |             |   |      |   |             |  
|Other real estate acquired in settlement of loans                                 |  | $    | 7,514,542   |   |      | $ | 787,956     |  
|                                                                                  |  |     
|Financed sales of other real estate owned                                         |  | $    |            |   |      | $ | 73,845      |  

See Notes to Consolidated Financial Statements.



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##### 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 six month periods ended June 30, 2008 are not
necessarily indicative of the results to be expected for the full year.  Adoption of
New Accounting Standards  Fair Value Option and Fair Value
Measurements  In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy prioritizing the
assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157.This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. As permitted under FASB Staff Position No. FAS 157-2, the Company
has elected to defer the application of FAS 157 to nonfinancial assets and liabilities until January 1, 2009. The Company does not believe the impact will be material to the financial condition of the Company.  In February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any
financial assets or financial liabilities as of January 1, 2008.



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
| |  | Fair Value Measurement  Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:  Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement
date.  Level 2: Significant other observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.  Level 3: Significant unobservable inputs that reflect a companys own assumptions about
the assumptions that market participants would use in pricing an asset or liability.  The Company used the following methods and significant assumptions to estimate fair value.  Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique, used
widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities.  Assets and Liabilities Measured on a Recurring Basis  Fair Value Measurements at June 30, 2008, using:



|                              |  |                                                              |   |                                             |   |                                         |  |   |  
|----------------------------- |  | ------------------------------------------------------------ | - | ------------------------------------------- | - | --------------------------------------- |  | - | -
|                              |  | Quoted Prices in ActiveMarkets for Identical Assets(Level 1) |   | Significant Other ObservableInputs(Level
2) |   | Significant UnobservableInputs(Level
3)
|Assets:                       |  |                                                              |   |                                             |   |                                         |  |   |  
|                              |  |                                                              |  
|Available for sale securities |  | $                                                            |  |                                             | $ | 73,591,942                              |  | $ | 



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Once a loan is
identified as individually impaired, management measures impairment in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of
impaired loans is estimated using one of several methods, including the present value of future cash flows discounted at the loans effective interest rate or a loans observable market price, or the fair value of the collateral if the
loan is collateral dependent. In accordance with SFAS 157, impaired loans where an allowance is established based on fair value of collateral require classification in the fair value hierarchy.



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company measures the fair value of collateral dependent impaired loans based on the fair value of the collateral securing these loans. These
measurements are classified as Level 3 within the valuation hierarchy. All impaired loans are secured by real estate. The fair value of these real estate properties is generally determined based upon appraisals performed by a certified or licensed
appraiser using inputs such as absorption rates, capitalization rates, and comparables. Management also considers other factors or recent developments which could result in adjustments to the valuation. Impaired loans are reviewed and evaluated in
at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.  Assets and Liabilities Measured on a Nonrecurring Basis  Fair Value Measurements at June 30, 2008, using:



|               |  |                                                              |   |                                             |   |                                         |  |   |           
|-------------- |  | ------------------------------------------------------------ | - | ------------------------------------------- | - | --------------------------------------- |  | - | ----------
|               |  | Quoted Prices in ActiveMarkets for Identical Assets(Level 1) |   | Significant Other ObservableInputs(Level
2) |   | Significant UnobservableInputs(Level
3)
|Assets:        |  |                                                              |   |                                             |   |                                         |  |   |           
|               |  |                                                              |  
|Impaired loans |  | $                                                            |  |                                             | $ |                                        |  | $ | 49,839,515



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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, 2007 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 Six Months Ended June 30, 2008     |  | CommercialBanking |             | Mortgage |   |           | AllOther |  |   | Eliminations |   |  | Total
|Interest income                            |  | $                 | 19,749,685  |          | $ | 4,948     |          |  | $ |             |   |  | $     | (25,062    | ) |  | $ | 19,729,571 
|Interest expense                           |  |                   | 10,896,430  |          |   | 20,114    |          |  |   |             |   |  |       | (25,062    | ) |  |   | 10,891,482 
|Net interest income (expense)              |  |                   | 8,853,255   |          |   | (15,166   | )        |  |   |             |   |  |       |           |   |  |   | 8,838,089  
|Intersegment net interest income (expense) |  |                   | 15,166      |          |   | (15,166   | )        |  |   |             |   |  |       |           |   |  |   |           
|Other revenue from external sources        |  |                   | 1,201,977   |          |   | 242,184   |          |  |   | 6,300        |   |  |       |           |   |  |   | 1,450,461  
|Intersegment other revenues                |  |                   | 12,420      |          |   | (12,420   | )        |  |   |             |   |  |       |           |   |  |   |           
|Depreciation                               |  |                   | 343,830     |          |   | 259       |          |  |   | 3,122        |   |  |       |           |   |  |   | 347,211    
|Provision for loan losses                  |  |                   | 2,635,750   |          |   |          |          |  |   |             |   |  |       |           |   |  |   | 2,635,750  
|Segment profit (loss)                      |  |                   | 903,060     |          |   | (100,926  | )        |  |   | (10,290      | ) |  |       |           |   |  |   | 791,844    
|Segment assets                             |  |                   | 680,928,577 |          |   | 1,598,792 |          |  |   | 273,386      |   |  |       | (2,397,266 | ) |  |   | 680,403,489
|Expenditures for premises and equipment    |  |                   | 9,173       |          |   |          |          |  |   |             |   |  |       |           |   |  |   | 9,173      



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



|                                           |  |                   |             |          |   |           |  |              |           |       |   |             |  |   |            
|------------------------------------------ |  | ----------------- | ----------- | -------- | - | --------- |  | ------------ | --------- | ----- | - | ----------- |  | - | -----------
|                                           |  | INDUSTRY SEGMENTS
|For the Six Months Ended June 30, 2007     |  | CommercialBanking |             | Mortgage |   | AllOther  |  | Eliminations |           | Total
|Interest income                            |  | $                 | 26,534,043  |          | $ | 8,811     |  | $            |          |       | $ | (40,164)    |  | $ | 26,502,690 
|Interest expense                           |  |                   | 12,713,839  |          |   | 31,353    |  |              |          |       |   | (40,164)    |  |   | 12,705,028 
|Net interest income (expense)              |  |                   | 13,820,204  |          |   | (22,542)  |  |              |          |       |   |            |  |   | 13,797,662 
|Intersegment net interest income (expense) |  |                   | 40,164      |          |   | (40,164)  |  |              |          |       |   |            |  |   |           
|Other revenue from external sources        |  |                   | 1,239,780   |          |   | 327,490   |  |              | 6,300     |       |   |            |  |   | 1,573,570  
|Intersegment other revenues                |  |                   | 12,420      |          |   | (12,420)  |  |              |          |       |   |            |  |   |           
|Depreciation                               |  |                   | 321,468     |          |   | 320       |  |              | 3,122     |       |   |            |  |   | 324,910    
|Provision for loan losses                  |  |                   | 176,500     |          |   |          |  |              |          |       |   |            |  |   | 176,500    
|Segment profit (loss)                      |  |                   | 9,690,137   |          |   | (80,166)  |  |              | (31,840)  |       |   |            |  |   | 9,578,131  
|Segment assets                             |  |                   | 727,238,458 |          |   | 1,758,368 |  |              | 1,096,632 |       |   | (3,547,347) |  |   | 726,546,111
|Expenditures for premises and equipment    |  |                   | 598,308     |          |   |          |  |              |          |       |   |            |  |   | 598,308    
|                                           | 
|                                           |  | INDUSTRY SEGMENTS
|For the Three Months Ended June 30, 2008   |  | CommercialBanking |             | Mortgage |   | AllOther  |  | Eliminations |           | Total
|Interest income                            |  | $                 | 8,591,313   |          | $ | 1,996     |  | $            |          |       | $ | (8,682)     |  | $ | 8,584,627  
|Interest expense                           |  |                   | 4,966,481   |          |   | 6,686     |  |              |          |       |   | (8,682)     |  |   | 4,964,485  
|Net interest income (expense)              |  |                   | 3,624,832   |          |   | (4,690)   |  |              |          |       |   |            |  |   | 3,620,142  
|Intersegment net interest income (expense) |  |                   | 4,690       |          |   | (4,690)   |  |              |          |       |   |            |  |   |           
|Other revenue from external sources        |  |                   | 613,537     |          |   | 121,579   |  |              | 3,150     |       |   |            |  |   | 738,266    
|Intersegment other revenues                |  |                   | 6,210       |          |   | (6,210)   |  |              |          |       |   |            |  |   |           
|Depreciation                               |  |                   | 169,046     |          |   | 130       |  |              | 1,561     |       |   |            |  |   | 170,737    
|Provision for loan losses                  |  |                   | 1,525,750   |          |   |          |  |              |          |       |   |            |  |   | 1,525,750  
|Segment loss                               |  |                   | (892,985)   |          |   | (44,088)  |  |              | (2,447)   |       |   |            |  |   | (939,520)  
|Expenditures for premises and equipment    |  |                   | 9,173       |          |   |          |  |              |          |       |   |            |  |   | 9,173      
|                                           | 
|                                           |  | INDUSTRY SEGMENTS
|For the Three Months Ended June 30, 2007   |  | CommercialBanking |             | Mortgage |   | AllOther  |  | Eliminations |           | Total
|Interest income                            |  | $                 | 13,539,810  |          | $ | 4,422     |  | $            |          |       | $ | (21,273)    |  | $ | 13,522,959 
|Interest expense                           |  |                   | 6,628,145   |          |   | 16,851    |  |              |          |       |   | (21,273)    |  |   | 6,623,723  
|Net interest income (expense)              |  |                   | 6,911,665   |          |   | (12,429)  |  |              |          |       |   |            |  |   | 6,899,236  
|Intersegment net interest income (expense) |  |                   | 30,051      |          |   | (30,051)  |  |              |          |       |   |            |  |   |           
|Other revenue from external sources        |  |                   | 616,662     |          |   | 169,198   |  |              | 3,150     |       |   |            |  |   | 789,010    
|Intersegment other revenues                |  |                   | 6,210       |          |   | (6,210)   |  |              |          |       |   |            |  |   |           
|Depreciation                               |  |                   | 174,056     |          |   | 160       |  |              | 1,561     |       |   |            |  |   | 175,777    
|Provision for loan losses                  |  |                   | 164,000     |          |   |          |  |              |          |       |   |            |  |   | 164,000    
|Segment profit (loss)                      |  |                   | 4,728,370   |          |   | (47,125)  |  |              | (13,939)  |       |   |            |  |   | 4,667,306  
|Expenditures for premises and equipment    |  |                   | 173,775     |          |   |          |  |              |          |       |   |            |  |   | 173,775    



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|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 ( the 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, 2007 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 and are particularly susceptible to significant change. 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.

Determination of the Banks allowance for loan losses as well as allowance for other real estate owned have been identified as critical accounting policies. 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. The allowance for other real estate owned is determined primarily on the use of external appraisals.



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##### Table of Contents

Liquidity and Capital Resources

Our liquidity and capital resources are monitored on a periodic basis by management, State and Federal regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy,
our liquidity ratio of 11.39% at June 30, 2008 was considered satisfactory.

At June 30, 2008, our capital ratios were in excess of the
regulatory minimum capital requirements to be classified as well-capitalized. 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       |   |  | MinimumRegulatoryRequirement |  
|                           |  | Consolidated |   |  | Bank                         |   | 
|Leverage capital ratios    |  | 10.73        | % |  | 10.69                        | % |  | 5.00  | %
|Risk-based capital ratios: |  |              |   |  |                              |   |  |       |  
|Core capital               |  | 12.44        |   |  | 12.40                        |   |  | 6.00  |  
|Total capital              |  | 13.70        |   |  | 13.65                        |   |  | 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:



|                             |  |              |           
|---------------------------- |  | ------------ | ----------
|                             |  | June 30,2008
|Commitments to extend credit |  | $            | 70,263,000
|Letters of credit            |  |              | 6,111,000 
|                             |  |              |           
|                             |  | $            | 76,374,000
|                             |  |              |           

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.



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##### 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:



|                                   |  |                        |         |                  |   |        
|---------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                   |  | June 30,2008           |         | December 31,2007
|                                   |  | (Dollars in Thousands)
|Cash and due from banks            |  | $                      | 15,767  |                  | $ | 16,826 
|Interest-bearing deposits in banks |  |                        | 122     |                  |   | 2,732  
|Federal funds sold                 |  |                        |        |                  |   | 9,500  
|Securities                         |  |                        | 79,633  |                  |   | 93,781 
|Loans, net                         |  |                        | 544,324 |                  |   | 561,730
|Loans held for sale                |  |                        | 883     |                  |   | 950    
|Premises and equipment             |  |                        | 10,003  |                  |   | 10,341 
|Other assets                       |  |                        | 29,671  |                  |   | 23,136 
|                                   |  |                        |         |                  |   |        
|                                   |  | $                      | 680,403 |                  | $ | 718,996
|                                   |  |                        |         |                  |   |        
|Total deposits                     |  | $                      | 593,498 |                  | $ | 625,851
|Other borrowings                   |  |                        | 9,384   |                  |   | 13,424 
|Other liabilities                  |  |                        | 3,733   |                  |   | 4,187  
|Stockholders equity               |  |                        | 73,788  |                  |   | 75,534 
|                                   |  |                        |         |                  |   |        
|                                   |  | $                      | 680,403 |                  | $ | 718,996
|                                   |  |                        |         |                  |   |        

Our assets declined by 5.37% for the first six months of 2008. Net loans decreased by $17.4 million, primarily due
to the transfer of approximately $7.5 million to other real estate owned as a result of foreclosures during the first six months of 2008. The remaining decrease in net outstanding loans is a result of normal pay down activity as we have experienced
a slowing of new loan production during the second quarter of 2008. Decreases in interest-bearing deposits of $2.6 million, federal funds sold of $9.5 million and investment securities of $14.1 million were primarily used to offset decreases in time
deposits for the first six months of 2008. Total deposits decreased $32.3 million during the first six months of 2008. The decrease in deposit accounts was primarily a result of decreases in time deposits of $33.8 million, offset by slight increases
in interest bearing checking, savings and demand deposits of $1.5 million. This reflects a strategic decision by the Company to allow higher-priced time deposits where there was no other customer relationship to lapse. We monitor our liquidity
position daily to achieve earnings enhancement as well as meet regulatory requirements while funding our obligations. Other borrowings decreased $4.0 million during the first six months of 2008 as our Federal Home Loan Bank advances decreased by
$6.0 million, offset by an increase in federal funds purchased of $2.0 million. The Company takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of funding. Our total equity has decreased by $1.7
million year to date as net income of $653,000 was offset by increased unrealized losses on securities available for sale, net of tax, of $629,000, purchases of treasury stock of $61,000 and by dividends paid of $1.7 million.



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##### Table of Contents

Results of Operations For The Three and Six Months Ended June 30, 2008 and 2007

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



|                          |  |                            |        |   |      |   |       
|------------------------- |  | -------------------------- | ------ | - | ---- | - | ------
|                          |  | Three Months EndedJune 30,
|                          |  | 2008                       |        |   | 2007
|                          |  | (Dollars in Thousands)    
|Interest income           |  | $                          | 8,584  |   |      | $ | 13,523
|Interest expense          |  |                            | 4,964  |   |      |   | 6,624 
|                          |  |                            |        |   |      |   |       
|Net interest income       |  |                            | 3,620  |   |      |   | 6,899 
|Provision for loan losses |  |                            | 1,526  |   |      |   | 164   
|Other income              |  |                            | 738    |   |      |   | 789   
|Other expense             |  |                            | 3,772  |   |      |   | 2,857 
|                          |  |                            |        |   |      |   |       
|Pretax income (loss)      |  |                            | (940   | ) |      |   | 4,667 
|Income taxes (benefit)    |  |                            | (503   | ) |      |   | 1,705 
|                          |  |                            |        |   |      |   |       
|Net income (loss)         |  | $                          | (437   | ) |      | $ | 2,962 
|                          |  |                            |        |   |      |   |       
|                          | 
|                          |  | Six Months EndedJune 30,  
|                          |  | 2008                       |        |   | 2007
|                          |  | (Dollars in Thousands)    
|Interest income           |  | $                          | 19,729 |   |      | $ | 26,503
|Interest expense          |  |                            | 10,891 |   |      |   | 12,705
|                          |  |                            |        |   |      |   |       
|Net interest income       |  |                            | 8,838  |   |      |   | 13,798
|Provision for loan losses |  |                            | 2,636  |   |      |   | 176   
|Other income              |  |                            | 1,450  |   |      |   | 1,573 
|Other expense             |  |                            | 6,861  |   |      |   | 5,617 
|                          |  |                            |        |   |      |   |       
|Pretax income             |  |                            | 791    |   |      |   | 9,578 
|Income taxes              |  |                            | 138    |   |      |   | 3,572 
|                          |  |                            |        |   |      |   |       
|Net income                |  | $                          | 653    |   |      | $ | 6,006 
|                          |  |                            |        |   |      |   |       



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Our second quarter results were highlighted by increased provisions for loan losses and compressed net interest margins,
which together contributed to a net loss of $437,000, or $0.03 per share. These factors have also contributed to a decrease in net earnings for the first six months of 2008 compared to the same period in 2007. Net earnings for the six months ending
June 30, 2008 were $653,000, or $0.05 per share compared to $6.0 million or $0.42 per share for the same period in 2007.

Our net interest income
decreased by $3,279,000 in the second quarter of 2008 and decreased by $4,960,000 for the first six months of 2008 as compared to the same periods in 2007. Our net yield on average interest-earning assets decreased to 2.68% in the first six months
of 2008 as compared to 4.05% in the first six months of 2007. The decrease in net yield on average earning assets is primarily due to a reduction in interest income on loans as a result of a decrease in average outstanding loans for the first six
months of 2008, coupled with decreases in the Prime lending rate from the end of 2007. Our net yield on average interest-earning assets was 3.64% for the entire year of 2007. Our increasing levels of nonperforming loans have also negatively affected
our net interest margin. Interest income that would have been recorded on nonaccrual loans since the end of 2007 amounted to $3.4 million during the first six months of 2008, effectively lowering our net yield on average earning assets by 103 basis
points. Our net cost on interest-bearing liabilities decreased to 3.98% during the first six months of 2008 compared to 4.56% for the same period in 2007. The decrease in interest expense is largely the result of a lower cost of funds during the
first six months of 2008.

The provision for loan losses amounted to $1,526,000 and $2,636,000 for the second quarter and first six months of 2008,
respectively. The amounts provided are indicative of our assessment of the inherent risk in the loan portfolio at June 30, 2008. The allowance for loan losses as a percentage of total loans was 1.84% at June 30, 2008 as compared to 1.34%
at December 31, 2007. 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. Our evaluation of the loan portfolio includes a
continuing review of loan loss experience, current economic conditions which may affect the borrowers ability to repay and the underlying collateral value. Please see the information on page 16 for a further discussion of our allowance for
loan losses methodology.

The following table shows our nonperforming assets for the periods ended June 30, 2008, December 31, 2007, and
June 30, 2007:



|                                                                                                         |  |                        |        |                  |   |              |  |   |      
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------ |  | - | -----
|                                                                                                         |  | June 30,2008           |        | December 31,2007 |   | June 30,2007
|                                                                                                         |  | (Dollars in Thousands)
|Nonaccrual loans                                                                                         |  | $                      | 50,045 |                  | $ | 32,744       |  | $ | 106  
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 4,682  |                  |   | 4,714        |  |   | 5,378
|Restructured loans                                                                                       |  |                        | 0      |                  |   | 0            |  |   | 0    
|                                                                                                         |  |                        |        |                  |   |              |  |   |      
|Total nonperforming loans                                                                                |  | $                      | 54,727 |                  | $ | 37,458       |  | $ | 5,484
|Other real estate                                                                                        |  |                        | 16,666 |                  |   | 10,394       |  |   | 1,741
|                                                                                                         |  |                        |        |                  |   |              |  |   |      
|Total nonperforming assets                                                                               |  | $                      | 71,393 |                  | $ | 47,852       |  | $ | 7,225
|                                                                                                         |  |                        |        |                  |   |              |  |   |      

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.



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When management believes there is sufficient doubt to the collectibility of principal or interest on any loan based on
its contractual terms, 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. 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 June 30, 2008 amounted to approximately $71.4 million, or 12.50% of total loans and other real estate. This compares
to approximately $47.8 million or 8.25% of total loans and other real estate at December 31, 2007, and $7.2 million or 1.26% at June 30, 2007. The increase in nonperforming assets is primarily attributable to the significant slowdown in
residential real estate sales that began in the summer of 2007 and has continued through the first half of 2008. With the significant slowing of home and land sales, the prices of homes and land have declined. Therefore, many of our customers who
develop and sell residential real estate cannot service their loans because they are not generating sufficient revenue, resulting in the significant increase in nonaccrual loans.

Nonaccrual loans increased by $17.3 million or 53% during the six month period ended June 30, 2008. There was significant movement within these loans during the quarter as $33.3 million went on nonaccrual status,
$7.5 million went into foreclosure, and $8.5 million returned to accrual status through the repayment of previously accrued interest. The ten largest nonaccrual loan relationships comprise $39.7 million or 79% of the total and all are collateralized
by residential real estate.

Other real estate owned increased by $6.3 million, or 60% during the six month period ended June 30, 2008. During the
first six months of 2008, we foreclosed on $6.6 million of real estate, net of write downs of $952,000, and sold $290,000 of real estate. The total balance of $16.7 million at June 30, 2008 is distributed as follows; residential development
(60%), homes and lots (27%) and commercial real estate (13%).

The level of nonperforming assets is a matter of significant concern to the Company,
which is actively working to resolve problem credits and to liquidate Bank owned real estate as appropriate purchasers can be found. Approximately 20% of the nonperforming loans are represented by three customer relationships which are currently in
bankruptcy reorganization. The Company is represented by experienced legal counsel who is working to ensure that its interests are protected and that the Company achieves maximum collection. The senior management of the Company meets with loan
officers on a weekly basis to review nonperforming loans and to ensure that the Company is following its most effective plan for reduction or restructuring of these credits. An additional committee of the Board of Directors has been formed to assist
management in the evaluation and liquidation of owned real estate. With a declining housing sales market and lowering real property values, liquidation of real estate at prices favorable to the Company is difficult. The Company continues to write
down property or record reserves as prudent.

Subsequent to June 30, 2008 the lead participant in two loan relationships totaling $6.6 million for the
Companys portion of the indebtedness notified the Company that the borrower was delinquent in payment of a scheduled interest payment and that there was some uncertainty as to whether payment would be received. The loan was not 90 days or more
past due as to interest or principal at June 30, 2008. The Company feels that if uncorrected, the relationships will become nonperforming prior to the end of the next reporting period. The loans are secured by real property that fully secured
the loans at their origination, but at the time of this filing the Company does not have a current appraisal to determine if there has been deterioration in the underlying collateral values.



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Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included
in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. These classified loans do not represent material credits
about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Information regarding certain loans and allowance for loan loss data through June 30, 2008 and 2007 is as follows:



|                                                                              |  |                          |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months EndedJune 30, |        
|                                                                              |  | 2008                     |         |   | 2007 |  
|                                                                              |  | (Dollars in Thousands)   |        
|Average amount of loans outstanding                                           |  | $                        | 564,527 |   |      | $ | 556,788 |  
|                                                                              |  |                          |         |   |      |   |         |  
|Balance of allowance for loan losses at beginning of period                   |  | $                        | 7,657   |   |      | $ | 5,230   |  
|                                                                              |  |                          |         |   |      |   |         |  
|Loans charged off                                                             |  |                          |         |   |      |   |         |  
|Real estate                                                                   |  |                          | (60     | ) |      |   | (126    | )
|Commercial                                                                    |  |                          |        |   |      |   |        |  
|Consumer installment                                                          |  |                          | (16     | ) |      |   | (5      | )
|                                                                              |  |                          |         |   |      |   |         |  
|                                                                              |  |                          | (76     | ) |      |   | (131    | )
|                                                                              |  |                          |         |   |      |   |         |  
|Loans recovered                                                               |  |                          |         |   |      |   |         |  
|Real estate                                                                   |  |                          |        |   |      |   |        |  
|Commercial                                                                    |  |                          |        |   |      |   | 1       |  
|Consumer installment                                                          |  |                          | 2       |   |      |   | 10      |  
|                                                                              |  |                          |         |   |      |   |         |  
|                                                                              |  |                          | 2       |   |      |   | 11      |  
|                                                                              |  |                          |         |   |      |   |         |  
|Net (charge-offs)/ recoveries                                                 |  |                          | (74     | ) |      |   | (120    | )
|                                                                              |  |                          |         |   |      |   |         |  
|Additions to allowance charged to operating expense during period             |  |                          | 2,636   |   |      |   | 176     |  
|                                                                              |  |                          |         |   |      |   |         |  
|Balance of allowance for loan losses at end of period                         |  | $                        | 10,219  |   |      | $ | 5,286   |  
|                                                                              |  |                          |         |   |      |   |         |  
|Ratio of net loans charged off during the period to average loans outstanding |  |                          | .01     | % |      |   | .02     | %
|                                                                              |  |                          |         |   |      |   |         |  

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.



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Certain nonperforming loans are individually assessed for impairment under Statement of Financial Accounting Standards
(SFAS) No. 114 and assigned specific allocations. The valuation allowance related to impaired loans amounted to $6.5 million as of June 30, 2008. Other identified high-risk loans or credit relationships based on internal risk
ratings are also individually assessed and assigned specific allocations.

Noninterest income

Other income decreased by $51,000 and $123,000 in the second quarter and first six months of 2008, respectively, as compared to the same periods in 2007. The year-to-date decreases are due primarily to a decrease in
other service charges and fees of $38,000, as well as decreased mortgage banking income of $85,000 as a result of decreased mortgage activity.

Noninterest
expense

Other expenses have increased by $915,000 in the second quarter of 2008 and have increased $1,244,000 for the first six months of 2008 as compared
to the same periods in 2007. Other expenses have increased during the first six months of 2008 compared to 2007 as a result of increased salaries and employee benefits, net of capitalized loan fees, of $134,000, increased occupancy and equipment
expense of $52,000 and increases in other operating expenses of $1,058,000. The increase in salaries and employee benefits is primarily attributed to increases in salaries of approximately $84,000, coupled with decreases in capitalized loan fees of
$218,000, offset by decreases in incentives and profit sharing expenses accrued of $187,000. The increase in occupancy and equipment expense is primarily attributed to increased depreciation expense of approximately $22,000. The increase in other
operating expenses is primarily attributed to increases in other expenses attributed to carrying other real estate owned of $54,000, increases in FDIC insurance premiums of $182,000, and by decreases in advertising expenses of $56,000.

Income Taxes

Income tax expense for the six months ending June 30,
2008 declined $3.4 million from the year-ago period. The decrease from the year-ago period is primarily attributable to 92% less income before income tax and a decline in the effective tax rate from 37% to 17%. The reduction in the effective tax
rate results from a decline in income before income tax and a lower estimated State tax liability resulting from low income housing and other credits.

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.



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##### 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 second quarter model reflects an increase of 25% in net interest income and a 5% increase in market value equity for a 200 basis point
increase in rates. The same model shows a 2% decrease in net interest income and a 14% 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 or 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.



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II - OTHER INFORMATION



|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.



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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: August 7, 2008 |  | BY:                           |  | /s/ David H. Gill                            
|                     |  |                               |  | David H. Gill, President and CEO             
|                     |  |                               |  | (Principal Executive Officer)                
|                     |  |                              
|DATE: August 7, 2008 |  | BY:                           |  | /s/ Thomas L. Redding                        
|                     |  |                               |  | Thomas L. Redding, Sr. Vice President and CFO
|                     |  |                               |  | (Principal Financial and Accounting Officer) 



21